Ladies and gentlemen, thank you for standing by. Welcome to the Textron Second 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. Eric Salander. Please go ahead.

Thanks, Greg and good morning, everyone. Before we begin, I would 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 $3.6 billion, up $93 million from last year’s second quarter. During this year’s second quarter, we recorded $13 million of pre-tax special charges, or $0.03 per share after-tax. Excluding these items, adjusted income from continuing operations was $0.60 per share, down $0.06 from last year’s second quarter. Manufacturing cash flow before pension contributions was $341 million compared to a use of cash of $26 million in last year’s second quarter. With that, I will turn the call over to Scott.

Thanks, Eric and good morning everybody. 2.6% increase in second quarter revenues reflected growth in industrial and Bell. We continued strong performance of Bell in the second quarter with a 13.6% operating margin. Revenues were up on higher military volumes as we delivered 14 H-1s, up from 9 last year. V-22 deliveries were down from 4 in the current quarter versus 6 last year and 21 commercial helicopters compared to 24 in last year’s second quarter. Commercial order flow continues to improve as we booked a number of significant orders in the quarter. We signed an agreement with Shaanxi Helicopter Company in China for 100 Bell 407 GXPs with deliveries expected to begin this year. We also received an FMS award for Bell for 4 412 VP helicopters that we will deliver in 2017. Our Bell 505 Jet Ranger X achieved FAA certification in the quarter, marking a significant milestone for the aircraft and we continue to see a strong conversion of orders. On the development side, our 525 Relentless program resumed the flight test activity earlier this month. We remain committed to this development program and anticipate certification of the aircraft in late 2018. Moving to systems, revenues were down slightly as ramping up TAPV deliveries were more than offset by lower weapons and unmanned systems deliveries. We also completed the final delivery in our Sensor Fuzed Weapon product line in the quarter. We are continuing our development efforts in the area of lightweight precision guided munitions and successfully test our Fury munition against moving targets from various unmanned aircraft systems, including our Shadow platform. At Paris Air Show, our unmanned systems business unveiled its next-generation platform with the Night Warden tactical unmanned aircraft system, with enhanced capabilities and runway independence. Our Textron Airborne Solutions business, ATAC, was awarded…

Thank you, Scott and good morning everyone. Segment profit in the quarter was $295 million, down $33 million for the second quarter of 2016 and a $93 million increase in revenues. Let’s review how each of the segments contributed starting with Textron Aviation. At Textron Aviation, revenues were down $25 million from this period last year, primarily due to lower military and commercial turboprop volume, partially offset by higher jet volume. Segment profit was $54 million, down from $81 million a year ago primarily as a result of the lower volume and mix. Backlog in the segment ended the quarter at $1 billion, approximately flat from the first quarter. Moving to Bell, revenues were up $21 million due to higher H-1 program revenues, partially offset by lower V-22 revenues. Segment profit increased $31 million from the second quarter of 2016 reflecting improved performance. Backlog in the segment was $5.4 billion at the end of the quarter, down $234 million from the end of the first quarter. At Textron Systems, revenues were down $10 million primarily due to lower volumes in our weapons and sensors and unmanned systems product lines partially offset by higher volumes and Marine and Land Systems. Segment profit was down $18 million due to lower volume and mix. Backlog in the segment was $1.6 billion, down $170 million from the end of the first quarter. Industrial revenues increased $109 million largely due to the impact the Arctic Cat acquisition. Segment profit was down $17 million due to the operating loss at Arctic Cat, which was consistent with our integration plan and unfavorable pricing and inflation. Finance segment revenues decreased $2 million and profit decreased $2 million. Moving below segment profit, corporate expenses were $31 million flat with last year. Interest expense was $36 million essentially flat with last year. Our effective tax rate for the second quarter of 2017 was 28.8%. During the quarter, we recorded pre-tax special charges of $13 million. Through the second quarter of 2017, we have recognized pre-tax charges of $150 million under the restructuring plan that we announced last year. During the quarter, we repurchased approximately 3 million shares returning $143 million in cash to shareholders. The work we have been doing over the past several years to strengthen our balance sheet and our businesses was recognized earlier this month by Moody’s with a credit rating upgrade to BAA2. To wrap up with guidance, we are reiterating our expected full year adjusted EPS from continuing operations of $2.40 to $2.60 per share exclusive of the Arctic Cat restructuring and deal costs and other ongoing restructuring efforts across the businesses. We also continue to expect cash flow from continuing operations of the manufacturing group before pension contributions of $650 million to $750 million. That concludes our prepared remarks. And Greg, we can open the line for questions.

[Operator Instructions] Your first question comes from the line of Jason Gursky with Citi. Please go ahead.

Yes. Good morning, everyone.

Good morning.

I was wondering if you could just talk about the demand environment on the biz jet side from a geographic perspective kind of walk us around the world on what you are seeing this quarter and the visibility that you have here into the second half of the year?

Sure, Jason. Look, I think on the business jet side, it’s still very North American centric market. It’s really – I haven’t seen any particular dynamics changing over the course of the year and that’s how we would envision of playing out for the balance of 2017. So, it’s still very North American driven.

Okay. And any potential opening there in China, it looks like the helicopter market is improving a bit for you being driven by China maybe some commentary on the regulatory environment of the demand environment for biz jets in China specifically?

Well, sure. For sure, the helicopter market continues to be stronger in China. The deal with 100 407s, there is a great program for us. We do see the helicopter market remaining strong. But again, from a regulatory environment these are helicopters largely operate at lower altitudes. And there has been a lot more reform around aerospace and those lower altitudes has been up in the flight levels. So in terms of the jet businesses it’s been still pretty weak. And I think part of it is – regulatory art of it has been the politics around business jets in China. And we certainly would expect that that will loosen up over time, but it remains pretty quiet.

Alright, great, okay. And then lastly on the 525, there is a couple of quarters ago where you suggested that the sales force was shifting its focus and its efforts moving [indiscernible] oil, gas market to other end markets that which you have get the aircraft back in flight task, can you update us on the current thinking with regard to the sales of 525 and where you expect the demand to be coming from and what the progress is looking like there? Thanks.

Sure. This is – look this machine was designed as an aircraft that would be ideally suited to the oil and gas market. We still think it’s a great oil and gas machine, obviously that market is in a very difficult spot right now. As oil prices have come a little bit, it’s probably starting to get a little better. We have seen some activity in the later end into that segment, but still very, very weak. And as you know there is not a lot of equipment out there sort of on the sideline, so this is going to take some time from sort of the line between oil and gas recovering and absorption what’s out there before you will see a lot of new aircraft orders I think. But we continue to talk to those customers. They still are very much in our focus. There is still a lot of interest around 525 for that market. But the timing is still to be determined. In the meantime we certainly are continuing to look at the VVIP market, governments troop transport and other sort of utility applications for aircraft of that performance envelope. So we are surely not dropping our focus on the oil and gas customers, it’s – but the timing will be an issue, so we still are working hard at those other markets.

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

Thanks very much and good morning. I wonder if we could talk a little bit about the industrial business and it looks like we started off the year with expectations for organic growth maybe in the close to 5% range and there have been some currency headwinds year-to-date, but it seems to be a little bit shorter that so far, so can we talk about the dynamics in the different businesses and what you expect in the second half?

So I think if you look at the constituent parts obviously automotive right now is more flattish, so there is a little bit of difference regionally, North American auto is down a bit. so I think getting any kind of significant growth on the topics side right now was probably unlikely just given the nature of what’s going in the automotive segment. The business is still performing well, I think our execution in terms of manufacturing operations and key measures like scrap and operational efficiencies and up-time are all positive so we are seeing good performance from the business, but we are not going to see a lot of top line growth in the current automotive environment. Around the vehicle side of the business, I think that for the most part our order rates are good and in the quarter of what we have had both in golf and our ground support equipment businesses and the industrial equipment product lines. So I don’t think there is anything out of the ordinary there. Obviously, mostly growth is driven by the Arctic Cat deal and our focus there continues to be as we talked about really moving a lot of the older inventory out of the channel, that’s going very well, frankly. And really at this point focused on getting new products and getting those launched and getting the dealer channel setup to take on a lot of new product and that will be our focus through the balance of the year.

Great. Thanks very much.

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

Hi, good morning everyone.

Good morning.

Scott, just in the overall business share market you sort of started the strategy a couple of quarters ago to kind of incrementally hold the line on price and then immediately post-election there at least you were asked a lot about policy changes potentially improving demand, so maybe you can just update us on both of those on the former what’s the market receptivity been and are your competitors doing the same and then I guess just with both are either changing demand it’s kind of looks like they are not, but just wanted to get your feel on both of those items?

I think that we are as we have talked about we are increasing our price that we are realizing out there in the marketplace. We continue to do that and we continue to do that in the second quarter, so we are seeing improved pricing versus where we were last year when we said sort of said hey guys enough is enough, we need to start getting some price back into the market. For sure there was some mix out there of customers that are waiting to see some movement on the government side, from a tax standpoint which I think largely people feel would help to stimulate the economy and drive some GDP and improve their business outlook, which would give them more confidence to do capital expenditures on things across the whole business including business jets. So I think there is are still little bit of reservation around that, obviously it’s a relatively flattish market. So I think we are being successful on the price front. We are certainly willing to do that at the expense of some volume and there are certainly some customers who are holding out and that’s fine we are not going to give back on the pricing front, I think it’s moving in the right direction. We need to continue to do more. But I think in general no other demand environment around the business jet side is relatively flat. Frankly, that’s is the biggest drag for us right now around volume is really on the turboprops and a lot of that as you know is more international business. So between economies and exchange rates and all these kind of things that has continued to put some pressure on both Caravan and the King Air product lines, so both of those models are down on a year-over-year basis in terms of volumes. So we are going to – that’s just the nature of the international market, so I don’t think we need to change our strategy, we will keep selling hard. But we would like to see those markets coming around a little bit obviously. The other thing that’s obviously drag for us on the margin side is that we are down pretty significantly on a year-over-year basis on our T6s which is a great product line on the multi-side for us. Hopefully we will see – I think we should see a little bit of up-tick here in the third and fourth quarter versus the first half of the year, but it is certainly going to be down quite a bit on a ‘16 to ‘17 basis and that was baked into our guidance obviously.

Okay. So what was both the Scorpion spend in the quarter relative to that full year $50 million?

Well, we don’t breakout specifically the spending on it. I would say it was – we always said it would be considerably higher in the first half and the second half and that will be true. We have had a very high level of activity here in Q2 as we finished the first couple of production aircraft, we got them flying and are now in the process of doing ordinance work and as we are all being prepared to have aircraft of ready for the experimental flight test program on beginning of August. And those aircraft are built, they are ready, so I would certainly expect that what we forecasted this year ramped down and Scorpion spending in the back half of the year will be true.

So if I just kind of guess at a rough layout of that it would look like you need to be, well, I guess on a reported basis you need to be about 9% aviation margin to get to the 7 that you start of the year targeting and maybe 9.5 to get to the 8x Scorpion, am I hearing you correctly that you are maybe looking at being a little bit lighter that based on what’s happened on the military and the prop side?

Yes. I would say right now I would forecast that on being the lighter side. And again primarily driven by the fact that we are – I would expect we are going to be lighter on the turboprops, particularly the King Air and the Caravan than we would have expected. We are not – we have to see how the back half of the year plays out, but certainly we are going into the back half of the year with a lot more turboprop volume requirement than we would had in our plan.

Okay. Thank you.

Sure.

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

Good morning.

Good morning.

I was wondering if you could go back on Bell and you called out the continuing strength on the commercial side, can you just talk a little bit more about what’s giving you that confidence, just because I am looking, we certainly see the weakness in oil and gas and oil and gas prices, is it simply the China order, just trying to get a little bit more around that please?

Sam, I think it’s much broader than that. I mean obviously the China order was grate for the 407, but we have seen strengthening just on normal sort of one-off order flow on 407. We see continued strength in our 429 product line. And again these are not fleets deals, just good flow of activity and orders closing on the 429 program as well as 412s, so the 412 order book continues to strengthen. There are still a couple deals out there that need to close through the balance of the year that we would expect to have happened that are sort of in negotiation. But it’s really – it’s – 505 obviously is, we’re going to resort it in a “as best as we can make and we will ship them scenario,” but that is not a whole a lot of dollars per aircraft, obviously. But I would say that when you look at our portfolio of the 505, 407, 429, 412, it’s – the order booking has strengthened across all those models and a broad range of applications, everything from military application to VVIP, EMS, search and rescue. It’s pretty strong across the board.

And is the backlog declined sequentially than all on the military side?

Yes. And that’s mostly normal for us, Sam, right. I mean, when we know that we don’t put the V-22s on the multiyear in until that year’s funding is appropriated, so we usually have this sort of cyclical backlog that happens largely driven by that.

Okay. And then also on Bell, just the strong margin this quarter, can you talk a little bit about what EACs were versus just the richer mix just in terms of the moving pieces to get that margin?

The EACs are reported sort of companywide, so I do not think we will go into in a lot of detail there. But we had positive performance and – but it’s not as huge going on a year-over-year basis in terms of the numbers. It’s just – our kind of the teams continues to have good, solid performance. Obviously, getting some additional volume on the H-1s in quarter was helpful. But the guys are doing a good job controlling cost and executing well and getting product delivered.

And I am sorry, one last question, the Canadian TAPV, I know it’s not in Bell, but just the Canadian TAPV, any change in kind of your outlook after taking that adjustment back in the first quarter?

Not really, Sam, and will continue to be a challenging program. The good news is, our deliveries in the quarter were kind of double from where they were in the first quarter. We continue to have – our slights on sort of finishing the majority of that program this year with, obviously, a little bit going into the second half of next year, but – which is still a challenging program, but we are getting it behind us.

Okay, thank you.

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

Yes. Hey, Scott. I wonder if you could go further on architect integration in terms of how that’s going and kind of give us a line for return to profit there. And I am not – and one variable that goes along with that, and I am not sure about it, I was wondering if there is kind of a long-term purchase intangibles that you have that’s going to be kind of a drag on the GAAP profit for a while?

So, really I think the integration so far is going well. I think we are through that first vertical few months, so we are getting the team through all the organizational changes and all the things that sort of go with a major acquisition. Everybody, I think, at this point is focused on their primary jobs and getting the work done. Job one, as we talked about, was running programs to try to clear out a lot of the aged inventory that was out there in the channel, and we ran out that pretty hard, and I think we have seen a lot of success in doing that and creating room for floor plan for these guys as we bring out and start to launch new product. We will have a lot of integration in the launch a lot of new products here as we get into latter part of August into September. On the dirt side, I think the snow product launches, which happened right before we completed the acquisition, have gone well. So snow bookings have been good. And the dirt process is one where we are integrating across so that we really look like the same company across everything from ATV through all the side-by-sides and up through the high-performance products. So I think we are in fairly good shape. We needed to do around organization. We have made all of our announcements in terms of what we are doing in terms of operational restructuring and aligning our production facilities. Obviously, and as Frank said, part of our plan here, it is losing money right now, which was part of our plan. We are running at low manufacturing rates, which, again, is consistent with our strategy to sort of bleed down a lot of that inventory that is out there and then start the reloading process with new product here as we get into the latter part of the year. So everything that we said we were going to go do is what we are in the processor of doing, and I think we are fine. There is nothing from intangibles or…

I mean, there is some drag associated with intangible amortization in the number broadcast that we gave, which was kind of the $0.10 dilution for the year, as Scott said, given the lower volumes and that accretive into ‘18, now includes all of the M&A accounted for.

Yes. So I think the guidance that we gave around, our anticipated dilution this year is, is going to be about what we thought it was, and it should become accretive as we go into 2018.

Okay, great. I appreciate that. One quick follow-up of a little surprise, you had the final Sensor Fuzed Weapon delivery this quarter and didn’t hit double-digit margin at systems. Is that the impact of TAPV being zero margins? And I think you said you could hit 8.5% on the full year at systems, is that still possible?

Yes, I don’t think that is possible, Pete. There is no question this TAPV issue has been a problem. As I said, the bulk of that, I think, has already been recognized, obviously, but it is going to put a driver on the total year systems number for sure.

Okay, got it. Okay, thank you.

Your next question comes from the line of Cai von Rumohr from Cowen & Company. Please go ahead.

Yes, thank you very much. So I think at the first – after the first quarter, you indicated that total aviation R&D like was going to be down in the second quarter. Can you comment as to whether it was? And were there any other issues that we should be aware of, like used aircraft losses were higher, lower, anything like that?

No, the delta is, in both the R&D front and the used aircraft loss you were negligible. I think…

Negligible versus the first quarter?

It was up very, very slightly and negligible versus the year-over-year comparison. So the dynamic is going on with respect to the margin we’ve guided is largely driven around the fact that no – as we talked about in the jet slide, were pressured because of the little bit higher mix around our net jet deliveries and the fact that we were down pretty appreciable on the turbo front for both the Caravan and King Air on the commercial side as well as the T-6 on the military side. The T-6, we fully expected. That was baked into our plan. All of the numbers around R&D so far have been essentially what’s baked into our plan. The pressure point really for us has been around the lower volumes on the King Air and the [indiscernible] what’s kind of pressuring us from a planned perspective.

Yes, the R&D, the aviation was up in the second quarter versus the first quarter, right? I think you said it was up like $7 million or $8 million year to year. By my numbers, the R&D has to come down very sharply in the third and fourth. Is that a – sequentially, is that kind of the way things go?

Yes, I expect it will come down and largely driven by the fact that we have got the bulk of the work around the Scorpion program behind us. So, we will obviously do some continued spending as we work our way in both the certification flight test program and the Air Force experimentation program, but it will certainly be down sequentially.

And then you talked of improved pricing. On the Q1 call, you talked of improved pricing sequentially on all models. Give us some more color on what does improved pricing mean.

Well, improved pricing, if we look at everything, because what we disclose is on a year-over-year basis. For most models, we were also seeing continued sequential pricing. There are some exceptions in there, which is why I would be careful that – for instance, on Mustang. Mustang pricing was down sequentially, and that’s largely because we stopped production of that aircraft, and we had the last aircraft that we were selling, and so we did do some additional discounting to move those last aircraft. Now the good news is that is done. We have sold the last of the production Mustang, so that would not be a factor for the balance of the year. But the teams are continuing to see progress on the pricing front and I expect we will through the balance of the year, and we are will to trade volume to make that be true.

Terrific. Last one. Bell margin, given the huge margin you had in the second quarter, can you beat the 11% Bell we have set out in the fourth quarter?

Yes, I think so, Cai. If we were to lay out sort of just color around that thing, I think Bell was continuing to have a strong year and are executing well in the military programs. We are seeing some strength on the commercial side, obviously, which is good. I think there will be upside there that will help to cover some pressure around where we are with systems, particularly with the TMOS business, it’s still a little bit to be determined as you are around backyard volumes on the aviation business.

Thank you.

Thank you.

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

Thanks. Maybe one for you, Frank, on cash flow. First half is pretty darn good in terms of free cash of manufacturing. Just looking at the seasonal pattern historically: a, I’m not sure you ever had second quarter inventory goes down; and b, it looks like it will at or above the top end of the range from a guidance perspective. Can you give some color around that?

Sure. Yes, now that look the seasonal pattern, which certainly suggest will be stronger in the second half. We continue to believe that. CapEx will be heavier in the second half. So it is a little back-end loaded. Obviously, as Scott indicated kind of we continue to see kind of volume that we need to move out there. So, it’s kind of a little early to be kind of changing our guidance, but certainly, we think we have given the strong first half performance. We think we have upside on the cash side.

Okay. And then one quick one on rev rec standard adoption in ‘18?

Yes.

Is Bell the one we should think about, because the V-22 volume would decline in ‘19 from a delivery perspective, but I guess you might accelerate some of that decline in ‘18, if you go to TSA?

Yes, I mean, look it impacts Bell. It impacts systems. It impacts kind of frankly top line net revenue versus gross revenue in some of our other businesses, but we are still working through kind of all of that, but we don’t expect it to be have a material impact when you look at the corporation.

Okay, thanks.

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

Thanks a lot. Hi. Just my first question on industrial, just wondered if there was any update on that sort of $400 million to $500 million sales guide for the year in Arctic CAT and also I guess what was the actual EBIT impacting Q2 from that acquisition?

I’m sorry Julian, I don’t have that number in front of me and we don’t – we are not going to go into EBIT at the individual sort of sub-segment level. But I was sufficed to say that in terms of how the business is performing, it’s performing consistent with our plan.

Understood. Okay. And then just following up on the cash flow question, I guess, if you think about the components within that full year guidance 650, 750. What sort of working capital assumption is dialed into that given the way you stand now?

I am not sure I understand how to answer the question, Julian. I think from our operational working capital standpoint, we are pretty confident where we are the issue, which I think was what kind of Frank was saying is that when we look at the total year perspective, while we are certainly, I think it’s going very, very well so far. We would expect it to go very well for the balance of the year. The issue will be around, I think, particularly sales volume at aviation, which would be finished goods. If we decide that we are not getting priced and we are good in trade volume. So operationally, I think I am not concerned, it’s a question of what the volume is going to be in the second half on aviation.

Thank you. And then my last one would just be on the King Air side, did the second quarter there play out largely as you thought. I mean the declines were a bit less than in the first quarter and you still think there is a reasonable chance you can get to sort of flattish deliveries for the year as a whole in King Airs or is the first half is sort of too lower bar for that to happen?

Well, the second quarter was certainly better than the first quarter with respect to our expectations and our plan of unit volumes, but we certainly need to see a pretty significant uptick in demand in Q3, Q4 and I don’t – we will see how the market plays out, Julian, but you are right, what we were off of what we would have liked to say our plan was more in the first quarter than the second, but we do need to see a material increase in volume here in Q3, Q4 to get to where we would like to be on King Airs.

Understood. Thank you.

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

Hey, good morning, guys.

Good morning.

Just following up on the last question with regards to King Airs, Scott, do you think it’s – just trying to gauge whether you think this is a shorter term issue where it might be international weakness or do you think its longer term where you are seeing cannibalization from the light trucks coming in and eating up King Air demand?

No, I think it’s really the dynamic, Sheila, is more around just international markets are still – are still kind of tough. And our exchange rates obviously are quite strong. And it’s making the product more expensive and we are not willing to take price out of there to sort of compensate for that. And so we are kind of holding the line on that. Again, remember this is a market where we have a product that’s very popular product to a certain product and we just kind of have to hold the line with it. So, I don’t think it’s a cannibalization particularly in the international marketplace, the King Air performance envelope and the mission that it fulfills is pretty unique. And I think we will be fine over the long-haul, but we need to hold the line here in the near-term.

Okay, that makes sense. And then if I could follow-up on the Scorpion and just the OA-X flight testing in August. I mean, could you just elaborate more on the process and sort of what you expect with ideal scenario for Textron coming out of it?

Well, as the Air Force has articulated, the experimentation program will really put these aircraft through their pace as they have got a bunch of different mission scenarios that includes from flight envelope, a lot of different mission scenarios, ordinance missions that are going to be run over the course of that August maybe in the beginning of September. And so they don’t have a specific criteria or pass, fail, they just – they want to see what the aircraft are capable of. Obviously, you have things like Scorpion and then AT-6 which are both very, very capable platforms, very different in terms of their performance envelope and they want to see what each of those aircraft can do as well as A-29, which we expect is also in there. So, it really is no – it’s unusual, it’s not a matter, hey, guys, you got to go do X or Y or Z or here is the past, they want to see what the aircraft are capable of. So that would be the first step in a process here and as the Air Force has said that will kind of inform them as to what they think their next step is.

Understood. Thank you very much.

Sure.

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

Good morning, gentlemen.

Good morning.

In regard to systems and defense overall, can you provide some color on the puts and takes around growth next year and what we should be focusing on. You talked about the TAPV and what’s going on there by putting that aside?

Well, I don’t know – obviously we are not quite ready to get into guidance for next year in terms of dynamics just mentioned particularly around TAPV and Ship-to-Shore Connector, which have been some of those more challenging points of the – of the systems business. We will have most of TAPV behind us, which is good. So I have certainly seen improved year in that regard and we expect that volume to largely be replaced by other vehicle programs, which historically have been normal good margin programs for us. So, we certainly see significant change in margin rate on a year-over-year basis there. Ship-to-Shore Connector, which again has been a multiyear fixed price development program, which has always been a difficult margin program, is going to be converting and starting to transition into production. We are in the process of negotiating long lead material and in the initial production units. So again from a year-over-year basis, I think particularly around the TMLS business, which has been a challenge for us MLP here in the last couple years frankly, we should see that business transitioning from fixed price development and a difficult fixed price development and production program into more typical margin programs going forward.

Excellent. On free cash flow given the comments you made earlier about inventory control and capital management, how are you thinking about conversion going forward?

Look, no differently. It’s where we should be converting cash kind of bit under one times, depends on CapEx levels and spending levels and deposit activity and things like that. So there is volatility to it. But we have been focused on kind of better working capital management and that’s what we are seeing, but no change in longer time expectations.

Right. Thanks for your time.

Sure.

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

Yes, thanks. Good morning, Scott and Frank.

Hi, Peter.

Hey, just quick one Scott on following back on Scorpion, I know obviously, the experimental programs, the most important thing here near-term, but was there any incremental takeaways from discussions in Paris, I mean seeing the aircraft over there?

Well, I would say from a Paris perspective, we continue to get good exposure from potential foreign customers, which has always been a key focus on the Scorpion program. I think that the aircraft especially now that we have the production versions available which is something that a number of the prospective customers have wanted to see. We continue those dialogues. Some are kind of watching and waiting to see a little bit what happens with the Air Force experimentation program and others continue to have more specific discussions with us around when they want to come over, when they want to fly the aircraft and are laying in some cases their own plans and budgets in place for the program. So I would say Paris was positive. But again, we really are very focused on experimentation program because I think that not only the will the U.S. Air Force get a good read on the capability of the platform, but I think a number of our perspective international customers are likewise on watching to see how the programs goes.

That’s great. And then just two quick ones Frank, just housekeeping on the stock buyback what’s left on your availability for that and then also what’s the expectations of the tax rate for the years I think last that was around 30%?

Yes. I think we have got about 20 million shares or so left on the authorization, but we will just redo the authorizations as required, so there is no real – there is no limitation relative to authorizations really because that’s a continuing thing that we look at. And tax rates should be around 28.5% for the year. So we will be a little better than where we had originally guided.

Perfect. Thanks.

Your next question comes from the line of Drew Lipke from Stephens. Please go ahead.

Yes. Good morning. Thanks for taking the time.

Sure.

I guess first question is on longitude, can you update us on where we stand as far as potential order activity there and then when you look at just kind of level of competition in the super midsize segment I mean how confident are you in your ability to hit the margin goal for the program as we stand today?

Well, I think we are pretty confident. The aircraft is flying really well from a performance standpoint in terms of the things our customer look at around range and useful load and speed we have a better aircraft and other aircraft that are in that segment today. So I think that as we talk to customers about the aircraft and accumulate a lot of information around the flight testing, it’s all very positive. I think people are very enthusiastic and we just – keep in mind, we just built the first one that really has a nice real aircraft with the real customer interior and are just entering into the phase where customers will get a chance to actually fly in the aircraft on demo flights. So we do have – we have already have some order activity, but you wouldn’t expect at this point to see a whole lot of that until people can actually fly the aircraft. And that’s the phase that we are entering into at this point. So I think we will do well. I think it’s again from a performance and pricing standpoint I think we are in a good place and we will see how it plays through the balance of the year.

Okay. And then just jumping over to Scorpion, two questions on that, I mean on the one hand you have got key members of the Air Force testifying consistently stating publicly that the OA-X program is the strategic priority and you have got Senate Armed Service Committee dedicating $1.2 billion, but on the other hand if you look Air Force’s unfunded priorities list, there is no mention whatsoever of the program, so I am curious what do you think of it, how do you kind of reconcile those two and what your take in the criticality of the program and then just also that the $2 billion of light attack for that Saudi package, do you believe that’s dependent on the OA-X program and what do you think your odds are there for that the Saudi piece?

Well, so I guess what I would say is part of the U.S. Air Force concern, remember that where they are in this process is an experimentation program. So I think the chief and a lot of very senior people Air Force have been articulating the need for a platform like this. And they feel that it’s important to the Air Force to have the capability like this, but it would be hard for them I think even on an unfunded list to advocate for something that they haven’t flown and seen demonstrated. So I think that their interest and desire on the program and certainly as you know the Senate Armed Services for instance saying what we have recognized this is a need and we want to put budget authority in there for it. We also can’t get the problem worse here. I think the Air Force is being pragmatic about the fact that they need to execute experimentation program, understand what the capability is of the platforms that they are looking at and then take their next step, whatever that might be. So I think from a process standpoint they are doing it an appropriate fashion, it will be very hard for the Chief to say how I am going to advocate for something that I haven’t flown and don’t really know what it’s capable of doing. So slightly that’s kind of where that the processes is on Air Force side. In terms of the Saudi budget item around OA-X, obviously this is one of the customers that we are in discussions with, but these are early on discussions. There are certainly a number of things that we are looking at, but we think that now the performance envelope, the capability of what Scorpion can do makes it a very viable product for what their requirement is, but it’s still in its formulative stages I would say.

Great. Thanks.

Sure.

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

Good morning. I wanted a clarification on Scorpion R&D Scott, it would seem to me like the Scorpion R&D was maybe up $5 million or so in the second quarter relative to the first quarter as opposed to the expectation it was going to be down a little bit, is that fair?

George, we don’t – obviously, we don’t breakout R&D in the individual businesses and certainly by product line, but without any numbers to it, in other words a significant amount of spending around Scorpion in the quarter. It was pretty comparable where it was in the first quarter, I mean the – we really have talked more about first half, second half around scorpion, because of the balance of work that we had to get going here in the first couple of quarters. But so there is no material change from where we would have expected it to be, but we still have to believe you will certainly see less spending as we go into the back half of the year.

And may Frank, first quarter you disclosed in the Q that there was $11 million pricing benefit at aviation, can you disclose what it was this quarter or we got to wait for the Q?

No, we had some positive pricing. But we will wait for the Q.

And then aftermarket relatively flat or up a little in the quarter?

Flat.

And then Scott, just in general you say that the demand is kind of like what you have been expecting so far in aviation, but we got a book to bill of one, business jet cycles have been going up, used planes as a percentage of fleet keep coming down, you are getting better pricing, so I mean what else does it take to get you to be slightly more positive on where the cycles go on?

Well, I think just more demand, George. It’s – I do think the business jet market in terms of where we expected to be is about where we are with these, right. I mean we are trying to get some pricing out there and we are succeeding with that. We have to succeed with that. I think that we would feel better about a prospect or if we did see some something around tax reform what people felt better about their businesses and therefore more likely to spend CapEx. But the business jet market is largely where we expected to be. I don’t think it’s much better or worse. I think there could be some upside if we get some tax stuff done. The thing that’s creating more of a drag or kind of what you are watching more closely is really around more of the total box side, which is a different dynamic as we talked about being a more international market for the Caravan or the King Airs, but I think the business jet side is performing as we expected.

Okay. Thanks very much.

Sure.

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

Hi, good morning guys.

Good morning.

How is the aftermarket been doing for Textron Aviation, broadly speaking when you think about spare parts and training services as a whole non-OEPs of the business, how is that growing?

It’s pretty flat on a year-over-year basis.

And what do you think is causing that?

Well, we haven’t had a dramatic change in the fleet size obviously. I would say you are not seeing the kind of install base grow. I mean your – our relative level of deliveries is flat or below what’s been here in the past decade certainly. And you see lot older aircraft that start aren’t being pulling that much. So there is no at a macro level there is nothing to drive a whole lot of additional service when your installed base really isn’t changing dramatically.

Yes. So I mean when we think about what’s been going on in the mid-to-late business jet markets, I guess to some extent even that the largest or even worst more recently, strategically when you think about the portfolio Scott, I mean when does the time will start doing some portfolio repositioning?

We come around the aviation side?

Just in general, right. I mean here we are how many years, 8 years past the financial crisis and biz jets aren’t growing again. And I mean when – I don’t want to say when you are throwing the towel, but when do you start thinking about different bigger likes of the business, something like that to bolster growth?

Well, look without getting I mean obviously if we had something in the M&A world but we were – on the road of journey, we would kind of talk more about that. I don’t think there is anything on the near horizon that we would have any conversation. I think when you look at each of the individual businesses, aviation is probably, perhaps, our best example right now is that we were trying to focus our R&D dollars in expansion of our portfolio within that business, right. So when you look at it not only going into the single-engine turboprop space, as you look at longitude and then hemisphere going up into those classes of aircraft where we have not been, we are trying to focus our R&D spending in those spaces that will give us net growth, right? So Scorpion certainly falls into that category. So most of the money, virtually all the money right now that we are spending is in products that will be adds to that portfolio; which are not, we are going to take away from existing with aircraft sales, because they are in a different class of aircraft than what we have had in the past. So, I mean that is our strategy organically to do that in the aviation business. Obviously, the same is true in the Bell Helicopter businesses. If you look at the 525, which is the biggest Bell we have ever done. When you look at the 505, which we are started to realize some of the benefits going back into the light helicopter side, where we have not been for a number of years; obviously, we got the V-280s and V-247s to expand the portfolio into a very large part of the military market. When you look at the vehicle business, expanding more into the consumer side, so again, I – I think, from an investment standpoint, I think where we are focusing our R&D dollars organically across our businesses is principally in expanding beyond the portfolios that we have historically served to try to drive growth even in a flattish environment. Now, obviously, if we can get some tailwind in the aviation side, or that’s all good for us, but we need to be spending our money in places that will drive long-term growth by expanding the rest of those product lines.

Yes. And then maybe one more just sort of smaller business, but I thought it was intriguing. When you had a us all down in Georgia and we were visiting the facilities down there, the aircrafts or what I call airport ramp mobile infrastructure business, right, with the DI service and TUG and Douglas and other, how is that business going? I mean, are you seeing growth there? And is there more to do there because that seems like an interesting niche?

Sure. Look, it has been – the acquisition that we started TUG a few years ago has gone extremely well. The deal went as we expected from a just integration standpoint. The growth of the business has been strong. We have added deicing side with Premier and then with Safeaero last year, and we continue to look at what would be likely smaller deals and we still kind of hunt around that area. We like it. We have a good position there today, I think a very good reputation with customers across that market and certainly that scenario that we would continue to look at things where we could expand because the ground support role has been a – it was a great acquisition for us and that continues to perform well on organic basis as we introduce more products into that space.

Okay. Yes, cool. Thank you so much.

Sure.

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

I just had a couple of follow-ups. Were margins up or down year-over-year in just the pure jet original equipment piece of aviation? So ex Beech, ex prop, ex aftermarket, ex R&D, just the Cessna jet OEPs?

Well, obviously, we don’t provide that, Noah, but we did talk just from a color standpoint of about one of the pressures being higher mix of net jet latitudes. And that does put some pressure on margin rates. On the other hand, we have some positive around, trying to dig as we have improved our pricing. That is on the beneficial side. So the bulk of the pressures obviously is more around the lack of the turboprops, but we have been challenged, and as you know, we will continue to be challenged around the mix associated with higher net jet deliveries.

Okay. Yes, okay, maybe should have even asked that ex that. I am just trying to better understand margins is going…

I will just send you our gross margin by aircraft, and then we would not have a question.

Well, there would still be a good half a dozen airplanes in that question and it’s an upper-or-down question. I was just trying to understand, because pricing getting better but margins going down as tough to square, although obviously the prop and the military mix stuff…

As described, Noah, the prop and the military is the primary driver. When you look at our equipment sales, that’s just difficult. Those are great products for us, and if I look this as issue, obviously, the military is a separate discussion. But when you look at the Caravan and the King Airs, we are trying to maintain the prices up there. We need to keep these as fair profitable products. And that’s you are going to see, you have seen and you would continue to see lower volumes, because we are going try to hold a line there.

Okay. And then just one more, I know you mentioned maybe some upside to the full year plan for the Bell margin, but I wanted to just maybe better understand what drove it to be so strong in the quarter in an effort to better understand what’s sustainable versus what was purely specific to the quarter. And it kind of looks like each one having five extra units, if I were just to super rough math, assume they are $25 million a copy and a 25% incremental margin, that would kind of get you right to what the year-over-year EBIT change was, the $30 million bucks. So is that directionally correct that it was mostly H-1 mix or is there some cost savings in there that is sustainable going forward?

It is a combination of both. Obviously, the H-1 volume is helpful to us, but we also had good cost control and overall business performance. But yes, there were some big one-time sitting in there.

And, Noah, on the military side, you need to think about incremental margin coming through at a NAF margin, not a gross margin level, just the way the accounting works and the accumulation of cost into inventories that area.

Okay, so that would be – so what I said would be much too high?

Yes.

Okay. And then so that would imply something like half of it was just sort of savings in performance, okay. Yes, that’s really helpful. Okay, great. Thank you.

And at this time, there are no further questions.

Terrific.

Thank you. That concludes our call. We will see you next quarter.