Textron Inc. (TXT) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Textron First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [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. Doug Wilburne. 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 $3.2 billion, up $128 million from last year’s first quarter. Income from continuing operations was $0.55 per share, up 19.6% from $0.46 reported in last year’s first quarter. Manufacturing cash flow before pension contributions was a $222 million use of cash compared to $125 million use of cash in last year’s first quarter. With that, I’ll turn the call over to Scott.

Thanks, Doug and good morning, everybody. Revenues were up 4.2% in the quarter, reflecting the success of our strategy of investing for growth, both in new products and acquisitions. Segment revenue was up in Industrial, Aviation and Systems, while essentially flat at Bell, consistent with our expectations. At Bell, we delivered 6 V-22s, flat with last year’s first quarter, 10 H-1s, up four units from last year and 30 commercial helicopters, down from 35 a year ago. On the commercial side, we had a good showing at HELI-EXPO, where we displayed actual flight test articles of our new 525 Relentless and 505 Jet Ranger, though both of which generated significant interest. At the show, we signed a letter of intent for 10 525s with Guangxi Diwang Group, a Chinese investment company. More recently, we also signed an LOI with PT Whitesky Aviation, an Indonesian operator for 30 505s. Development on both programs are proceeding well. The three test 505 helicopters are completed over 700 test hours with certification and first deliveries expected later this year. The 525 has two aircraft and flight test, with a third unit expected to enter soon. The aircraft is meeting or exceeding all of its performance objectives, including having demonstrated a top speed in excess of 200 knots. The effectiveness of 525’s integrated fly-by-wire design has been evident during the testing by the aircraft superior in flight handling, maneuverability and stability. Combined, these factors should significantly contribute to the value of this aircraft for our customers. At HAI, we also announced the new Bell customer advantage plan or CAP which provides our customers the opportunity to lock in predictable cost effective maintenance for their aircraft. Our CAP product delivers broad cover solutions for our customer’s daily operation, which in turn protects the value of their investment, while increasing aircraft availability. We were also named number 1 helicopter service and support for the 22nd consecutive year by Pro Pilot Magazine. On the H-1 front, we have received recent orders from the DoD for 61 additional units, including 9 FMS units for Pakistan. This takes production through the first quarter 2019. The remaining US DoD program of record and significant introduction of foreign military demand provide a solid long-term outlook for this program. Moving to Systems, revenues were up modestly primarily driven by higher unmanned systems volumes. During the quarter at Textron Marine and Land Systems we received $174 million contract for five additional Ship-to-Shore units to be delivered in 2020. Earlier this month, we were also awarded a contract for 60 COMMANDO Select armored vehicles to be delivered this year in Iraq and Colombia. On the Canadian TAPV program we're on track for deliveries beginning in the third quarter as we successfully completed the customer reliability testing program two weeks ago. At TRU Simulation + Training we were just awarded another contract by Boeing to design and manufacture simulators for their newest twin-aisle airplane the 777x. Moving to Industrial, we saw 9.2% increase in revenue reflecting our continued investments. During the quarter at specialized vehicles, we launched our newest Bad Boy product, the Onslaught 550, a mid-size 4 by 4 ATV. At Jake we announced the HR700 which is the world’s first 14 foot wide rotary mower providing increased productivity for our professional turf care customers. At Tools and Test new products in our look electric utility space are driving significant growth in this category. At Kautex, our selective catalytic reduction products and geographic expansion drove growth in excess of global vehicle production rates. Moving to Textron Aviation, we delivered 34 jets in the quarter compared to 33 last year and 26 King Airs compared to 25 last year. Our sales success affirms that our strategy of investing in new products is resonating with aircraft buyers. During the first quarter we also received European certification for the Latitude as well as the ProLiant Fusion equipped King Air 250 and 350. Advanced sales of Latitude fractionals by NetJets to their end customers have been going very well and we look forward to starting deliveries of the new aircraft later this summer. To sum up, we had a good start to the year as demand in our end markets finished the quarter generally consistent with what we were expecting. Operationally we also had another good quarter as we achieved margin improvements at each of our manufacturing segments. We continue to believe that we will be able to generate solid overall growth in revenue, earnings and cash this year. And with that I will turn the call over to Frank.

Thank you, Scott, and good morning, everyone. Segment profit in the quarter was $280 million, up $21 million from the first quarter of 2015 on a $128 million increase in revenues. Let’s review how each of the segments contributed starting with Textron Aviation. At Textron Aviation, revenues were up $40 million from this period last year primarily due to higher jet volume. Segment profit was $73 million, up from $67 million a year ago. Backlog in the segment ended the quarter at $1 billion; $47 million lower than at the end of the fourth quarter Moving to Bell, revenues were essentially flat as higher military revenues offset lower commercial revenues. Segment profit increased $6 million from the first quarter of 2015 primarily due to improved performance. At Systems, revenues were up $9 million primarily due to higher unmanned systems volumes while segment profit was up $1 million. Industrial revenues increased $80 million due to higher overall volumes and the impact of acquisitions. Segment profit increased $9 million also reflecting the higher volumes and the impact of acquisitions. Finance segment revenues decreased $2 million and profit decreased $1 million. Moving below the segment line, corporate expenses were $32 million compared to $43 million last year reflecting the impact of a lower stock price on our share based compensation expense. Interest expense was $33 million, flat from last year. During the quarter we issued $350 million in 10-year notes at a rate of 4%. This was effectively prefunding the retirement of $250 million in 4.625 notes that are set to mature in September. We also repurchased 6.2 million shares of stock during the quarter returning $215 million in cash to shareholders. To wrap up with guidance, we are confirming our expected full year EPS from continuing operations of $2.60 to $2.80 a share and cash flow from continuing operations of the manufacturing group before pension contributions of $600 million to $700 million. This concludes our prepared remarks So, Greg, we can open the line for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Cai von Rumohr from Cowen and Company. Please go ahead.

Yes, thank you very much. So your aviation volume was up, but your inventory step up was down. Maybe give us some color in terms of why the profitability wasn’t a little bit better?

Well, Cai, I think you look at the first quarter, the revenue increase was fairly modest. So in terms of leverage, we are talking about sort of what I recall the lot of small numbers. We I think that had pretty good execution by the team. We had an awful lot of R&D spending frankly as we are getting ready to do the first Longitude flight here coming up in the early part of this summer. And so even with the step up, as you note in there, which was probably $5 million, $6 million something like that. That was more than offset by a fair bit of R&D spending to get ready for the Longitude. So there is nothing fundamentally different. I don’t think -- the mix obviously was more biased towards Latitudes than some of our legacy aircraft, but that’s something we expected and kind of talked about in the context of our overall guidance for the segment leverage for the year, and I think that’s what we’re seeing kind of play through.

And then a last follow up, so should we assume that the Latitude is a mix negative in terms of your shipment? And also could you comment on the level of used aircraft losses if any?

Yes, I think – as we talked about, I think the Latitude mix will be a slight drag in terms of our normal gross margin flow through. We expect obviously that should improve over time. It’s still a good product for us, but it’s a little bit lower on the mix side and some of our other aircraft at this point. You know, used aircraft, there were some losses in the quarter, but they were de minimis, I mean, they are not a material number.

Thank you.

Sure.

Your next question comes from the line of Robert Stallard from RBC. Please go ahead.

Thanks guys, good morning. Scott, there has been a lot of negativity in the last couple of months by the business jet demand environment. Used inventories seem to have gone up, pricing softened. I was wondering what [indiscernible] we are seeing out there in terms of customer interest and how confident you are in your forecast for 2016 in this division?

Robert, I would say that if we look at the first quarter, there is no question that January and February were pretty rough letting. The turmoil in the market and general sentiment, I mean, I think caused a lot of people to sort of stop, and wait and see what’s going on. But as we went in through March, I would say continuing now into April, the market has been pretty good. I mean, we would always like to see it stronger, but the momentum that we felt in the latter part of last year certainly took a pause through January, February, but has returned to a pretty decent market here in March going into April.

And then as a follow up, Frank, obviously you highlighted the buyback was strong in Q1. Do you expect it to moderate going forward and will you be more interested in acquisitions perhaps?

Well, as we said, I mean, we will continue to take a look at what the acquisition opportunities look like, our cash flow needs and we returned excess capital to shareholders. As you say, we don’t kind of – we did a lot of that in the first quarter. We will continue to look at kind of the appropriate use of capital as we go through the year. But we are ahead of the game in terms of our -- certainly our plan do that we saw set dilution at this point.

That’s great. Thanks so much.

Your next question comes from the line of Sam Pearlstein from Wells Fargo. Please go ahead.

Good morning. Just following up on our last comment about the share count. Do you still assume it’s going to be the 277 million shares? I know that it was heavy in the first quarter. Will that be lower for the year?

It should be lower for the year by about the number over the normal dilution, so kind of 3-ish million. We bought about 3 million more than our normal employee plan dilution would reflect, it would be lower by about that amount.

Okay. And then can you talk a little bit about Bell and what you have seen as far as demand on the 412s and as the relatively stronger dollar hurt you in those sales, I guess, I am wondering with two deliveries in the first quarter, are we still on track for 12 of them?

I think that the commercial market is still challenging for sure on the helicopter side, and exchange rates US dollar doesn’t help us particularly. But the 412, I would say our line of sight on the year for the guidance we provided, which was around 12, I think is firming up. So I think we feel pretty good about that. And there is certainly opportunities out there as we look into the out years and there is deals that still need to close, but there is still – it’s a great helicopter, it serves its purpose very well, it’s got a great customer base and there is still people looking at expanding increasingly their fleet to 412. So I'd say we have pretty reasonable line of sight onto the 2016 in our working opportunities that are going out in the ‘17, ‘18 at this point.

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

I guess on R&D can you talk about the expectations for R&D for the full year may be on a segment basis? And then also in terms of headcount, I think you added headcount across three of the four segments with the exception of Bell and may be what that additional capacity is for?

Well, Sheila I would say that the total year R&D is probably going to be pretty consistent with what we guided which we only do for the total company level. There is always a little bit of timing in this thing, I mean clearly with getting ready for the flight test programs and whatnot at Aviation on the longitude program we spent a disproportionate amount of that in terms of the run rate getting ready for flight test. So, the other programs are running about as we expected there is really no change to the guidance, the 525 flight test programs are going very well but consuming expenses at about the pace we expected. 280 is going very well, we’ve got some nice significant milestones in the fabrication of that first unit for flight next year. So I think our guidance for the total year remains unchanged, we just had some higher spending here in the first quarter particularly aviation getting ready for the longitude program.

And then on headcount?

The headcount numbers, I don't - I'm not sure, I don't have the exact numbers in front of me Sheila. I don't think there is any big material changes, the only place we’ve had really material changes in headcount unfortunately have really been around Bell and that's mostly been dialing back some of the production run rates in Bell on the commercial helicopter front. Other than that it's been I think relatively stable in most of the businesses.

And then just a follow-up on the demand question I asked earlier. It's pretty original but can you just talk about pricing and maybe if the competitive environment has changed at all?

In?

In more so in aviation I guess.

Aviation has been fairly flattish on a year-over-year basis Sheila as there are a couple of models that have seen a little bit of an uptick in price, a couple have been a little been down in price but overall not a big impact in pricing really across the whole company, pricing has been relatively flat. As I said, I think part of it is just we had to be a little bit patient her as we went through a couple pretty tough months and hanging in there but the demand environment which is really kind of in the end what drives it picked up in March and felt pretty good.

Your next question comes from the line of Jason Gursky from Citi. Please go ahead.

Maybe I’ll go back to Bell. Scott, can you talk a little bit about the next multi-year on the V-22, there has been some recent press reports out there about that’s shaping up, can you maybe provide a little bit of a color on your thoughts on that that would be helpful, particularly on the volumes?

Sure, so I'd start by saying that it's early in that process, so we've already started to work with the customer on providing information. Right now the challenge is it’s a pretty broad range of volumes depending on, as they’re working on their budget for those out years and obviously it’s you know there is a mix of what they want to do with the program of record for the marine core, you've been some articles out there about the air force having an interest in some additional CVs, there is the Navy card program, and how that starts to drive demand as well as creating some optionality around FMS opportunities. So, right now it's a - when we're providing numbers it’s across a pretty broad range of units, so it's at this point I'd be reluctant to put a number out there, seriously I don't think there is anyone who would want to guide to yet to give you guys an idea because it's just the range of opportunity is just too high in terms of you know where that number falls out it could it’s just you know they’re running the numbers, running the financials and asking us for a lot of input on a pretty broad range of possible numbers of units.

Let me ask you it differently, without FMS, the top end of that range allow you to hold current production rates?

No, I don't think it's likely that we will hold current production rates, it's going to be you know it will be south of that I really don't see a potential outcome that would be the current production rate, so we are planning for another detriment down when we get out there into that ‘19, ’20 timeframe, but it’s -- we just don’t know how big that detriment is going to be right now. When you look at Navy, that’s 40 some units, there is still 20 some in the Marine Corp program of record, there can be a couple of CVs, there can be some optionality built in for FMS, but I do not think that the expectation should be it would run at the current run rates.

Okay. Understood. And then the follow-on, the LOI with regard to the 505 and the 525, can you just remind us during those converts into actual contracts, when will you start telling its or have a better idea of what your ramp is going to look like on deliveries for both of those aircrafts, so just kind of the timing of the LOIs converting the contracts.

Well, I think we’ll start to see conversion on 505 contracts, probably starting here pretty soon. Those aircraft, we’ll be looking at the initial deliveries likely in the fourth quarter. So there is already conversations going on with customers that are -- will convert those to actual contracts. I would say on the 525, you won’t likely see that until sometime as you get closer to certification in mid-summer or so. Last year, next year, rather with just because our certification expectations are kind of late summer, early fall before we would start firming those up for deliveries by the end of the year.

Your next question comes from the line of Pete Skibitski from Drexel Hamilton. Please go ahead.

Hi, good, morning, guys. Hey, Scott, geographically, is North America kind of still the only game in town. I think you’ve been running, I don’t know, 75% of your citation deliveries were North America and I think a similar amount at Bell Commercial. I’m just wondering if that’s the status and if there is any change that you detect in the North American market versus three or four months ago.

Well, certainly on the Aviation side, it’s still more or less US driven. I think jets this quarter were probably about 80% US deliveries, about 20% international deliveries. If you look at our turboprop product between the King Air and the Caravans, those are more like 50-50 US and International and that’s more typical for those products and I think the turboprops are doing well. Caravans, particularly in China, are strong. So we -- but I would say however, we were starting to see some momentum pick up a little bit in Europe. So I think you’ll start to see some increased jet deliveries over there. And turboprop, again, staying fairly balanced between US and international as we go through the balance of the year.

Okay. Got you. And then last one, just wondering what your expectation was on this air force nuclear helicopter program. I think basically you guys are the incumbent, it’s I think a few billion dollars probably and there has been a lot of chatter that they would still source it to a competitor. I’m just wondering what your expectation is there and if you had any thoughts?

Well, we’re probably seeing and hearing the same things that you’re hearing. It sounds like we are the incumbent, but those helicopters have been there, those are Hueys from a long time ago. And at least the requirements that we’ve seen out there, we think they’re looking for a larger and different helicopter. So we’re seeing and hearing the same chatter. It sounds like they’re looking at going sole source to another product at this point.

Your next question comes from the line of Carter Copeland from Barclays. Please go ahead.

Hey, good morning, guys. Just, Scott quickly, wondered if you could give us some color on what you saw in service revenues across Aviation and Bell in the quarter.

So on the Aviation side, it was pretty consistent with where we’ve been. I think it was around 35% of revenue on the helicopter side, [indiscernible] but it was down a bit year-over-year and again, I think that’s just reflecting that we continue to see lower utilization, particularly in the oil and gas segment in the marketplace.

When do you think you reach a bottom on that, I mean clearly there is some destocking in that end market. So when do you start to lap some of the easier compares there?

Hard to say, Carter. I mean I would be just making a total guess, but I think a lot of it’s going to have to do with obviously what happens with oil prices and when do guys start utilizing assets. I can tell you, down in the gulf, where we have an awful lot of foreclose that are operating with oil prices being down, things have been slower. Frankly, some customers have been slow to pay some of the operators that we’ve worked and so as a result, those guys will put aircraft on the ground or they will back off in general, but it’s got to go through its cycle. So I am not probably the right guy to opine on the oil prices and what that recovery looks like, but I think it will tie more to that going forward.

Great. And then on Systems, just a quick follow-up. Anymore color you can give us on the unmanned revenue in the quarter, did it have a negative mix impact for the margins?

No, I think the unmanned is probably in line with typically what we expect for margins in that business. We've seen fairly high utilization on our fee for service programs which are going well. The aircrafts are performing well and executing the contracts that we have. We've continued to deliver the upgrades for the Shadow V2 program and those are kind of flowing through exactly as we expected and we've got some decent business development work going on for some international sales and things like that. So I think everything in the unmanned world is good. The margins obviously we were this quarter fairly light at Marine and Land Systems because we will largely generate a lot of the revenue here in the third and fourth quarter associated with the Canadian TAPV program obviously getting that milestone in the test complete was a big deal for us. So I think each of the units are doing well and are where we expect it to be. Unmanned is good business and margin is consistent with our expectations.

Great. Thanks a lot.

Sure

Your next question comes from the line of Julian Mitchell from Credit Suisse. Please go ahead.

Hi, good morning. Just wanted to start with the first question on aviation margins because I guess in Q1 you were talking earlier about how the margins were a couple of 100 points short of the full year margins hogged in aviation based off of mix of leverage - volume leverage and also R&D. As we think about the rest of the year and how you make up that 200 bps, should we think about that as fairly evenly split between R&D tailing off and leverage recovering or is there some sort of waiting between the two?

Julian, I mean, I think it’s – I wouldn’t read a whole lot into the Q1 numbers, right, I mean, the revenue was up $40 million, so leverage on $40 million couple of million of – few million of R&D, a couple of million of this or that just makes such as huge swing. So I don’t think there is anything that I would look at the first quarter granted – yeah, just in terms of specifically R&D, the R&D spending is probably somewhat disproportionate in terms of the overall impact on margins here in Q1 that it would be in the latter quarters, but I really don’t there is anything fundamental we’ve looked at in the leverage issue in the first quarter as being indicative of what's going to happen in Q2, Q3 and Q4. So our guidance that we provided you guys around sort of that window of overall operating margin percent I think we're on track to do and the revenue side. So the leverage is going to pretty consistent I think with what we told you and again the number in Q1 is such a small incremental on the revenue that I don’t think you can read a whole lot into in terms of leverage.

Very clear. And then my follow-up would be around the manufacturing cash outflow, that was about 100 million higher year-on-year. The vast majority of that is due to working capital stepping up, but at the same time your buyback spend in Q1 suggests you're very confident of that cash flow swinging around. So maybe just give a little bit of background as to where that big working capital build really came. And do you think we should see the manufacturing cash flow swing positive in the second quarter?

So I think first of all on an absolute basis you guys know we generally consume cash in the first quarter. We tend to have inventory build associated with products that do sell off good, better in different aviation and they will tend to have more higher sales in the latter part of the year. So on an absolute basis I don’t think there is anything terribly surprising. In terms of the year-over-year comparative, we do have situation with respect to customer deposits primarily almost exclusively frankly on the military side of Bell where as a result of performance based payments over the last couple of years we had favorable position in terms of working capital which will unwind through the course of this year and that’s a good part of what you are seeing here in the first quarter. But those numbers are absolutely consistent with what we guided you guys in the overall cash numbers. So we will see that working capital impact through the course of the year, but again completely planned and consistent with expectation and so we have no change in our confidence in terms of our overall cash flow for the year.

Very helpful. Thank you.

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

Yes, Scott, I wanted to pursue a little bit more this R&D. So you’ve made a comment first thing that the R&D spend was more than offset what was maybe 5 million step up in fees, could you quantify how much more it offset and then how much lower the R&D might be in the subsequent quarters?

So the dynamics we have in the quarter, George, for sure, we have the last quarter really of any of the step up impact on accounting in aviation, that was about $5 million number. And all I am saying is that our spending on the R&D side on a year-over-year basis to be comparative was a number that was quite bigger than that. So it was – of you take those two significant pieces that was dilutive to our margin rate or overall leverage if you will on a year-over-year basis. But again, in either case where these huge numbers, it’s just when you’re looking at a $40 million increase in revenue, the difference between 4 million better in margin and 8 million better in margin, 10% leverage, 20% leverage, you’re talking about a couple of million dollars. So it’s – none of these number are big numbers.

Got it. And I was just wondering – R&D 10 million versus say the step up in 5 million [ph] in the quarter, I am just trying to roughly calculate what that impact might be, and then how much higher R&D was this quarter than what you might expect it to be in subsequent quarters?

George, it was on the order of about 10 million. I mean, I think for a modeling purpose that’s about the right number to put in there. Again, it’s not a particularly big number. And we don’t expect it to change our overall company R&D over the course of the year. It’s a relatively small number, but it’s on that magnitude.

Okay. So does R&D go down a little bit then in the subsequent quarters?

Yes, but again not by a very big number, because it was only up by a very small number.

Frank, just to qualify the tax rate was, more like 30% this quarter versus the 31% guide, are we going to still see 31% or is 30% a better number?

I gave you the 31, it obviously depends on at the end of the day, kind of what our international versus domestic mix is and we will know that until we move further through the year. But I continue to use 31.

Okay. And one last one Scott, orders this year versus last year’s first quarter were up like 90 million or so, almost 10%, was that still primarily domestic or did you see more of the orders from international at all this quarter?

I wouldn’t say on the jet side, most of orders in the quarter were US. I think we will see a more international mix here, certainly as we are proceeding through April into Q2.

Okay. Thanks very much.

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

Thanks very much and good morning. I will really beg for your indulgent to ask one more question about aviation margin, which is just about – if you look what’s implied for the remainder of the year, it looks fairly flat with what you did in Q2, Q3, Q4 overall last year, excluding the inventory step up and so to have flat margins year-on-year in aviation for the rest of the year, when it would seem like more latitude deliveries to [indiscernible] would be a headwind. What sort of the opposing factor that allows you to keep those margins flat?

Well, I think in general performance in the business is – I mean, the guys are executing well and we do have some volume that’s increased on a year-over-year basis. And we still have good gross margin products, so that those create some leverage to help offset some of what might be a bit of a negative mix on a year-over-year comparative basis in terms of the mix of aircraft.

And then just as a follow-up also in terms of the pickup in activity that you've seen in March and April in terms of where is it across, would you say it's across platforms or is there any place where it’s concentrated. And one of the reasons I ask and that we’re talking about small numbers though it's hard to tell but if you just look at the high end, the Sovereign and X deliveries were fairly low in Q1, I know Q1 is light but is that a place where you're seeing kind of incremental weakness in demand relative to the other platforms?

It's probably some of which we’re seeing is with the latitude in there we do see some aircraft that may be a year or two years ago could have been a Sovereign are now going to be a Latitude. So, the aircraft in terms of the range and performance are different and for a lot of our customers the Sovereign is still the right answer and that's why we still see reasonable sales of Sovereign but for sure when we look at the total number of aircraft in that Sovereign space, some of those are now becoming Latitude. So if someone is in the middle of the country or they are in Europe or they’re in a place where about 2,000 nautical miles will get you there, they’re tending to air on the side of a Latitude versus Sovereign, so that explains kind of where I think we are on Sovereigns. And on TENs as we’ve said that's a fairly unique product, it’s been a very popular product over time but it's relatively small number of units each year.

Your next question comes from the line of Myles Walton from Deutsche Bank. Please go ahead.

It sounded like in the fourth quarter, the thing here is maybe we’re a little bit supreme on the international side, but I guess Scott some of your commentary there seems that like you had seen a pickup as expected and so I expect you and your growth in King Air?

Yeah, I mean I think we've seen the King Air market being pretty solid in most applications, I’d say it's been a little lighter on special missions that it has in the past and that’s a little bit of what we saw in the fourth quarter and the first quarter of this year. But remember we also had the conversion going from the old cockpit to the new model that came out very late last year and so getting that into production, getting the last of the older models sold and now making that conversion to the new model also has some impact on volume but frankly with the new model out there is selling well, we just got certification in Europe, which is [indiscernible] is a big deal for us, so I think we feel pretty good about the King Air market and where it’s going.

And just a clarification on the margins, the pension tailwind year-over-year expected have been 10 million to 15 million across the segments and may be deviation in five of that, is that about the right way to think about the tailwind from pension?

No, It was probably somewhere around that $10 million number but most of that is actually taking at corporate just the way we - well, I mean we spread out but it wouldn't be 5 at aviation, that’s going to be a smaller number than that. So I wouldn't - I don't have the exact number in front of me but it's relatively --.

There is a benefit but its spread around the organization.

Your next question comes from the line of Jeff Sprague from Vertical Research. Please go ahead.

Just a couple of questions on cash flow, Frank thanks for the color on the or maybe it was Scott, the military dynamics but just kind of think about the quarter here. Accounts receivable and inventories were both actually up, I would guess that Bell issue was actually in some accrued accounts somewhere, can you speak to what was going on in the accounts receivables and inventories in the quarter?

The issue I talked about on Bell is in the working capital line Jeff, so that’s where it’s reflected.

I'm just looking at the absolute growth in receivables and inventories in the quarter --.

Jeff, just to be clear the comment on customer deposits was a first quarter last year to first quarter this year versus end of year last year to this quarter so --.

And then just shifting to pension, do you foresee continued contributions at this level or if there is a potential that those need to kind of move up in the out years?

Well, it obviously Jeff depends on returns and discount rates and everything else but we don’t see meaningful contributions beyond these levels in the near term unless there is some significant change in the market dynamics.

And then I was also just wondering and back to the tax rate, Frank, there is this FASB change on stock comp that can be adopted this year. It's not required until next year, but we are seeing a few companies adopt that. Has that been a concern this year and is that something that could meaningfully impact your tax rate if you adopt?

I think, we are looking at it, but as I said stick with 31 is the right place to think about things.

And then one just last one. Could give us some idea of what percent of the Aviation backlog is the NetJets Latitudes or someway to just kind of think about that?

No, we don’t get into that level of detail on the backlog, Jeff, but the only thing I will say around the NetJets thing is that we really don’t put stuff in from that just into the backlog until we have agreed delivery dates and tail numbers and that stuff. So we will incrementally add NetJets to that backlog only when we - NetJets says, hey, look this is when I want delivery, this is the date, this is the tail and so there is only a small percentage of that overall order is in backlog today and that will grow the number we’ve put in there fairly linearly as they start taking deliveries and start committing to the next aircraft delivery date.

Great. Thank you for the color.

Your next question comes from the line of Justin Bergner from Gabelli & Company. Please go ahead.

Good morning, Scott, good morning, Frank.

Good morning.

I want to ask a good question on the industrial business. Would it be possible for you to give us a sense as to how the different parts of the industrial segment grew relative to that 6.5% organic constant currency growth in that business?

Yeah, we can provide some color around that. I did have that number right in front of me. But if you looked at the overall growth rates we are – I am not sure how to break it out exactly. Our specialized vehicle business had pretty reasonable growth. We had relatively flat market in our tools and test world, but again there is the dynamics within that which we kind of talked a little bit about. I think we are doing very well in the utility space. A lot of the other tools that were re highly consumed by a lot of the oil and gas exploration kind of guys obviously continues to be soft, but net there were some growth in that segment. We had very solid growth on the automotive side of things on a year-over-year basis. And the turf care world was relatively flat.

Thank you. That's helpful. Given that the first quarter in the industrial business is tracking slightly ahead of your full year goal, should we think about the industrial business as being a segment that could exceed your earlier guidance or are there parts of the business that you don't expect to be quite as strong as you look through the rest of the year?

Well, I think we feel pretty good about where we're right now. The guys in pretty much all the businesses had a pretty solid quarter, but it’s probably little early in the year to feel like we would materially change the range on what we told you with respect to the segment. So certainly they are on the tracks right now, they would be towards the high end of it, but I’d say it’s pretty early in the year too.

Thank you.

Your next question comes from the line of Ronald Epstein from Bank of America. Please go ahead.

Hey, good morning, guys.

Good morning, Ronald.

Just maybe a couple of quick details. You guys announced that you won 777x flight simulator at Mechtronix, so congratulations on that. How big is that potentially? I mean how do we think about that for the Mechtronix business?

It’s a good question. So the - and I have to be careful, because I don’t know exactly all that was disclosed with our customer but certainly the scope of that contract is to provide the simulators for their use as well as their training centers. And beyond that obviously a lot of Boeing’s 777 customers will buy their own simulators for doing their own pilot training. So I think the scope of the contract that we have is for the sales directly to Boeing, but obviously from our perspective, while that's a great contract and we're thrilled to have it, it also gives us, we think, the position in the marketplace that we should win our fair share of end customers from Boeing who buy their own simulators. So it’s the contract value specifically associated with Boeing plus future opportunities that are still to be determined.

Now, just -- maybe just for clarity, thanks for that, but this is a bigger -- Mechtronix historically wasn’t as big a player, right, in large commercial, right, and this is a nice new segment, business for them, correct or no?

It is. So true and we bought Mechtronix obviously. Part of the rationale for the acquisition was, we felt they had some terrific technologies, very capable team and a great product, but they were a very small company and they had had some challenges and got a little over-leveraged at one point and ran into some financial trouble. And I -- that hurts you in that market, because when you look at big customers, whether it's a Boeing or a lot of the major airlines in the world, these assets are like an aircraft. They're very long-lived, right. So companies want to know when you're buying a fairly high dollar capital item that you're going to be able to be around and provide the service and support and upgrades and such overtime and I do think that one of the things that hampered them in the marketplace was as a result of their financial struggles, they had some uncertainty around them. So it wasn't a technical or a product problem, it was a business viability issue and obviously, when we acquired them and sort of put our balance sheet and reputation behind it, that kind of got rid of that sort of barrier with a lot of customers. So the team up there won the 737 MAX a couple of years ago. I think that they've executed very, very well on that. The Boeing folks obviously have been very happy with how the team has performed on the 737 MAX and that gave them confidence to then also make us their partner on the 777X. So if you execute well and perform well, it can sort of snowball on the right direction. But for sure, part of the underlying thesis of the deal was that we thought you had a company that had a lot of great technology, great product, great capability, but it needed to have a little more certainty and strength from a financial standpoint and I think we've provided that.

Cool. Thank you for that. And then one more, my favorite airplane, the Scorpion, where do we stand on international interest, potential order that kind of thing for it?

So I think there is a fair bit of international interest. We still have a lot of customers that are talking to us. We have had the aircraft dollar of the country. We've had a lot of customers flying it. Really, the next major milestone for us, well, there is really two. One is that, we've had a couple of relatively minor things that we wanted to change in the production configuration of the aircraft. We've completed that engineering work and we're in the manufacturing process right now, building that, what's called the confirming production version of the aircraft. Customers obviously want to fly that and see that before they would place an order. And the other issue for us was always around the airworthiness and how do you get a certification and as I think you've heard publicly, there is now an air force program, there is program office, where they will conduct airworthiness certifications of aircraft that were not funded in development by the air force and so we've already submitted our application in that process. So that's sort of a work in progress as well. So, we think this all kind of dovetails with getting the first confirming article built and ready to fly here in probably early to mid-summer. And the airworthiness program will get underway and the air force ultimately will provide the airworthiness certification of that aircraft, which is a big deal to all of our prospective customers.

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

Yes. Just a couple of quick follow-ups. So Frank, the corporate expense being $32 million, you said it was due to the share price. Is that though changed at this point you're thinking on corporate expense being around 160 for the year?

No. I stick with the same number, George.

Okay. And then just to make sure you commented that aftermarket was about 35% of revenues each year, which would imply about 3.5% to 4% growth in the aftermarket?

That's probably about right. I'd say low to mid-single digit at this point.

Okay. And you had $164 million of acquisitions in the quarter, Scott, maybe if you could just list what they were because you make a couple of small ones and it's hard to keep track of them?

Well, the principal deals in the quarter were Able Engineering, which we announced, this is a repair and overhaul business that does sort of a mix of both Bell product as well as some fixed wing products, so we acquired that early in the quarter. That’s now integrated into our aviation services network, but it’s providing both work – actually right now probably more Bell than anything else. So they had a – company had great relations with a number of our customers that looked at a mix of how they maintain their fleet with a combination of both new parts as well as some parts can be overhauled. We have entered that business through that acquisition with Able and frankly that’s gone very well so far. We also acquired in the first quarter a company called ATAC. This is a company that provides tactical training and principally under contract to the US Navy, so supporting our current customers. We fly missions that allow the Navy and the Marine Corps to not utilize their own asset to provide things like touch worthy [ph] training, controller training as well as adversary forces for schools like Top Gun as well as a lot of other aggressor forces to emulate enemy aircraft in exercises conducted by the US Navy and the Marine Corps. I would also as a history doing some work for the air force, there is a number of opportunities out there that we think we continue to grow in that space. It’s a nice augmentation for us until – in terms of how we address customer both in the US as well as internationally to provide training capability. There is also a very small acquisition that we did in the quarter. A lot of the service and support that was done on a true simulation and training platforms in particular. Now, the actual simulator maintenance, which is an important part of the business that had been effectively outsourced for quite some time to a small company that was doing that. We think providing the right level of service support is critical to those products over time and didn’t feel comfortable that we should be dependent on a third-party, so we acquired and it was basically acquiring those people, so that they are now part of the company as opposed to having a third-party conducting that service and support.

So the M&A impact on aviation at 1.3% that you mentioned in the slides and was that all due to service or the organic service numbers, somewhat less than the 3.5% to 4% I just mentioned?

Yes, but again, it’s not a huge number either George, but a little bit smaller.

Okay, those are my follow-ups. Thanks very much.

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

Hey, good morning everyone. The 34 jet deliveries in aviation, if I take out 7 Latitudes, it’s 27 ex-Latitude deliveries and last year, it was 33 total with no Latitude. So there is a six – a unit decline of 6 units year-over-year ex-Latitude in the legacy business. How should I think about that rate of change, how it run rates through the remaining quarters of the year?

Noah, I think it’s still going to be relatively flattish. I think what you’re seeing there is that the – in the first quarter, as I said, January and February were pretty slow months with all the stuff going on with the market and what not. But I would say the rate of how the team is doing in terms of sales that certainly picked up in March, through April and we would expect we will continue to pick up a bit through the course of the year. So I don’t think we are viewing it as very different than we originally thought when we guided.

Okay. I mean, should I be thinking rough order of magnitude. I had something close to 30 Latitude deliveries, so call that up 15 for the year. If that six run rate, that would be close to 25, giving you a net spread of up 10. Is it in that ballpark or it sort of sounds like you are saying that negative six could improve through the year?

I don’t think that we can go into that level of granularity at this point. I mean, we are going to be up. I think we might be up a little bit more in Latitudes, but the mix when you get down into M2s and CJ3s and it’s – I just don’t think it’s going to be materially different.

I think Noah, our original guidance in terms of top revenue, we are still on track for that. We still in track to see most of the growth coming from Latitude. And at the end of the day, we expect [indiscernible] be approximately flat plus or minus.

And I think you said you’d expect the Latitude to be mix - slightly mix negative to the overall segment margin this year. Do you expect that it to be negative or positive to the mix next year?

I think, I'm not ready to do 2017 guidance, I think we’ll - we don't know yet next year on what we’re going to look at in terms of the mix of NetJet versus normal retail sales I think it would be probably premature to talk too much about that.

Understood it’s - the business is moving around, I just thought maybe on that airplane you might have more visibility further output understood thank you.

Alright Greg that concludes our call for the day, thank you ladies and gentlemen for joining us.

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