達信公司 (TXT) 2020 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 of 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.

Revenues in the quarter were $2.7 billion, down from $3.3 billion in last year's third quarter. During this year's third quarter, we reported net income of $0.50 per share compared to $0.95 per share in the third quarter of 2019.

Adjusted net income, a non-GAAP measure, was $0.53 per share for the third quarter of 2020. Adjusted net income excludes $7 million of pretax special charges, $0.03 per share after tax, related to the restructuring plan announced in the second quarter. Segment profit in the quarter was $189 million, down from $297 million in the third quarter of 2019. Manufacturing cash flow before pension contributions totaled $344 million up $163 million from last year's third quarter.

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

Thanks, Eric, and good morning, everyone.

Overall, the third quarter results reflected a strong operating performance across all our teams with strong cash generation and improved margins.

At Bell, we had a very strong quarter with 15% operating margin on slightly higher revenues. On the commercial side of Bell, we delivered 41 helicopters, down from 42 in last year's third quarter.

Military remained strong in the quarter, largely due to higher aftermarket volume on existing contracts in support of the V-22 and H-1 fleets. Also in the quarter, Bell continued to increase the scope of its support of the U.S. military aircraft with the award of a new $213 million H-1 spares contract. In the past year, H-1 aftermarket contracts now total over $1 billion.

Also in the third quarter, Bell definitized a $272 million contract on the H-1 program with the Czech Republic for 8 Yankees and 4 Zulus. On future vertical lift, the V-280 continues to fly in support of the Army's risk reduction program and has now flown over 190 hours as we continue to demonstrate the capabilities of this aircraft to our Army customer.

On FARA, Bell has begun building a 360 Invictus prototype aircraft, starting with gearboxes, rotors and airframe structure.

And within Textron Systems, the third quarter was strong with margins of 13.2%. In the quarter, Systems was awarded an initial contract to support the ground-based strategic deterrent missile system as a subcontractor to the Northrop Grumman with work beginning this year. Also in the quarter, Systems received an additional task order for the Air Force CAPCAS program to support Eglin Air Force Base. This award is in addition to the 2 bases announced at the end of the second quarter.

Systems also announced the successful flyaway of the first 2 Ship-to-Shore Connector Craft 100 and 101. These 2 craft are now stationed to Panama City, Florida, where they've been placed in the testing and operational roles by the U.S. Navy.

At Aviation, revenues were down in the quarter as expected from lower new aircraft deliveries and aftermarket volume. We delivered 25 jets, down from 45 last year, and 21 commercial turboprops, down from 39 in last year's third quarter. While the pandemic impacted volume in the quarter, we did see aircraft utilization levels continue to recover, and we're encouraged by new order flow. Order activity was strong in the quarter, reflecting an increase in new aircraft bookings that resulted in backlog growth of $400 million to $1.8 billion at the quarter end.

On the new product front, we inducted the third Cessna SkyCourier into the aircraft certification program, which data it had accumulated over 240 flight hours. Program is progressing well, and the aircraft is on track for certification and entry into service in the second half of 2021.

We announced the new Beechcraft King Air 360, which recently received FAA-type certification. This updated turboprop includes technological advancements to the flight deck and enhancements to passenger comfort.

Moving to Industrial. Revenues were down from last year's third quarter primarily due to lower volume in specialized vehicles, principally reflecting the timing of snowmobile deliveries and reduced demand in the ground support equipment business.

At Specialized Vehicles, we continue to see strong retail demand in our outdoor powersports business during the third quarter and expect revenue growth in the fourth quarter.

At Kautex, the automotive production outlook has steadily improved since the low point in May, and demand from our customers has returned faster than anticipated. Kautex teams have responded well in managing costs and executing through these challenging times and delivered a strong operating performance in the third quarter.

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

Thank you, Scott, and good morning, everyone.

Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $795 million were down $406 million from a year ago largely due to lower Citation jet volume of $234 million, lower aftermarket volume of $95 million and lower commercial turboprop volume of $83 million. Segment loss was $29 million in the third quarter, down from $104 million of profit last year primarily due to the lower volume. Backlog in this segment ended the quarter at $1.8 billion.

Moving to Bell, revenues were $793 million, up $10 million from last year on higher military volume, partially offset by lower commercial revenues primarily due to the mix of aircraft sold in the period. Segment profit of $119 million was up $9 million largely due to a favorable impact from performance. Operating margin at this segment was 15%, up 100 basis points from last year. Backlog in this segment ended the quarter at $5.7 billion.

At Textron Systems, revenues were $302 million, down $9 million from a year ago primarily due to lower volume of $20 million at TRU Simulation + Training. Segment profit of $40 million was up $9 million due to a favorable impact from performance, partially offset by lower volume. Operating margin of 13.2% was up 320 basis points from last year's third quarter. Backlog in this segment ended the quarter at $1.9 billion.

Industrial revenues of $832 million were down $118 million from last year primarily from lower volume of Specialized Vehicles. Segment profit was $58 million, up $11 million from the third quarter of 2019 primarily related to the favorable impact from performance of $24 million, principally reflecting cost reduction activities, partially offset by lower volume and mix. Operating margin was 7%, up 210 basis points from last year's third quarter.

Finance segment revenues were $13 million, and profit was $1 million. Moving below segment profit. Corporate expenses were $28 million, and interest expense was $38 million.

With respect to our restructuring plan announced in the second quarter, we recorded pretax charges of $7 million on the special charges line.

Subsequent to the end of the quarter, we entered into a closing agreement with a state taxes authority that will result in the recognition of tax benefits that will reduce our tax expense in the fourth quarter by approximately $40 million to $50 million.

Turning to the balance sheet. We issued $500 million of fixed rate 10-year notes at a coupon of 2.45% in the third quarter, and used the proceeds to pay down the $500 million 360 loan that we entered into in the first quarter. Following the cash performance in the quarter, we ended with approximately $2.7 billion of cash on the balance sheet, and we have effectively prefinanced all our existing term debt maturities through 2021. In the fourth quarter, we expect to repay $350 million of floating rate notes due in November and $362 million of outstanding borrowings on the corporate-owned life insurance policies that were drawn in the first quarter for additional liquidity.

While we continue to believe it is prudent to maintain a higher-than-normal cash balance as we close out the year, we expect to reactivate our share repurchase program on an opportunistic basis in the fourth quarter.

With that, I'll turn it back over to Scott.

Thanks, Frank. To wrap up, our teams executed very well and generated solid results in the third quarter. Looking to the fourth quarter, we expect our defense businesses to continue their strong performance. At Aviation, we anticipate a return to profitability as they begin to capitalize on the new aircraft order flow generated in the third quarter. And in Industrial, we expect a continuation of the rebound in our end markets.

That concludes our prepared remarks. Operator, we can open the lines for questions.

(Operator Instructions) Your first question comes from the line of Robert Stallard from Vertical Research.

First of all, Scott, I was wondering if there's been any change to your thoughts on 2021 deliveries at Aviation. Are you still thinking about the same as you were 3 months ago?

I think the order flow has been encouraging, Rob. And I would say at this point, our plan is that we probably see about half of the recovery. If you look at the dip from '19 into '20, we would expect to see about half of that come back in demand in '21.

Okay. And then secondly from me, in terms of the fourth quarter, you gave us some end points on the business. But I was wondering if the very strong cash flow that you saw in the third quarter can be continued. Or did you pull some items forward into the third quarter?

I think we'll continue to see good cash flow. It's pretty balanced across working capital and across all segments of the business. As you know, we tend to have growth in inventory going into a fourth quarter and then burn that down. And this year, inventory was obviously something we've been managing much more closely, but I expect that we will continue to see good cash generation in Q4.

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

Scott, just maybe good to see the backlog kind of spike up at Aviation. Can you give us a little color there on kind of what the mix of what you're seeing there?

Yes, it's pretty much across the board. We've seen nice pickup in jet activity, and it really is from lights through our midsize, super-midsized platforms, which is good, and also pretty strong order activity in the King Air family.

Okay. And just as a follow-up and staying in Aviation, just the lower aftermarket demand, I guess it still seems a little surprising to us just given what we've heard about biz jet flight activity. What are you seeing there? And do you expect that actually to start to turn the corner before we see deliveries pick up?

Well, I mean, there -- it -- sequentially, it certainly is improving, Peter. So it's still down in the sort of low to mid-20s on a year-over-year basis. But as we've seen the flight activity continue to grow, the services coming back with that, so it's not surprising that it would trail a little bit. But we don't think it will get back to comparable on -- in fourth quarter, but we certainly expect to see it continue to sequentially improve.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

On Aviation, I realize there was a tough slug from the losses in Q2, but how do we think about the path to breakeven and moving pieces that you saw in Q3 and going forward?

Well, I think given the backlog that we've seen and deliveries that are scheduled now for Q4, Sheila, I definitely think that we'll see profitability at Aviation in Q4. What we're trying to get that to call all the way back to kind of a breakeven on the year, whether we get there or not, it's -- it will probably be close depending on how the demand and service activity and whatnot happens in the quarter. But certainly, we're expecting a profitable Q4 and getting the business back to breakeven.

Okay. And then switching over to Bell, I think there's been a lot of noise from third parties on FARA and FLRAA on the future of the program, which I disagree with. But perhaps you could provide us your thoughts, Scott, on how you're thinking about that. And if there's any change with the administration next week, how you think about the future of that program, too.

Okay. I think we continue to have a lot of dialogue from the working level all the way to very senior members in the Army. There is no question that they are very committed to the FVL programs. It's one of the highest priority programs they have in modernization in the Army. They realize it's absolutely critical to their capability and the role that they play whether that's in near peer competition or just in general. I know they recognize that they're operating aircraft that are 40 going on 50 years old technology. And for sure, they've been upgraded over the years, but the capability that they're looking for in FVL is something they need.

As I said, it's a very high priority. They're like -- they're rational people. They understand budgetary pressures, and they know there will be budgetary pressures regardless of whether there's a change in administration or not, I'd say, over time.

But look, these are very long-cycle programs, and they're committed to the programs. And they've worked hard to make sure that they have the ability to budget and fund these programs. And obviously, from our standpoint, we're very focused on continuing to execute on it. As I said in the prepared remarks, the V-280 continues to fly. It's done great.

As you know, we've been over 300 knots flight level. We've demonstrated level 1 maneuverability. So the most critical things that they're looking for in speed and range, maneuverability, we've demonstrated now. Hard to believe it, but we've been -- the flight test program, almost 3 years in December. So -- and on the far front, we're making great progress. We started to build the initial critical components of the aircraft. So I think our teams, even through the whole COVID process, continue to make great progress and work hard at demonstrating the capability of the products that we've designed and build for the Army. So we feel very good about the program.

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

Just wondered if you could speak about the margin performance of Bell and the productivity commentary there. And just if you encountered any COVID-related costs and how you anticipate if you get -- if there's reimbursement of those or just -- what it was that you saw that drove that.

So look, on the cost front, I mean, for sure, there are some costs that are directly incurred. We had some disruptions here and there. But I had to say that, that business, and this has been true in several of our businesses, continue to operate through the whole COVID process. And obviously, we had to put all the proper safety protocols in place, and I think those have been very successful. But our guys have continued to execute.

We're getting the output. We're delivering what the customer needs. Obviously, one of the things we're benefiting from is we've seen a significant uptick in the amount of activity on the installed base. Contracts on V-22 and H-1, and that's driven some additional volume through some critical parts of the factory, which has yielded good productivity. So I think that, for sure, there have been some minor -- relatively speaking, I would say, minor costs incurred in the process of working through a difficult time. But really, what you're seeing in terms of margin performance is just good solid performance by our teams and executing well on some increased volume going through the shops.

Okay. Great. And then just a quick follow-up on Aviation. Just with respect to Q4 deliveries, what you're looking for there, I mean I know it's been -- there have been some challenges getting some aircraft delivered and whatnot due to restrictions. How are you thinking about the remainder of the year just as it's important to think about the '21 commentary you gave us earlier?

Well, I would say there's -- like there's a -- there's risk here and there on a couple of aircraft if a customer is unable to show up or get the -- take the delivery. Again, we're still living in a bit of a dynamic world, obviously, in terms of restrictions around travel and things like that. But at least as we see it right now, it's sort of one-offs here and there. It's not -- we don't expect it to be a material number.

Obviously that could change if there's a real big change in terms of travel restriction. But -- and again, they're much like at Bell, the teams are working. We have occasional disruptions on supply base issues and things like that, but in general, are working our way through it. So I think we feel pretty confident that we'll be able to deliver on the volume that we're expecting to see in Q4. And obviously, we expect to see the same in that assumption in terms of how we recover and increase volume in 2021.

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

Yes. Scott, you avoided answering Carter's question about specific deliveries in the fourth quarter. I mean are you expecting somewhere around 50 deliveries in the fourth quarter?

I didn't think Carter's asked for a specific number. Of course, if he had, I would have evaded the question.

Okay. So you're going to evade my question as well?

Well, I'm sure you know we don't give a forecast of the exact numbers. And look, it's not an environment probably where we would do that. But certainly, we feel like the order book coming through Q3, we're pleased with the amount of activity. We're pleased with the amount of activity that we're still seeing out there in the marketplace. And look, I think our expectations are that we'll see a decent recovery coming out of this. This is, as you know, a very different environment than maybe what we've seen before, where we had challenges in this end market. The used market continues to be robust.

If you look at activity in that light to mid-sized jet market in the U side is quite strong. I mean you hear brokers talking about that all the time. We certainly see that in selling our own used aircraft business. So again, these -- as you know, these things are all sort of subject to something crazy happening from an overall market environment. But right now, we think the demand is looking pretty good. The fundamentals are good, and then we ought to be able to deliver a good fourth quarter.

In terms of orders in the fourth quarter, Scott, you expect orders to be significantly better than Q3? I mean usually, your fourth quarter is the biggest order quarter.

Well, Q4 can be a decent quarter, George. As you know, usually, the book-to-bill is not there because usually our strongest delivery quarter is in Q4. So -- but as I said, I think right now, we are continuing to see good activity. Look, some of those aircraft are things that we'll deliver in Q4. But for sure, we're starting to see bookings and things that are -- aircraft deliveries are out in 2021 as well.

But I mean like last year, the implied orders in Q4 were $1.5 billion versus $1.2 billion in Q3, so you did almost $1.2 billion this Q3. Would you expect to see $1.5 billion in orders in Q4?

Yes, George, I don't -- I honestly don't know. I mean I think that trying to dial in on that number is something we probably won't do and just -- because we just don't know, right?

I mean, look, our sales teams are out there. They're selling. I'm encouraged by the amount of activity. We're seeing deals close. Aircraft are moving at a good pace. So I mean we never guided that number, but we certainly feel good about what's going on in the end market.

And the percentage of orders in the quarter from net jets, can you disclose that?

We do not. But suffice to say, there are orders in the quarter, and I expect there to be orders in the quarter for Q4. So again, look, the encouraging part about what's going on in the market is that we're seeing increased activity in flight hours, and we're seeing increased demand when we talk to guys that are, frankly, that are charter operators of our aircraft from companies that are guys that wheels up, that are membership-oriented kind of companies.

And from NetJets, who, as you know, is a very important partner for us in that fractional market. The demand in all of those areas appears to be quite strong, which is encouraging not only for deliveries this year, but also we're building some order book and giving us some visibility into 2021.

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

I guess asking George's question another way, did NetJets or has NetJets fully rebooked what they debooked in Q1?

Okay. So we're -- we've never given backlog by aircraft and certainly not by customer. So I don't think we would provide that guidance.

I would say from a color standpoint, we feel good about where NetJets is. I think they feel good about where their market is, and they're seeing strong demand. And a lot of it is new customers coming to the market, which is good for business aviation overall.

Okay. And just roughly taking, Scott, the delivery now forecast that you're talking about for 2021, it looks like the last time you were at similar kind of volume assessment was a mid-single-digit margin business. Is that the right place to think about for next year just, I guess, given the cost cutting that you've done and maybe a bit of a different mix in terms of bigger airplanes coming through?

No, look, guys, I mean, obviously, we're not doing 2021 guidance at this point. But when we get to the call in January, we would expect at this point that we'll get back to providing you that kind of revenue and margin expectations for the year.

Okay. I guess last one then. Looking at Industrial Kautex versus vehicles, was Kautex actually up year-over-year in the quarter? And I think you comment special -- the vehicle side would be up in Q4. Is that sequentially or year-over-year you're talking about?

Well, from a revenue standpoint, we weren't back to where it was on a year-over-year basis. And obviously, the same is true in the Specialized Vehicles business. But we did see a recovery, frankly, that was stronger than we expected, particularly in North America and Asia, look strong. Europe is still a little bit soft. So revenue was not up on a year-over-year basis, but it was up significantly, obviously, from where we were in Q3 and delivered good margins.

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

And good results. So I was kind of surprised by how good numbers were at Industrial and Bell and as well as the extent of the drop at Aviation. Could you maybe walk us through any favorable adjustments or unfavorable adjustments particularly EACs? And where there any sort of catch-ups or anything in the profit because those numbers at Industrial are kind of better than anything I can think of that you've done in a long time?

So sure, Cai. Well look, in Industrial, we don't -- that's not the kind of counter, so we don't do the EACs or catch-up sort of things like that. I think that, obviously, as we went through the last 6 months, there was a lot of focus on efficiencies and cost reductions and trying to optimize the operations. So as volume came back into those businesses, they performed well and delivered good margin. We expected in -- for instance, in the Kautex side, we were anticipating all along getting some fairly good mix, a lot of the newer technology particularly around hybrid vehicles and things like that, where we have a good position and a strong product line, are contributing there as well.

So on the Industrial front, it was just delivering and converting well on volumes starting to come back into those businesses. I don't think there's anything particularly notable on the -- like I say, I think the best color to give you on Bell is that we really have seen nice growth in the aftermarket side particularly on the military programs, in H-1s and V-22s. And that's driven additional volume and a critical technology for us, right? That's a lot of our gearboxes, rotating things and blades and things of that nature, which help to drive good productivity and efficiency in terms of utilization of the factories. And that I think falls through as good margin business.

And then so Bell, you consistently talk of the drop in margins to 10% to 12% and the margins pretty consistently go up. How should we think about where your margins might be next year?

I mean does 10% to 12% assume kind of the level of military aftermarket you were seeing, and therefore, that's now too low? Or are we going to see a steep drop-off? And if so, why is it? Because it looks like you would be headed for a cliff. Maybe talk a little bit about the trend we should expect in '21.

Well, Cai, I think that we'll obviously give the guidance in '21 at a later time. But overall, we work again on these, on -- in some cases, multiyear contracts. We've had additional volume come in. But as you know, as you do future contracts, these are negotiated deals, and you expect to see some pressure on some of those margins once that higher volume is in there and goes into your base numbers. But a lot of it will depend, frankly, for us on what level of R&D do we continue to spend around these FARA and these FLRAA programs, which will certainly pressure. As you know, those are cost-share programs, so the government is funding a lot of that, but there is still a contribution for us to have to make in support of those programs. And there's still a lot of work to do there.

So that will put some margin pressure on a go-forward basis as well. And over the long term, it will depend a lot on how we do on volume of bringing in additional FMS cases and things of that nature. So okay, I still think this is a low double-digit margin business. We've always said that 10% to 12% number. Originally, people didn't believe us and said, "No. It's going either to 8% to 9%." Now people don't believe us and say, "It's going to be 13% to 14%." So on the average, it sounds like 10% to 12% is probably about right.

Could you -- last one, could you give us any sizing of the EACs you've been seeing there at Bell as you come down the end on the V-22?

Well, not at Bell. I mean the program adjustment for the quarter was $22.5 million compared to $21 million last year. So on a year-over-year basis, total Textron, there is no big deal.

Yes. There was no change on a year-over-year basis, really. And so Cai, I think we had good margins in the Systems side as well. And I think part of that is, look, we're sort of turning the corner, I would say, on the Ship-to-Shore development program. We've started getting more craft deliveries. Production lines are starting to run better. We're starting to get supply parts coming in at the right time.

Obviously, we've got the initial units now from the definitized production contract are starting to enter into production. So that's a program that obviously is going to start to be a contributor to the profit. And the rest of the business, frankly, continues to perform well, and we expect that as we see some of these new things, like the CAPCAS programs start to roll in, again, that will generate revenue and good margins. So I think that Systems is also going to run in that low double-digit margin area.

Next question comes from the line of Kristine Liwag from Morgan Stanley.

I just wanted to circle back on Textron Aviation. For the bookings that you've had so far, can you provide more color on the pricing environment and competitive dynamics?

No. No, look, we had slight positive pricing in the quarter, and you'll see that. But again, the market, I think, again, it's -- it benefits from not having this huge number of used aircraft out there, particularly not new, young used aircraft that it puts pricing on customers considering do they buy a used aircraft or new aircraft. So that's a positive for us.

I think -- look, I think we all know, in general, people were planning higher production rates this year than what the demand has turned out to be in the market. So you do occasionally see deals where someone's trying to move aircraft, and we're trying to be much more disciplined about that and instead, [bringing] our production volumes and maintain reasonable pricing. And I think that's what you'll -- you'll see in the quarter is that we had slightly positive pricing.

And also, as flight departments plan out their fleets, to what extent has fewer commercial airline affected their buying decision so far? And when you think about customers who are in the cusp of ordering an aircraft that hasn't quite signed the dotted line, what's the variable that they're looking at that would make them more confident in ordering? Is it more visibility with the economy? Is it a vaccine? Easing border restrictions? Can you just provide more color in terms of their decision tree?

It's hard to say. I mean to be anecdotal, I guess, I mean every customer is a bit different. But there's no doubt that as an industry, I mean we're seeing a new aircraft. I believe that, again, charters and clubs and fractional owners are also seeing this, that you have people that are coming into business aviation that have not historically been in business aviation or owned an equity piece of an aircraft.

And clearly, the -- again, the macro environment out there right now is, is there some health dynamic to it? There probably is. Is it also the fact that for lots of companies and individuals that aren't around hub airports? We all know that when you see the dramatic reduction in the number of commercial flights, particularly if you have to connect through some place, the reduction in the number of flights is making it very difficult for people to get from point A to point B in the country without taking a whole day doing it.

So I think the convenience factor, which a lot of customers obviously have enjoyed for many, many years, is becoming more appealing to a lot of other folks as it becomes harder to travel commercially. And look, our view on over the long term is maybe some of that is people that might charter. I mean maybe they go back to commercial airlines someday. But we think a lot of people, once they've experienced the convenience and the productivity and efficiency of traveling private, they'll stick with it.

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

Scott, just kind of big picture, what's the visibility and confidence to getting back to sort of what I'll call it '18, '19 segment profit levels? Like what's in your control versus what's not in your control?

And your pre-COVID, at least you talked about Aviation gaining pricing to deliver better margin. Are you seeing that pricing now? Industrial had room for self-help pre-COVID. That's still the case. So just realistically, what's the path back here?

Well, look, I mean, obviously, it's different in each one of the businesses. First of all, obviously, in Bell and Systems that have not seen nearly as much disruption going through this, have continued on delivering good margins. I think Bell is in a very good place. Systems, we all know needed some self-help particularly around the Ship-to-Shore Connector program, which, as I said, is steadily improving.

And we're starting to feel good about that, and not only in executing what we have, but having got the first production contract under our belt. So I think those guys are going well. Things like the CAPCAS program which, look, that was a nontrivial investment for us to get all those aircraft ready and now putting them to work is -- will be a nice turn in the performance of that business.

So I think those guys are fairly straightforward. If you looked in the Industrial businesses, Kautex generally converts well and performs well and I think are showing that as we come back through the auto cycle. And I expect them to continue to perform well. As you know, the volume is usually lighter in the automotive industry in Q4. But I think that, again, they're getting back into their normal stride and will do well.

We know we had things to do in the industrial side around channel development in particular. And I think that we're seeing the benefits of our relationship with Bass Pro on the tracker side. Our Arctic Cat channel is also performing well, and we're seeing good retail volume through those channels. So I think the cost structure, as we talked about before, we are consolidating some facilities and reducing footprints. And as a result of those restructuring activities, I think we come out of this cycle in TSV in a much better place. So that should drive improved performance versus what we've seen in the past.

Look, aviation is very much a volume game. We've obviously had to go through some very difficult restructuring here just in terms of adjusting for a lower volume than we -- where we were. In 2018, '19 time frame, as I've said, I think we'll probably get half of that back is kind of how we think about 2021 and then get back to the road that we were on when we get into the future years.

I think our product lineup has never been better, right? When you look at where we are with Latitude and Longitude, SkyCourier is coming along very nicely. So it's been a rough year for sure for that team, but they continue to make the kind of progress in terms of the positioning of the products and the business and the cost that we should be able to get back on our -- back on track here as we go into 2021 and beyond.

And then just following up on the Aviation comment, you talked about getting back to the previous road that we were on. I mean is double-digit margin in that segment a pipe dream at that -- at this point?

Or is that a realistic goal? And then -- and also, I'd just say thinking about production rate as a function of that, you talked about getting half deliveries back in '21. What does it say about production rate in '21?

Well, look, guys, I mean, obviously, we've always been trying to target of getting back to double digit. We were making good progress, I think, towards getting there. But as I said, you do need to have volume, right? I mean we have to have a market that has got enough demand that we can get volumes back there to do that. And I think, again, we are getting there. A big part of it was, obviously, this year having a full year of Longitude. And obviously, that -- I mean we have a full year of Longitude, but overall, the business has seen a dramatic reduction in demand.

So -- and as I said, I think we'll get about half of that back. So when we think about the production run rates for 2021, it's targeting a delivery that's going to be somewhere in between where we are this year and where we were in 2019. So we're setting production run rates to achieve that. Obviously, run rates increase through the course of the year because we expect, again, when you think about 2022, that you're back up maybe to where you were in '19. But this is a plan, guys, right? I mean to think that we have that kind of visibility in this market, we haven't had that kind of visibility in this market in a very, very long time.

So again, I feel very good about the macro environment. The fact that there's not used aircraft out there, the fact that we have a very nice product lineup with a (inaudible) makes us feel comfortable that we should be thinking that way and planning that way. But obviously, we'll make production line and volume decisions as things play out.

Your next question comes from the line of Ron Epstein from Bank of America..

Maybe on the biz jet side, just following up on the whole string of questions that we've had. When the time comes to ramp back up, right, which hopefully isn't too far out, how difficult will that be, right? I mean given the restructuring that's going on, how is your workforce in Wichita? And do you have a sense on how your supply chain is doing?

Well, look, I don't think it's that difficult to ramp back up, Ron. I mean we're not -- we're certainly not straining our supply chain, obviously. So we have to do -- we have to work very closely with guys like Pratt and Williams and Honeywell around volumes on engines, which obviously are a pretty long lead item. Avionics it kind of -- I mean, look, there's nothing magic about it, right?

I mean you -- we work with our supply chain all the time to do these forecasts and kind of line things up. Frankly, if I looked at some of the things that have been the longest lead times and the most constraining things in supply base are typically, as you know, around bearings and castings and forgings. And to be honest, right now, there's a lot of capacity that's been freed up. I mean the -- these are common suppliers to commercial aviation.

And so as those volumes have dropped the supply chain, frankly, our biggest struggles over the last 4 or 5 years. I mean the team works through it, and obviously, it hasn't been a problem in the end, but there's a lot of work that goes into ensuring that we get the right supply and source of supply for a lot of those critical items. And that was strained because of the very, very strong demand in the commercial side.

Obviously, that's not the case today. So we still have to do a good job of forecasting and working with suppliers. But I'd say, solving those issues is easier than it has been for the last 10 years.

And then -- and maybe another question -- another Aviation question, if I may. If you look at the fleet utilization today, do you guys have a sense on how many Citations are being used just for personal, leisure travel as opposed to business travel?

And I guess my question is this, right? When we get to a post-COVID world, and you have people flying for business and for all the other reasons they fly, one of the things that kind of seems to me that could happen is business aviation post-COVID could be actually far more robust than it was pre-COVID because of what happened during COVID. So my question is, do you see any evidence of that? Is that something you guys talk about? Or am I completely off base?

No. Look, I think that's the macro environment that I think is a positive, all right? The -- there -- first of all, to answer your first question, I mean we don't have the data, right? I mean we don't -- we know all of our Citations flying. We have very, very good information on all that stuff. But nobody checks a block that says, "Hey, this is a personal trip or a business trip."

So I mean we don't have that data obviously to break it out. But I think we know when you see the market coming back and you got 85% of the flight hours, we all know that business conventions aren't happening. You guys aren't having conferences. There's -- I mean there just isn't -- we all know there's nowhere near as much business travel happening today as there was a year ago. And so we know that -- therefore, that, that gap and that increase has a lot of personal use going on of aircraft.

And certainly, we know this from discussions with our charter operators, the club guys, our fractional. Everybody knows that there is a lot more personal travel going on than you would normally see. I mean if we look at Europe in August, it was over 100% of a year ago. That's not business travel in Europe in August, right? So you see a much higher utilization of these aircraft for personal reasons right now.

And so the case we would make and certainly it's how we think about it is when you think about business travel coming back, and it is starting to come back, right? And there's no question more people are traveling and moving around, but not in anywhere near the scale of what you would have seen a year ago, that just as you're seeing more people opt to use business aviation for personal reasons, you're going to see more people choose to use business aviation for business reasons. And so you're going to have both higher utilization in personal and higher utilization in business. And therefore, that's what I say drives a better macro environment than we've seen in a long time.

And again, as we look at orders, as we look at customers, that it is that kind of a mix in anticipation of people, like already using it personally and anticipating using it more on the business front. So that's the reason, frankly, for us to feel bullish about why this will recover in a positive way.

And again, also, of course, you have this dynamic of not having this large used market out there. So I think we'll see aggregate demand increase, and it will look to the new aircraft demand because you don't have a lot of new used aircraft out there to compete with it.

Yes, that makes sense. And then one last one, if I -- kind of changing subjects completely. Before the pandemic and kind of the whole world got turned upside down, you guys have made a bunch of progress on reshaping the industrial portfolio. Are you comfortable with where it is? Or is there still work to do there?

Look, there's always work to do, but we're comfortable with where we are. And look, we're very focused, obviously, at this point on executing and operating the businesses, and that's what we're doing. And I think it's working.

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

Scott, last quarter, you had provided the forecast that 2020 Cessna jet deliveries would decline 30% to 40% for the year. And the first 3 quarters are 40 to -- down 40% to 50%. Is the fourth quarter decline less than that 30% to 40% to still pull you into that range for the year? Or does the fourth quarter year-over-year decline looked more like what it's been year-to-date?

No, I expect that we'll see some recovery on those percentage basis as we go into Q4 based on the order book and the level of activity we're seeing in the market.

Got it. Okay. So that 30% to 40% for the year stands?

That's still how we're thinking about the year, correct.

Got it. And then -- and maybe looking at Bell commercial somewhat similarly, the unit change year-over-year there improved nicely in the third quarter versus the first half of the year. Maybe you could just elaborate on what you're seeing from your customers in that market and how you're thinking about 2021 at this point.

Well, look, I think that we've certainly seen some softness on the commercial side, and it's largely driven by the fact that it's like Aviation and a lot of things, it's hard to get a lot of face time with customers. It's hard to kind of just get deals done. As you know, our Bell commercial business is heavy on foreign customers. A lot of fleet operators, a lot of our bigger aircraft are international, and it's still a challenge to sell and do demos. And frankly, a lot of these are government or private/public kind of things. And in a lot of the world, it's hard for -- hard to get deals done.

So I think we'll continue to see that. And again, does that -- how does that change into 2021? I wish I could tell you the answer to that. I mean it depends on how the virus is progressing and what different countries do around governments really getting back to work and getting deals done. So it's been a challenge through the course of the year, and I think it will continue to be one as we go forward.

Do you feel like you have less visibility on that on sort of where to set production there for next year than you do with how you're speaking to the Cessna jet business?

No. I think we are pretty well set on what we think the production levels need to be. Again, these are relatively long-cycle production especially when you get into customization and things like that. So we've made the adjustments that we think we need to make in terms of production. Like I said, I think the only difference that's a little more challenging maybe, Noah, is the fact that a lot of them are international customers, so.

Yes. Okay. And Frank, on cash flow, working capital has been a not insignificant use of cash for a pretty long time. And in the nice cash flow number you have in the quarter, it's -- it looks to be a source.

Are you at a pivot point where, with all the new jets in Cessna and some churn in some of the other businesses, you've had to use working capital where you can now have that as a source of cash sustainably for a while moving forward? Or is that a bad read?

No. It -- I mean, look, it moves around, Noah, obviously, depending on seasonality of the business and other factors. I think the teams have done a really nice job in decelerating as we went into the pandemic and very -- being very focused on working capital utilization and cash generation. And that's reflected in the numbers.

As we mentioned earlier in the call, we'll continue to see, I think, some liquidation of inventory in the fourth quarter just on the higher volumes that we would typically see in that fourth quarter. But then we would expect working capital to kind of seasonally move around as we move into '21.

So we -- we've been very focused on it. I think we're doing a better job of managing it, but there's always going to be some quarter-to-quarter volatility to it. But we -- the teams have been very focused on it and done a nice job with it.

Your next question comes from the line of Seth Seifman from JPMorgan.

I was wondering, the payroll tax holiday has been a benefit on the cash flow this year. And if so, if you could quantify it.

It's been a benefit. We won't quantify it, but it has been a bit of a benefit, but it hasn't been a kind of significantly material number on cash.

Okay. And then if we were to end the year today, what kind of change in pension expense would you be looking at for '21? And have you given any more thought to mark-to-market accounting?

Yes. Look, so there's lots of things that go into the pension calculation, so I can't really kind of snap a line today because we haven't done all of that analysis. From a discount rate standpoint, their interest rates are down a bit, so that probably creates some headwind. There's a little bit of tailwind associated with just the averaging of various gains and amortizations and things like that over time.

So it's ultimately kind of hard to tell where that will fall out. We wouldn't expect it to be a big headwind as we look at '21, but it may be some headwind and kind of -- I'm not going to kind of comment around looking at different kind of accounting policies vis-à-vis pension. We'll save that for if and when we were to do anything in that regard.

And then maybe one bigger picture, Scott. In the past, I feel like discussions of the business jet demand environment have often revolved around politics and elections and tax rates and all that stuff. And we're potentially looking at a change in administration and a higher corporate tax rate. Is all that stuff kind of irrelevant this time given the other demand drivers that you'd talked about? Or maybe we've just made too much of it in the past?

Yes. I don't know, Seth. It's a good question. I mean this probably -- I'd have to say, normally, when you see uncertainty or a question -- and for sure, we've seen that before, right, where people are kind of waiting to understand the tax policy or the outcome of an election, but with no markets like uncertainty, obviously. It's kind of interesting, obviously, this year, because of the pandemic, there's just so much others world going around out there, that maybe it's hard to see what role politics is playing. I mean generally speaking, I'd say we've seen that in the past, right, where people kind of hold off until they have visibility, and then they kind of -- look, it's kind of interesting because in the end, everybody's -- goes kind of back to where they were, right? It's just regardless of what the answer is in terms of a political outcome.

It just seems like this year, because of all the other noise around the pandemic, it's -- doesn't seem to be playing as a prominent role in discussions. But I'm sure there's some of it out there. But I think what the -- in the insight, as we know, we have seen this before in election years, even when we see it in election years. Once you get past the election, people kind of get back to their life, you know what I mean? And I suspect that would be a dynamic here as well.

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

Yes. I just wanted to follow up on the margin at Bell and Systems. I mean the Bell margin was the highest from my record since the fourth quarter of 2012 and the Systems was the highest since the third quarter of 2009.

So I guess my question is, I mean, obviously, Scott, you've said the Bell margin is not sustainable yet. But you -- does Systems margin still seems to be sustainable? Or it's a little bit abnormally high this quarter?

Well, like it's probably a little on the high side, George. I think, as I said, there -- we've been seeing steady improvement, and a lot of that is self-help around getting the Ship-to-Shore connector program squared away. I do think the team has made a really good progress on that, and that will continue to be a contributor.

We've -- we have had things like the CAPCAS programs, which, again, as I said, has required an investment, which is now converting into revenue and margin which will help us on a go-forward basis. There's also -- there's a lot of new programs. There's a lot of R&D programs that are in there around modernization, which all that will balance out, I think, to be, as I said, I think kind of a low double-digit margin business.

And what gets the margin at Bell down to the range you've talked about? I mean there had been some expectation that this year would be weaker because you had the new V-22 by, I mean, obviously, getting some benefit by growing after support for that program. But so what happens to get the margin to drop as much as it seems to have to drop to get kind of to your guide?

Well, again, I think we are ramping up R&D activity, and we'll see that continue into next year as we've got more and more resource coming in particularly on the FARA program. Though I expect, as we continue to make progress on FLRAA, we've seen a lot of requirements work here in the -- in this early phase of the next phase of that program, and you'll start to see more engineering and R&D as we sort of head towards kind of a PDR capability on that platform.

And I think, look, we are getting benefits of having more volume going through a lot of these shops. And obviously, as you renegotiate and do future contracts, that volume goes in there, and we'll get negotiated down to a more nominal margin on some of those things. But we are certainly -- I'm sorry, go ahead, George.

Sorry about that. Now this is kind of a trivial question. But you delivered one Citation X in the quarter. I think the last time you delivered one was the first quarter of '19. So is there anything unique with that one? Was that one just sitting in inventory? If you had any color on that.

Yes. I mean it's just -- I mean we've obviously phased that program out, so just the last a couple of aircraft which we've been using for other reasons are just finally selling out of inventory.

Okay, Greg, yes, that concludes the call at -- on our end.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.