Textron Inc. (TXT) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Textron Earnings Conference Call. At this time, all participants are in 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 revenues in the quarter were $3.8 billion, down $267 million from last year. During this year's fourth quarter, we recorded $73 million in pre-tax restricting charges or $0.23 per share after tax and other onetime favorable adjustments of $0.10 per share after tax. Excluding these adjustments, adjusted income from continuing operations was $1.15 per share, up $0.41 from last year's fourth quarter. Manufacturing cash flow before pension contributions was $284 million compared to $477 million in last year's fourth quarter. For the full-year, revenues were $14 billion, down 2% from a year ago. Adjusted income from continuing operations was $3.34 per share compared to $2.45 last year. Manufacturing cash flow before pension contributions was $784 million, down from $872 million last year. With that, I'll turn the call over to Scott.

Thanks, Eric, and good morning, everybody. Q4 was a very strong quarter. Despite low revenues, margins were up, driven by strong execution in our businesses with year-over-year in op growth of 10% and 160 basis points of margin improvement. At Bell, execution remains strong despite lower revenues from military volumes in the quarter. On the commercial side, we delivered 46 helicopters, up from 45 in last year's fourth quarter. In the quarter, we achieved, both FAA and the asset certification of 407GXi, which offers next-generation pilot experience, connectivity, precision navigation, and enhanced engine controls. Also in the quarter, Bell 505 Jet Ranger X fleet reached 10,000 flight hours worldwide, achieving the milestone in less than two years since entering service. In December, the Sacramento Police Department became the first police agency to take delivery of the law enforcement-configured 505, continuing to demonstrate the mission versatility of the aircraft. On the military side that was awarded $188 million for five additional V-22s as part of the Multiyear III contract modification. That also received a multiyear contract to provide logistics and repair services for the U.S. Navy and Air Force’s V-22 fleets with $277 million in backlog for year one and options for an additional two years. Also in the quarter, the Royal Bahraini Air Force announced an order for 12 AH-1Z Viper attack helicopters at a ceremony at November’s Bahrain air show. This is one of many foreign military opportunities for the H1 platform that we're continuing to pursue. On the new product front, Bell marked the anniversary of the V-280’s first flight in December. Since its first flight one year ago, the V-280 has completed over 80 flight hours and has now exceeded 280 knots true airspeed with in-flight transitions between cruise mode and vertical takeoff and landing. We're excited to continue demonstrating the agility, maneuverability, and operational readiness of this innovative and technically advanced aircraft. At Systems, revenues were down on lower TAPV delivers at Textron Marine & Land Systems and lower volume at Unmanned Systems. In the quarter, Textron Marine & Land Systems received $314 million contract modification in support of the U.S. Navy Ship-to-Shore Connector program for the procurement of long lead material on the first production lot. We continue to make progress on the current engineering and manufacturing development contract with first two craft in test with deliveries anticipated this year. Also in the quarter, Textron Systems received $152 million multi-year contract to provide Shadow Tactical UAS contractor logistics support, aircraft production and ground control equipment through mid-2020. Textron Systems also was awarded a multiyear contract from NAVAIR for upto $401 million to conduct intelligence, surveillance and reconnaissance services with Aerosonde unmanned air vehicle. Moving to Industrial, revenues were lower in the quarter, primarily reflecting the disposition of the Tools & Test business. This week, Textron Specialized Vehicles announced a partnership with Bass Pro Shops and Tracker Marine, to launch a line of Tracker Off Road brand in side-by-sides and ATVs. Bass Pro Shops is the world's leading outdoor retailer with a network of nearly 200 destination retail stores and 575 independent Tracker Marine dealers. Combination of Tracker’s brand strength and established dealer network and our own expertise in designing and manufacturing, advanced powersports products will provide us the foundation necessary to accelerate our growth in this industry. At Textron GSE, our ground support business received an order for 56 TUG tow tractors from Envoy Air, the largest regional carrier for American Airlines. 2018, we saw growth in revenue and operating margin at Textron GSE and expect to see this trend continue in 2019. Also in the quarter, Kautex won a contract for its first hybrid fuel system with the Renault Nissan Mitsubishi Alliance in Japan as Kautex continues to grow in the plug-in hybrid electric vehicle segment. Moving to Textron Aviation, revenues were up $1.6 billion, up 12%. In the quarter, we delivered 63 jets, up from 58 last year; and 67 commercial turboprops, up from 45 in last year's fourth quarter. For the full year, we delivered 188 jets, up from last year’s 180; and 186 commercial turboprops, up from 155 last year. We continue to see strong orders across Citation business jet portfolio, which resulted in quarterly order growth, both sequentially and on a year-over-year basis in each quarter of the year. On the new product front, the Citation Longitude received its provisional type certification in the quarter, allowing operators to begin flight training in preparation for deliveries in 2019 as we prepare for final type certification. To sum up, 2018 was a strong year for our businesses. We continued our strategy of investing in new products and leveraging operations to drive earnings growth and margin expansion across Aviation, Bell and Systems while returning significant capital to shareholders. While we're disciplined in our Industrial results due to performance of our specialized vehicle business, we’ve implemented a number of changes, we made several leadership changes, rationalized product lines, reduced the manufacturing footprint, implemented a cost reduction program and launched a new distribution partnership for our powersports product, all of which we expect will position the business for success going forward. Looking across all the segments, we have many other items to highlight. At Bell, we received significant procurement contracts on key V-22 and H-1 platforms from our U.S. customer. We also opened our new Advanced Vertical Lift Center in Arlington, Virginia allowing Bell’s military customers, partners and policymakers to gain exposure to our technology for the future vertical lift including V-280 and unmanned V-247. On the commercial side, we continue to see an increased demand across the portfolio. We delivered 192 commercial helicopters in 2018, up from 132 a year ago as our customers continue to acquire our aircraft for a variety of missions. For 2019, we'll continue to ramp production of the 505, and we're increasing production rates on other models based upon increased customer demand. At Textron systems, we continue to see good progress including follow-on orders for our unmanned surface vessel, additional fee-for-service task orders with Unmanned Systems and the award of procurement contracts being ramped with U.S. Navy Ship-to-Shore Connector production program. We also announced our intent to form a joint venture between TRU Simulation and Training and FlightSafety International to better serve our Textron Aviation customers. Textron Aviation experienced improved jet order intake throughout the year. For the second consecutive year, the Latitude earned the title of the Most Delivered Business Jets in the Midsize Category, while the Longitude successfully circumnavigated the globe, demonstrating its commanding performance and reliability to customer along the way. We announced the expanded relationship between the Textron Aviation and NetJets, reaching agreement to purchase 175 Longitudes and 150 Hemispheres. Success of these platforms demonstrates the importance of new product introductions in this competitive segment. On the new product front, we advanced our two new turboprop programs, unveiling a full-scale mockup of the SkyCourier and NBAA, and a full-scale mockup for the Denali of Experimental Aircraft Aviation show. Both aircraft continue to make good progress and are expected to make their first flights in 2019. With these accomplishments behind us, we're well-positioned coming into the year. As we look at Textron's 2019 financial guidance, we're projecting revenues of about $14 billion. At Bell, we’re expecting strong execution again in 2019 with flat revenues of lower V-22 production is offset by higher commercial volumes. At Systems, 2019 is an important transition year as we move the Ship-to-Shore program from development to production. At Industrial, we expect better execution in our specialized vehicle business to drive improved profitability. At Aviation, we're projecting continued growth on increased aircraft deliveries across the portfolio, including the Longitude and a double-digit operating margin in 2019. We're projecting EPS from continuing operations in the range of $3.55 to $3.75 per share and manufacturing cash flow before pension contributions to be in the range of $700 million to $800 million. With that, I'll turn the call over to Frank.

Thank you, Scott, and good morning, everyone. Segment profit in the quarter was $397 million, up $37 million from the fourth quarter of 2017 on a $267 million decrease in revenue. Let's review how each of the segments contributed, starting with Textron Aviation. At Textron Aviation, revenues of $1.6 billion were up 12% from this period last year due to higher volume and mix across the jet and commercial turboprop product lines as well as favorable pricing. Segment profit was $170 million, up from $120 million a year ago due to higher volumes and favorable pricing. Operating margin at this segment was 11%, up 240 basis points from last year. Backlog in the segment ended the quarter at $1.8 billion, about flat from the end of the third quarter. Looking to Bell, revenues were $827 million, down from $983 million last year, primarily on lower military volume. Segment profit of $108 million was down $6 million, largely on lower military volume, partially offset by favorable performance. Operating margin at the segment was 13.1%, up 150 basis points from last year. Backlog in this segment was $5.8 billion at the end of the quarter, up $100 million from the end of the third quarter. At Textron Systems, revenues were $345 million, down from $489 million a year ago, reflecting lower TAPV deliveries at Textron Marine & Land Systems and lower Unmanned Systems volume. Segment profit of $37 million was flat with last year's fourth quarter, with lower volume and mix offset by favorable performance. Operating margin at the segment was 10.7%, up 310 basis points from last year. Backlog in the segment was $1.5 billion, up about $300 million from the end of the third quarter. Industrial revenues were $1 billion, down 12%, largely related to the disposition of our Tools & Test product line. Segment profit was $73 million, down $10 million from the fourth quarter last year, largely due to the impact from the disposition. Favorable performance reflecting a positive impact of $17 million related to patent infringement matter was offset by inflation and mix. Operating margin at the segment was 7.2%, about flat with last year. Finance segment revenues increased $3 million and profit increased $3 million. Moving below segment profit. Corporate expenses were $12 million, down $32 million from last year's fourth quarter, largely due to lower stock-based compensation expense. Interest expense was $34 million, a decrease of $4 million compared to last year. With respect to our restructuring plan, we recorded pre-tax charges of $73 million on the special charges line in the quarter. We ended the year with manufacturing debt of $3.1 billion. For the full-year, we repurchased approximately 29 million shares at an overall cost of about $1.8 billion. Turning now to our 2019 outlook, I'll begin with our segments on slide nine of the earnings call presentation. At Textron Aviation, we're expecting revenues of about $5.5 billion, reflecting higher volumes across our commercial product lines. Segment margin is expected to be approximately 10%, reflecting higher volume and improved performance. Looking to Bell, we expect overall revenues will be flat at about $3.2 billion, reflecting lower military volumes, offset by higher commercial volumes. We’re forecasting a margin of about 12.5%. At Systems, we’re estimating lower 2019 revenues of about $1.4 billion, reflecting lower volumes at Textron Marine & Land Systems and Unmanned Systems. Segment margin is expected to be about 9%. At Industrial, we're expecting segment revenue of about $3.8 billion and a margin of about 7%. At Finance, we’re forecasting segment profit of about $20 million. Turning to slide 10, based on the U.S. planned discount rate of 4.35%, we’re estimating 2019 pension income to be about $10 million versus pension cost of about $33 million last year. Turning to slide 11, R&D is expected to be about $620 million, down from $643 million in 2018. We're estimating CapEx will be about $380 million, up from $369 million last year. Moving below the segment line and looking at like 12, we're projecting about $140 million for corporate expense, a $145 million for interest expense, and a full-year effective tax rate of about 20%. Our outlook assumes an average share count of about 233 million shares as we continue to deploy the majority of our free cash flow toward share repurchase in 2019. That concludes our prepared remarks. So, Greg, we can open the line for questions.

[Operator Instructions] Your first question comes from the line of Peter Arment from Baird. Please go ahead.

I guess, a question on Bell. Frank, you mentioned the 12.5% margins. That's a little better than I think we were expecting. Is there any differences on the first half versus second half just based on the cadence of your volume?

In the outlook side of things?

Yes. I mean, outlook, yes. Thank you, Frank.

Yes. No, it'll be, kind of -- well, we don't expect a lot of quarter-to-quarter variation except for obviously kind of we do see differences depending on program review. So, there's no kind of significant mix issue associated with quarter-to-quarter, but it all depend on the program review.

Okay. If I could squeeze one more, just on -- I don’t know if I missed this Scott in your preamble. Did you mention what a total delivery number will be for Aviation for the year?

No. Peter, we don't give that. We just gave -- I mean obviously the increase of about $0.5 billion in terms of total revenue, but not a breakdown by exact numbers of aircraft.

Okay, appreciate it. Thank you.

Sure.

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

With the volatility we saw in December, and it seems to be continuing a little bit into this year and all the concerns about global growth. Have you seen to have any impact on I guess broadly, any of your businesses but most specifically at Textron Aviation?

No, we're really haven't, Ron. I mean, obviously we have -- I mean, I certainly appreciate the volatility going on in the stock markets. But, I would say that the sense we get from most of our customers is the underlying economy is still in good shape. And even if you have a little bit lower growth, there is -- still things are in a good place for their businesses. And I guess, from a pure technical standpoint, to have a book-to-bill that's pretty much right at 1, slightly over 1 in the fourth quarter is a pretty strong sign of continued strong order flows. So, we certainly didn't see it reflect in the actual orders that were taken, and in terms of the sense of customers and activity that's still ongoing, still getting very positive feedback from our sales teams.

Okay, great. And then, it seems like at Bell, that favorable performance is a theme. But, when we -- and I think we’ve talked about this a bit in the past. When we think about 2019, how do we think about call it, the positive estimates of completion in the defense contracts at Bell when we think about modeling it this year?

I think we're -- the guidance actually is down a little bit from what we achieved this year. And I'd say, the primary driver of that is that when you round out, we'll finish up a lot of the Multiyear II contracts. As you get towards the end of that you have some management reserve and performance that you're able to release. We'll see a little bit less of that in 2019 because we'll be really transitioning at that point into Multiyear III contract in terms of our cost and therefore revenues. But it's still I think quite strong performance, and 12.5% margin rate delivered by those guys is just showing they're running the business really well, even while investing in some important new things, like the V-280s of the world, so.

Got you. And then maybe one last one on Scorpion. Anything new going on there? If you could just update us on that?

No, there's not. I mean, I'm sure you guys have seen the sort of press articles and whatnot around the future of light attack. And frankly, we read all these things too. We're not entirely sure where all that's going, but I'm sure we'll see more clearly what's happening here in the coming few months.

Great. Thank you very much.

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

Congratulations on a good quarter. I think this is the first 11% Aviation margin you've had since 2009. Just on that, can you talk about the entrance of the Longitude coming into the market, and how you're thinking about 100 basis points of improvement within Aviation for 2019?

I think when you look at the growth, obviously a big chunk of the growth in revenue we'll see year-over-year, Sheila, is tied into the Longitude. The aircraft is in, I think, a very good place. The production line is rolling. We've actually tweaked production up just a touch because obviously, with the NetJets announcement, they'll start taking deliveries in the latter part of next year. Retail demand is also strong. So, obviously, we'll see the first few will have some dilution from our normal margin right here at the beginning of the year. But in terms of the production line and the cost and what we're seeing, we think we're going to have a product that hits the market in terms of performance and cost, and the demand seems strong in the market. So, we're pretty excited about it.

And then on Industrial, maybe can you provide an update on where you are with the restructuring? What the size of the specialized vehicle business look like? Your spot in it with this progress on the dealer channel and the product update?

Well, I think the actions that we took in the fourth quarter were largely around sort of addressing some of the cost issues, adjusting some of the product portfolio, frankly some of that on the curbside, a couple of product lines that we chose to exit. We just didn't see that that was going to be a long-term profitable business for in some of those particular product lines. So, we exited some of those things. So, between the cost and some of the portfolio and manufacturing footprint rationalization that largely happened in the fourth quarter. We'll see a little of that trickle here into the first quarter, but most of it is behind us. So, I think that the team has a very good plan and is executing quite well in terms of getting our arms around the operational side. Obviously, the other thing, which we've talked about in the past, is something that would be a more difficult thing. Something that takes longer to build out is the distribution and addressing that side of it. This partnership that we announced with Bass Pro and Tracker is obviously something we're very excited about. Building out a distribution and a strong retail channel is quite difficult, so the opportunity to partner with the guy that's the best in the world at that, I think, will be a great thing for the business in that mid- to longer term. So we're obviously, working very closely with them right now on the rollout of product into that channel. So as we look at 2019, I think we're in a -- we're obviously, in a much, much better place than where we were. So I think what the team is focused on, our operations and now growing out the new distribution channel, will be resulting in delivering a good year, I think, and then with good momentum going into 2020 and beyond.

Great. Thank you.

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

Thanks good morning.

Good morning.

When you touched on the cash guidance, it looks like 2018 on a cash flow from ops came in a little bit light. I was thinking that has something to do with the delays in the Longitude and maybe some inventory build there. But it looks like you're assuming a still a pretty significant drag from a working capital perspective in ‘19.

No, I mean, cash flow was kind of in line for '18 with kind of where we expected. We had some puts and takes, obviously. Kind of some of the performance specialized vehicles put a little bit of pressure on cash. But other -- the businesses did really well. We talked about one of the things that has been going on is there is a change in payment terms as we move from Multiyear II to Multiyear III, where we get less cash relative to percentage complete or kind of effort as we go forward. So we are seeing a little bit of drag on cash associated with that. Saw a little bit in '18, see a little bit more of that in '19 that is putting some kind of pressure overall on cash flow. But it's not a working capital issue. It's a timing of payments from the government on military programs. It's creating a little bit of drag.

Okay. And Scott, on Cessna, I think in '18 you talked about rather than taking production rates up, your kind of tweaking at the margin, getting a couple of extra airplanes off of a couple of different lines. Have you -- did you actually take rates up in ‘18 or are you taking rates up again in '19? I'm talking everything ex Longitude.

Okay, but I mean it's a process that's sort of a continuous process, right. We don't kind of have a magic date where we decide that. But I guess, I would say that as we've seen the demands continuing to strengthen in 2018, we did make a decision -- again, ex Longitude, to take up some of those rates. So I think whether you're looking at Latitudes, CJ4s, I mean, it's in sort of across the range. Based on that demand, we have been increasing the flow rate in those lines as we worked our way through '18 with, obviously, expectations we'll see some higher deliveries of each of those models in 2019.

All right, thanks very much.

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

Scott, a couple of quick ones. First of all, has the government shutdown had any impact on your business, particularly with the FAA clearance of the Longitude?

Not yet, I would say, Robert. So we -- on the document front, which is really where we are on Longitude and have been for a while, the teams continue to do their work. The good news is that virtually all those documents are delegated to us, so that work is continuing unimpeded by the FAA guys not being in. When we finish all that, which is not too far down the line here, obviously, FAA has to issue that final type certification. And that is something -- I mean, we're obviously, we're not delegated to do that. So I would say in the next month, no, it doesn't have an effect on us. But we will reach a point here where we will need the FAA to issue the type certification.

Okay. And then secondly, in Industrial. There's been some nerves about what's going on in the automotive market. I'm wondering what you've seen at Kautex in the last 3 months. And what your expectations are there for 2019?

Well, I think we saw some softness on OEMs, generally speaking, around the world in 2018. And we work all of our forecasting off IHS data, so I mean we're not an independent forecaster of the automotive market. And those are the numbers will indicate some softening globally, and those are the numbers that are baked into the guidance that we gave you guys.

Okay. That's great. Thanks so much.

Your next question comes from the line of Seth Seifman from J.P. Morgan. Please go ahead.

Thanks very much and good morning. Just to kind of bring together a couple of other questions about Industrial. When we peel back the onion, and we look at the guidance you've given, are you assuming earnings growth at Kautex in 2019, or is a lot of what we're seeing in terms of the, I would say, relatively strong margin you're expecting there coming on the specialized vehicle side?

I would say the automotive side, we expect sort of flattish. And that's, again, based on IHS data. We do have some new product launches, which is helpful to us to offset some of the overall softness. But net, I would say it's relatively flattish on the automotive side of things. So not sure we would give a whole lot more color to it. I think their margin rates should be fine. Most of the margin improvement, obviously, on a year-over-year basis is driven by much better performance coming out of the specialized vehicles side of the Industrial segment.

And then when you look at the R&D forecast for this year and looking kind of down, I guess, about $25 million or so. But when you look at the different moving pieces within our R&D, is there anything that's kind of shifting around significantly in terms of where your -- where the investment is going?

No, there aren't big shifts. I mean, we did overspend R&D this year beyond our initial forecast, and also that was aviation really just because of the magnitude of the documentation task on the Longitude side. So obviously, we've had a lot of engineers -- a lot more engineering effort going into that here in the last 6 months than we would ever have expected. But that's obviously behind us and we expensed that as we went through the third and the fourth quarter. And we're expecting to wrap that up here pretty shortly. So that's -- there's no major shifts, I'd say, from business to business. It's just some overspend here. It's been a bigger task than we expected to get through the Longitude cert.

Okay, thanks very much.

Your next question comes from the line of Pete Skibitski from Alembic Global. Please go ahead.

Good morning guys. Hey, Scott, wondering how the snow season has started off for TSV. Has that contributed to the fourth quarter margin? And I just want to get a sense, do you still have a lot of kind excess dirt inventory in the channel, or is that gone at this point?

Well, I'd say the snow season has been okay. I mean, it's been spotty in different areas. I think in the mountainside, particularly this year as we've launched this Alpha One. That thing has been a very hot, top-selling snowmobile. So that stuff has moved very, very nicely. There's been other parts of the country where snow has been a little bit slower, so I'd say it's sort of an average year maybe. On the dirt side, because we discussed in the third quarter, there was too much inventory out there. We've been working through that. And -- I mean, it's still there but it's -- but it goes down every week.

Okay, great. And then just one thing I'm not clear on. The -- you got the provisional certification for the Longitude. Did you book some revenue in the fourth quarter on the Longitude?

No.

You didn’t?

No, we did not. We did not transfer title of any aircraft. It just gave the ability for those aircraft to be available to use if needed for pilot training. I mean, we're actually doing a fair bit of that and using our own experimental aircraft to help with that. But it will allow the -- those customers to use the aircraft. And there were also some programs -- international programs and special missions where you had to demonstrate to them sort of a completion of at least the flight testing phase, which we're able to do. So -- but no, we did not transfer any title nor take any revenue recognition on those aircraft.

And then the first quarter, if we -- the shutdown continues and you don't get the full cert in the first quarter, do you expect to book any revenue there just on title transfer?

No, no. If we're not able to get the final cert, we wouldn't be able to do that.

Okay. Thanks for the clarification.

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

On aviation margin, this one, can you dig a little bit more into some of the drivers of the improvement in 2019? From volume? I know you've made some manufacturing improvements, maybe pricing as well.

Oh, absolutely. No, we continue to see price improvement, so it's sort of all of the above, right. I mean, we had some benefits, obviously, to volume. I think the factories and efficiencies and productivity, the team is doing a terrific job of that. And if you look at price improvement again in the quarter, it was consistent with all we've been -- I'm talking about all year. We continue to see price ahead of inflation, and that's also contributing to the higher margin rate.

And any perspective on how much more room there might be to run in terms of that margin? I know we talked about reaching for double digit previously. Here we are in 2019. Going beyond these things, is there business for normalized -- more normalized margin for aviation longer term?

Like I said, we're only probably going to guide one year at a time here for sure. We're working obviously hard to continue to drive that margin. We certainly see 2019 as getting this thing back up into the double-digit number for the full year. And so, you would expect to see -- and I think you will see incremental margins on a year-over-year basis as we go through each of the quarters and have a total year where we get a nice 100 basis points or more margin expansion for the business. And again, that's driven by having some good volume of good gross margin product coming through, ongoing efficiency and productivity. And we are continuing to drive price. I mean, you will probably see a little bit better volume here in the legacy models, but that's also with a little bit of price benefit as well.

Okay. So, no 2025 guidance, Scott?

Not just yet.

Okay, all right.

But, we'll think about it.

All right. Thank you.

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

Yes, good morning. And I apologize if these questions are duplicate because I've had no power here. My cell service is spotty.

That’s all right, George.

Scott, could you comment on the Aviation through the quarter? I mean, there was some rumors that December slowed. I was wondering if you saw that and how you're seeing things into January as well.

No, George, we did not see that. And I did comment earlier. We saw a book-to-bill at 1 to 1 in the fourth quarter which, for the heaviest delivery quarter of the year, is something that we would not normally expect to see. And I think that just reflects that we're continuing to see good demand in the marketplace. Our sales teams are still feeling good about where things are. There's still an awful lot of customer activity, and it's fairly broadly across the product portfolio. It's Longitude, it's Latitudes, Sovereigns, CJs. I mean, it's a -- I think it's a -- we continue to see a pretty strong market. The use available of any kind of newer aircraft continues to be at extraordinarily low levels. Those aircraft move fairly quickly. It's a healthy market right now.

And then a question maybe for Frank. The Industrial revenue guide for '19 seems a little bit low. I mean, Tools & Test is in a full year that you had -- that you're backing out here. Is that lower Kautex revenues here, assuming even though you said flattish profits, or is it SPV less? If you'd give a little bit more color on that.

I think as -- well, there's about $250 million of revenue kind of from Tools & Test. So that's obviously a pretty meaningful headwind of coming output. As Scott mentioned earlier, kind of at Kautex, we -- based on the IHS data, we expect kind of flattish type of numbers. And as we look at the specialized vehicle business, obviously, we're focused on performance, improved profitability there. We've taken some restructuring actions to actually kind of get out of a few product lines. So that's putting a little bit of headwind on things. And we're just, therefore, planning relatively flattish when you look at all that. But where the focus is on performance of specialized vehicle, without a lot of top line growth.

And then one last one. The CapEx number, I mean, you wound up a lot lower in '18 than you thought earlier in the year, and you're continuing that trend this year. I mean, what polar ends there that you actually cut out to get the much lower numbers?

George, I think there was some lower CapEx spending in pursuit of some of these military programs for providing [red error] aggressive forces. A proposal for the big one has already been submitted. We expect to find out if we're on that IDIQ list sometime in the mid part of the year. And so that's, I mean, that's a business where you need to make the investment in the assets to provide the service. So we're in that today. It's a great business. We performed well, and we've seen some increase in the hours of our existing customers. Team is doing a great job executing on that. But what we were trying to do is, to the extent we can, obviously, is gate the capital expenditures with the revenue-generating opportunity. So we certainly slowed some of that from '18 into '19.

Okay, very good. Thanks very much.

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

Hey good morning everyone.

Good morning.

Frank, I know you spoke to the cash flow a little bit in the prior question. But I was just wondering if it's possible to just sort of bridge the handful of major components in the '19 outlook, growing the EBIT and the earnings, but the cash flow being relatively flat.

Well, again, no, I don't know how to -- we can take it offline to give you a little bit more color on things. But again, we -- we're not looking at a inventory build or a working capital build. There are changes in the pace of the cash receipt for effort completed on the military side. And so that's the big one. It's still pretty good cash conversion, solid cash conversion off of the after-tax earnings that we're looking at. So there is not any kind of a big change in cash relative to after-tax earnings. And then that pressure on it relative to kind of the rate that we saw in '18 does reflect those slower paces of military bids.

Okay. So that's the bigger piece.

That is the piece.

That is the piece, Noah. I mean, if you look at the -- that would -- everything else is sort of bounces around off there. It's really the change in the -- going from sort of these performance-based payments to the way the how are things are done in Multiyear III.

And then in the Bell revenue, I guess, where is -- if you can tell us where V-22 is in 2019 relative to the reset that's occurring there, just so we can have the right kind of medium-term trajectory going forward? And then on the commercial side, I know you said higher units. Wasn't sure if you could quantify that and just sort of -- maybe a little bit of a state of the market there just given the fuel price volatility.

Well, I can address the color, I guess, on the commercial side. We do expect units to be up pretty materially next year. 505 continues to ramp, so we'll see some benefit there in terms of additional 505 units. But as we talked about kind of late last year, we have tweaked the production volumes of most of the other product lines as well. So we expect to see stronger deliveries in 407s, 429s, 412. And we're -- it's -- the magnitude varies across all the pieces of the product line, if you will, Noah. But it's certainly -- the demand environment on the commercial side is -- remains strong and has given us a little bit of tailwind on each of the models. In terms of V-22, I mean, not sure you're looking for revenue because it doesn't -- as you know, it doesn't tie up easily to unit deliveries anymore. So, you kind of...

That's why I was sort of even -- I guess what I was asking is how much lower does the revenue contribution go as it's resetting to the next multiyear?

I'm not sure. I'm not sure I can say much more than lower. I mean it is lower. Obviously, the -- if you look at Multiyear III coming on, the annualized delivery rates are lower, and so as you can imagine, the cost incurred under the revenue accounting is also lower. I don't know if we could give out the exact number.

We're seeing pressure on the production side. We are seeing benefit of a larger fleet and kind of flight activity on the support side. So there is some offset to the lower production. It helps things as the fleet continues to grow. But kind of overall, as we transition into Multiyear III, as we talked about, there is pressure on V-22.

Okay. I can stick with my estimate of.

All right. Thanks very much.

Your next question comes from a line of David Strauss from Barclays. Please go ahead.

In terms of the backlog now at aviation, do you have any NetJets Longitude orders in the backlog?

We do. Yes. I mean, David, the way we do this is -- and we've always done this with Latitude, is we basically, as we firm up and commit the tail numbers and firm deposits on those aircraft, we move them into backlog. So it's usually about kind of a rolling 1-year look. And as their first deliveries will be in that Q3, Q4 time frame next year, those -- they firm those units up and deposits, and so they're in the backlog. So we had the NetJets units went into backlog. And we also had obviously, retail units going to the backlog in Q4 as well.

And then on systems, down a little bit again in 2019 relative to 2018. Given the programs there, what's your -- is your expectation in '19 represents the bottom? And systems will grow in 2020?

No. Look, David, I expect so, right. I mean, we have -- as Frank said, the revenues are slightly lower forecast in '19. Principally came out less in terms of the TAPV program. The vehicle deliveries out of Slidell are done. So I mean, there is the support and service, but the unit deliveries are essentially behind us, so we'll see lower revenues associated with that program in 2019, which is fine. We have -- we do have some lower volume in the -- particularly on the Shadow Unmanned programs. We have increased volume on the fee-for-service that kind of offsets some of that. But I think if you look out into the 2020 time frame, we will start to see some revenue in 2019 associated with the long-lead procurements on the Ship-to-Shore production program. But we certainly expect to see that program definitized here in the first half of the year, and you'll start to see increased -- pretty significant increase in revenue as we go into 2020 on the Ship-to-Shore program. Then there's a number of other programs, which I think we have a good chance of adding into the backlog for systems as we work our way through 2019.

And Frank, just a quick follow-up for you. Can you help us mechanically how pension is swinging from an expense item to an income line -- income item. I guess, the discount rate helped you some. But given where I see your asset returns in -- more in ‘18, I'm kind of surprised we saw that big of a swing.

And it has to do with the kind of a amortizations associated with gains and losses in prior years. The pension accounting has an averaging and smoothing effect on those gains and losses. So, we're just kind of rolling off of loss amortization and rolling into a better kind of amortization number. And so it's this smoothing effect associated with kind of all of those calculations. We're basically putting some of the amortization associated with things like the financial crisis behind us.

Okay, good for you. Thanks.

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

Hey. Good morning, gentlemen.

Good morning, Carter.

Frank, I wondered if you could just tell us for clarification that the EACs -- the gross EACs? And then, Scott, I wondered if you just can maybe comment on the Longitude. When you think that -- if you think that has a positive mix contribution to segment margin rate in ‘19, or if that's more of a 2020 phenomenon?

No program adjustments were $29 million in the quarter.

So Carter, I think if you looked at the -- over the course of the year, we will probably see some dilution to our overall margin rate, and certainly in the first quarter, maybe a little bit into the second quarter. But as we get into sort of the normal line flow in Q3, Q4, we expect Longitude will be a contributor at our sort of standard gross margin, if you will. So it probably has a little bit of a dilution that we're factoring in net from the total year. So you expect probably '20 to see a little bit better than that, because you won't have those initial units. But that is factored in, obviously, to the guidance we're giving you.

Okay, that's great color. And one last one, you got a Super Bowl.

Oh this would be a dangerous place to say anything we think Carter.

I know I was just tempting you. Thanks guys for the color. I appreciate it as always.

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

Could you give us a little more color on the Tracker deal? As I read the release, they are coming out with some dirt product under their brand name. Do you produce that product? And kind of what's the basis of your agreement?

So we do. So the whole partnership here, Cai, is that we provide the engineering and manufacturing, and Bass Pro and their Tracker independent dealers provide the distribution channel. So we do talk about it as a partnership. It's not a conventional sort of, hey, we wholesale, and you do retail. We work -- kind of have been working together on the design, the branding, really tailoring this around what Johnny and his team want to take through that channel under the Tracker brand. It's a great relationship. We're sort of a both guys win kind of a deal. They are a great company, got a lot of great people. Nobody knows the retail side of outdoor sports like they do. So it's been something where we bring sort of the technical and manufacturing capability, and they bring the branding and distribution side.

And do they do snow also, or is it only -- is it only Off Road?

They will do some snow in some of their stores, obviously, in selected regions. And where they do that, they will do that under the Arctic Cat brand. Because the Arctic Cat brand is -- I mean, that obviously, that brand stands for itself in the snow side.

Got it. And then -- so turning to aviation. Could you give us what the net price impact was in the fourth quarter?

And you'll see the numbers when they come out. We had net price of $14 million, consistent with what we saw in the third quarter actually.

Okay. And then R&D, it's down -- projected to be down $23 million. Is that all likely to be at aviation? Give us some color on terms of what's down and what's up.

Well, as you know, Cai, we don't usually bake at this thing. But I would say -- the color I would say is that we really overspent a little bit, and it was primarily in aviation, and it was primarily just because of the magnitude of the Longitude cert activity. So there are not big shifts between the businesses. So, I would expect that we would see somewhat lower R&D spending in the aviation business in 2019.

Terrific. And last one. So, where are we with the Denali sky tracker and Hemisphere?

So, both the SkyCourier and the Denali, we're expecting first flights of those aircraft this year. I think, the program is progressing well. I mean, our teams are a little bit stretched here with a lot of our engineering resource being tied up on the Longitude, but they're working hard to get those first flights this year. So I think those programs are in good shape. The Hemisphere, as we talked about, is -- there is work going on, obviously, from our concept design and whatnot as we work with NetJets on the specification of that aircraft. We will not ramp a lot of spending into that until after we're confident that the engine program is in good shape. And we expect that's kind of a -- we will understand where that is exactly as we get kind of more into the midyear time frame.

Thank you very much.

Your next question comes from a line of Jon Raviv from Citi. Please go ahead.

Scott, on Longitude, can you just give us sort of a state of the union address here in terms of kind of what has happened? Your perspective on the fixes that you've all proposed, the acceptance of those fixes, and kind of like what is actually left to do here to get final certification, shutdown notwithstanding.

Boy, you got me. But the state of the thing is that the flight testing program has been done for some time. The last issue that we had that was something we really had to work with FAA was around this -- the fuel system. That was resolved. It was flight tested. It's -- I mean, that's behind us. And we're just doing documentation. It's rather staggering. I think we're -- I know we're getting close. I was down with the team about a week or so ago. But just to give you a sense, we're up to 157,000 pages of certification documents. It is truly mind-boggling. But the vast, vast majority of that is behind us. We got teams that have been working really hard to get the final documents completed. But I mean now, as I said, flight test is done. There is not a -- there's no technical issue. It's just something that we have to finalize these documents and get done.

Yes, understood. And then on the new distribution agreement. Is there any -- the way these agreements have been structured, is there any difference in terms of profitability, opportunity when you go kind of into a more tailored approach like this, or once these distribution channels get fully set up, can we see even more improvement in that business from a margin perspective?

I think we expect it to not be very different. It should be a nice healthy margin. So I mean, it's certainly structured that way. As I kind of alluded with Cai, this is a win-win for both companies. So both we and the Bass Pro team are equally incentivized to make sure that this is a good, profitable program.

Thank you.

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

Yes. Just a quick one, Frank. How much was aviation -- what was Aviation aftermarket in the quarter compared to last year, up?

So it was flat on a kind of adjusted basis to kind of adjust for the change that we had in the engine program revenues. So kind of flat for the quarter, 4% on a like-for-like for the year.

Okay, thanks.

Your next question comes from the line of Seth Seifman from J.P. Morgan. Please go ahead. Seth, your line is open.

Sorry, I think I was on mute there. Just a quick one on V-280. Scott, can you talk about maybe the range of outcomes that you're thinking about for V-280 in the '20 budget? What would be considered good? Is there some kind of commitment that you guys have to have? And how that might affect -- how -- whether it's a lot or a little that's in the budget? How that might affect your pace of spending on V-280 going forward?

Well, it'll affect our pace a lot. And so I mean, we have no insight into what the [PB-20] looks like at this stage of the game. We're certainly encouraged by the dialogue that we've had and I think the army has had publicly around their desire to accelerate these programs, both Cap Set 1 and Cap Set 3. So we would certainly hope to hear shortly, to start to see that -- those statements turn into some contracted work. As I said earlier, look, we've now exceeded 280 knots. I think our team has done everything we've asked of them to design and build a terrific aircraft. Its maneuverability is understanding. It's been demonstrated. So it's sort of debunked all these notions that to order product can't have the maneuverability of a more conventional aircraft, the speed now going through and then breaking through that 280 knot performance envelope. This thing does everything and more than it was expected to do. So at this point, look, we'll have no choice but to roll back any funding that we put into it, waiting to see what the army is going to do, because we've done what we can do.

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

Scott, I'd love to hear your latest thoughts on Cessna product strategy, bigger picture. I mean, you had these launches at the high end of your product set that are going well for you. But it's still competitive out there. There's people that project that you guys may replace some of the stuff in the middle of your product portfolio. But -- and I know over time, you want to invest to grow, but you also probably don't want to just be constantly, perpetually spending to grow. And so I'm just curious what you're thinking your medium- to long-term next steps are.

Well, look, I think the -- I mean, we have a pretty full plate right now. I mean, obviously, we're thrilled with how the Latitude has gone. We are thrilled with where the Longitude is and how its reception is in the market. Obviously, we feel great about the prospects of Hemisphere. We got the engine thing resolved particularly with the NetJets launch, and again, our belief in what these new products do to drive growth. So, we're certainly prepared to move on, on that. And Denali and the SkyCourier, we think are both going to be home run products. So I mean, we're just -- we're pretty loaded up right now. So, I'm probably not in a position. I mean, we do product planning, look at this stuff all the time. But, there's certainly nothing that we're prepared to announce beyond that right now. I think we're pretty full up with a lot of exciting programs. It will be terrific for the future of the business.

That makes sense. And Frank, just two clean-ups. So, one is pension question. Where does that year-over-year change fall, just so we can look at the underlying? And then on getting the tax rate down to 20%, is that -- is there anything that's specific to only ‘19 in that, or should we be plugging that in as far as we're going?

Yes, I mean, the pension change kind of falls throughout the operation. So it's obviously kind of baked into the guidance. Some of it gets kind of inventoried, but most of it is P&L. And that's in the various operational performance of the segments.

Is it heavier in one segment? But I guess, I meant…

No, I mean not.

It's pretty spread out?

Yes, it's pretty spread out. On the -- sorry, what was the other question?

Tax rate.

Tax rate. So tax rate, no, as we've indicated, there's -- it's probably in the low 20s kind of go-forward basis, not kind of at 20%. So we expect a little bit of benefit for some discrete items in '19. Obviously, we continue to work it for the future. But it wants to be a little higher than that longer term.

Got it. Thank you.

And at this time, there are no further questions.

Okay. Everyone, thank you very much. And we'll be talking at the end of the first quarter.

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