Textron Inc. (TXT) Q1 2021 Earnings Report, Transcript and Summary

And ladies and gentlemen, thank you for standing by. Welcome to the Textron First Quarter Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to your host, Eric Salander, VP of Investor Relations. Please go ahead, sir.

Thanks, Brad, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $2.9 billion, up from $2.8 billion in last year's first quarter. During this year's first quarter, we reported net income of $0.75 per share. Adjusted net income on a non-GAAP measure was $0.70 per share for the first quarter of 2021 compared to $0.35 per share in the first quarter of 2020. Adjusted net income for 2021 excludes $6 million of pretax special charges, $0.02 per share after tax related to the 2020 restructuring plan and $15 million of pretax gain on the sale of TRU Canada, $0.07 per share after tax. Segment profit in the quarter was $256 million, up from $156 million in the first quarter of 2020. Manufacturing cash flow before pension contributions totaled $71 million, up $501 million from last year's first quarter. With that, I'll turn it over to Scott.

Thanks, Eric, and good morning, everyone. Overall, the first quarter was a strong quarter for Textron. Segment margins were up 330 basis points in the quarter, driven by strong execution across all of our segments. At Bell, revenues were up in the quarter on higher commercial revenues, partially offset by lower military revenues. On the commercial side of Bell, we delivered 17 helicopters up from 15 in the last year's first quarter. We saw solid order activity in the quarter across our commercial models, both domestically and internationally and across multiple end markets, including corporate, private, utility, and emergency medical services. On future vertical lift, that was awarded a contract modification of $293 million for the second phase of the competitive demonstration and reduction program for FLRAA. As we conclude final flight activity on the V-280, I think it's important to highlight the impressive performance milestones that the aircraft has demonstrated in over 215 flight hours over the past 3-plus years. This included 305 knots of demonstrated true airspeed, level 1 handling qualities and autonomous flight. On FLRAA, Bell is continuing with its build of the Invictus 360 prototype, where we are about 1/3 of the way through the manufacturing process in anticipation of first flight in Q4 of next year. Moving to Textron Systems. Revenues were flat in the quarter while the business continued to execute well with improved operating margins. In the quarter, Systems was awarded a contract to up to $607 million from the U.S. Army for the sustainment and modernization of existing shadow systems to the upgraded Block III configuration. Also in the quarter, Systems successfully participated in the U.S. Army's Future Tactical Unmanned Aircraft Systems rodeo at Fort Benning and completed direct soldier flight demonstrations of our platform, the Aerosonde HQ. Systems is currently responding to the FTUAS RFI, which will help inform the next phase of that program. Systems also delivered the first RCV medium prototype to the Army customer as they look to test these vehicles and define requirements for the future of robotic combat vehicle programs. At ATAC, we are continuing to ramp F1 flight hours at the operating sites related to the 3 awards of the U.S. Air Force CAPCAS program. At the end of the quarter, we had 16 F1 aircraft certified for operation and deployed across our customer sites. In Aviation, revenues were up - I'm sorry, revenues were eventually flat in the quarter with slightly lower volume, reflecting lower aftermarket revenues, partially offset by higher pricing. We delivered 28 jets, up from 23 last year and 14 commercial turboprops, down from 16 in last year's first quarter. Order activity was strong in the quarter, resulting in backlog growth of $450 million to $2.1 billion at quarter end. In the quarter, we delivered our 1,560 XL-based Citation jet. This milestone delivery is a testament to the value and performance of this platform as well as Textron Aviation's commitment to the ongoing support of the fleet. We also announced the new CJ4 Gen2 and delivered 5 aircraft in the quarter. This model upgrade is another example of our continued investment in our existing portfolio of aircraft. On the new product front, the Cessna SkyCourier aircraft certification program continues to progress well as we work towards entering to service targeted towards the second half of this year. Moving to Industrial. Revenues were up from last year's first quarter, primarily driven by higher volume and price in our Specialized Vehicle product line. At Specialized Vehicles, we continue to see strong retail demand across our customer end markets. At Kautex, we saw our volume of fuel systems for hybrid electric vehicles more than double to about 9% of our total production volume in the quarter, the startup of 4 new models. While the retail demand in industrial-owned markets has been improving, channel inventory remains below targeted levels as we work through supply shortages and disruptions, which we expect will improve throughout the course of the year. In summary, it was a great start to the year. We've seen improving customer demand in our end markets, increased commercial order flow at Aviation and Bell and continued solid execution in our military businesses with strong cash generation in the quarter. With that, I'll turn the call over to Frank.

Thanks, Scott. Good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $865 million were down $7 million from a year ago, largely due to lower aftermarket volume, partially offset by higher pricing. Segment profit was $47 million in the first quarter, up from $3 million of profit last year, primarily due to a favorable impact from performance and the mix of products sold. Backlog in the segment ended the quarter at $2.1 billion. Moving to Bell. Revenues were $846 million, up $23 million from last year on higher commercial revenues, partially offset by lower military revenues. Segment profit of $105 million was down $10 million, primarily due to higher research and development in the quarter, largely related to future vertical lift programs. Backlog in the segment ended the quarter at $5.2 billion. At Textron Systems, revenues were $328 million, flat with a year ago. Segment profit of $51 million was up $25 million due to a $27 million favorable impact from performance and other. Backlog in the segment ended the quarter at $2.4 billion. Industrial revenues of $825 million were up $85 million from last year, primarily from higher volume and mix as well as price at Specialized Vehicles and foreign exchange fluctuations. Segment profit was $47 million, up $38 million from the first quarter of 2020, primarily due to higher volume and mix, price, net of inflation and favorable performance at Specialized Vehicles. Finance segment revenues were $15 million, and profit was $6 million. Moving below segment profit, corporate expenses were $40 million, and interest expense was $35 million. With respect to our 2020 restructuring plan, we recorded pretax charges of $6 million on the special charges line. We also completed the sale of TRU Canada in the quarter and realized a pretax gain of $15 million. Cash performance in the quarter was strong with $71 million on manufacturing cash flow before pension contributions, a $501 million improvement over last year's first quarter as we continued our focus on inventory and working capital management. In the quarter, we repurchased 1.8 million shares, returning $91 million in cash to shareholders. To wrap up with guidance, we're raising our expected guidance of adjusted EPS to a range of $2.80 to $3 per share, up $0.10 from our prior outlook. We're reiterating our outlook for manufacturing cash flow before pension contributions of $600 million to $700 million with planned pension contributions of $50 million. That concludes our prepared remarks. So Brad, we can open the line for questions.

[Operator Instructions]. Our first question today comes from the line of Pete Skibitski with Alembic Global.

Guys, the $2.1 billion in backlog in Aviation, it kind of seems like it's putting through a real positive start of a cycle for you guys. Are we just at the point where the young used aircraft availability is just so low that customers are really forced to come to you guys? Is that kind of what you're seeing out there?

Well, Peter, I think the correlation between availability of young used aircraft and what that means in terms of new aircraft sales, for sure, are correlated. And I think if you look at what's happened here over the last period of time, we've been seeing that number come down. And at this point, we're down below 1% of the fleet that's out there that's under 10 years old available for sale. So without a doubt, I think that's helping. I think the overall demand environment is also more positive, right, so you've got more people that are looking to acquire aircraft than we've seen in quite some time. So the level of activity, the number of customer interactions is certainly quite strong. And so when that's happening, and again, the small number of young used is off to a factor in that. But I think part of it is just there's just strong demand in the market right now.

Yes. I mean, I think that's the biggest backlog you have in like 10 years, as far as I can tell. So are you forced to kind of look at production increases at this point?

Look, I think we'll look at it through the course of the year. Obviously, at this level of demand keeps up, we always are constantly looking and tweaking the production schedule. So I think we'll continue to monitor it and adjust accordingly.

I guess last one for me. Similar volumes to the first quarter of '20, but the margin is about 5 points higher. So is Aviation - and you touched on pricing, I don't know if you know kind of the level of pricing you're getting right now, but is Aviation a structurally higher-margin rate segment at this point do you see going forward just from the cost takeout? Or do we really need a lot more pricing to reach that level?

Well, Peter, I think there's two things going on. One is, I mean we did take cost out, but a lot of that had - obviously had to do with volume. So there's - I think the business is executing stronger from an overall performance standpoint. There was a price, and frankly, we're seeing a nice rebound, particularly in the parts side of the aftermarket business, and that's a good mix for us. So you saw some pricing contribution, and frankly, some good mix as you go into Q1 and saw overall aftermarket was actually down slightly. But the mix of part demand driven by increased utilization was a positive for us.

And we do have a question from the line of David Strauss with Barclays.

Scott, you touched on pricing a little bit in the Aviation. But could you talk about kind of across the board on - in all of your commercial businesses, kind of the pricing environment relative to raw material inflation that you might be seeing?

Sure. What we're - there's no question that inflation is out there. We're seeing it in a number of cases, but I think what our strategy has been is to try to keep pricing ahead of inflation, and we've been successful doing that. So you're right, it doesn't matter. Aviation, Bell through the industrial businesses, we're seeing a positive price environment.

Right. Okay. And then can you remind us at the Aviation, how much of the business, I guess, on the new aircraft side is kind of Fortune 500, 1000 large corporate? And what are you seeing in that portion of the market? Is that rebounding at all yet?

Well, we don't usually track that specifically or give that out. But it's - I mean, we are seeing the corporate aviation departments are starting to come alive. There's more dialogue going on, and I expect that will continue to increase through the balance of the year. I think - and again, data sort of anecdotally, you can't give a specific breakout of this. Obviously, the number of cycles on aircraft continues to increase, particularly domestically in the U.S. March was actually up over where it was in 2019. These comps for 2020 are obviously kind of flaky, but if you look going back to 2019, the cycles domestically were up for our aircraft, which is great. I think it's still predominantly driven by a lot of personal travel and things like that, but we are clearly starting to see some corporate travel coming back. I mean I just - personally as I'm traveling around to our businesses and out and about, you go out the restaurants, you're meeting, I mean, suppliers are starting to travel. Customers have starting to travel. You're starting to see more of that. And I think as that happens, we'll see more and more corporate level, flight department, buying activity pick up.

And we do have a question from the line of Ron Epstein with Bank of America.

So what products in Aviation are you seeing the most increase in your own product line, Latitude, Longitude, smaller, bigger? I mean, where are you seeing the most higher ticking going up?

Well, the good news here, Ron, is it's virtually every model of jet and turboprop that we have is seeing strong activity, which is good. So it's literally, it's across the entire portfolio of all of our jet and turboprop products.

Got it, got it, got it. And then if you could give us a quick update on kind of what you're hearing, seeing, feeling on future vertical lift.

Future vertical lift is progressing exactly as the Army said. As I said, we - obviously, we and our competitor got the contracts for Phase 2. You know the draft RFP had come out late last year. Comments went back. Response to those questions have now come in. We expect an industry day and then ultimately, the real RFP to drop here sometime probably in that May or so timeframe. So those guys are staying very much on schedule in terms of what they've told us. We've just wrapped up our V-280 flight activity, which I think was a hugely successful program that demonstrated everything we wanted to demonstrate. So right now, the team is focused on the objectives of the second phase of the program, which is continuing to do risk reduction. So this thing makes a smooth transition from the risk reduction phase into a full-blown program record. And it's kind of a parallel path of working that with the Army, at the same time that the formal RFP activity is going on in proposal development. And I'd say it's progressing exactly as the Army told us it would.

And with the skinny budget that was dropped by the administration, do you feel any better, any worse, the same about the prospects for the program longer term?

Well, I think the expectations were that we'd see pretty flattish budget. And I think that's what we're seeing. And I mean, for sure, I could argue it's down a little bit based on inflation-adjusted and such. But the Army has been really clear about the importance of modernization. Their top priorities are still getting enormous amount of focus. They've always been very responsible about their intention on how they would pay for this. They were never expecting some big top line adjustment. They have always said that they would fund this by reducing legacy funding, so they could put their focus on modernization. I think if you listen to what General McConville says every time he speaks publicly, it's the - it's been very, very consistent, and I think that's absolutely their intent. So I think that, again, we've only seen the skinny budget, right? We haven't seen details down below that. But certainly, in terms of the top line support and everything that the Army is talking about, the focus on modernization is continuing.

And we do have a question from the line of Peter Arment with Baird.

Scott, you've called out some good performance at Specialized Vehicles. Maybe you could just give us a little color on what you're seeing there and what's driving that?

These guys are executing well. Demand on the - on all those product lines, exception probably is the ground support equipment is still a little bit soft, although activity is starting to pick up in that area as well. But if you look at the core businesses of Golf and PTV and then, of course, all the off-road, the retail demand environment, is very strong. We've also seen solid pricing. I think the business is executing well. It's - it is a struggle some days. I mean, tactically, just getting supply chain stuff worked out is kind of a battle every day. But the team is doing a nice job of working through that. We would like to continue to drive higher volumes and get some more product out there in terms of inventory levels, but I think that just bodes well for the future, and the guys are executing well and driving improved profitability.

And just to follow up on the supply chain comment. We continue to hear about supply chain stress from other industrials, especially around the semi chips and things like that. What are you seeing, I guess, across your businesses? Are you seeing the same impacts or is it different?

So we're not seeing as much impact in the aerospace pieces of that. And I think a lot of that has to do with the fact that a lot of those businesses, because they also have defense businesses, kind of kept operating through a lot of the pandemic. It certainly was true of our businesses for the most part. So that supply chain has come back up and is running better. And obviously, in many of these cases, you share demand with a lot of the commercial stuff, which is still down, so there's capacity out there. So we haven't seen a lot of challenges yet in that space. It's more on the industrial side of things, and those supply chains are getting back up and operating. Obviously, there's a lot of shipping issues, there's all kinds of stuff. But they are tactical challenges, and the guys pretty much work through them every day. But I think as we go forward, there's certainly opportunity to see higher volumes to not only to meet that strong demand, but also get inventory levels restocked.

And we do have a question from the line of Seth Seifman with JPMorgan.

Good quarter. I was wondering if you guys could talk a little bit. I think initially, we talked about first quarter deliveries being sort of assessment being sort of flattish year-on-year and then improvement in Q2, Q3 up in the fourth quarter. So I guess sort of you when you probably think about that, do you see the Q2 and Q3 numbers now up a little bit from where you've seen them now based on what we've seen in the backlog, given that Q1 came in above expectations as well?

Yes, I mean, I think that's exactly what we would expect, right? I mean there's a normal cyclicality to the business. Q1 is usually a lighter delivery quarter. Q4 is obviously, usually the very strong delivery quarter. The big difference is, usually, you don't see a whole lot of order activity in Q1. And clearly, we saw that this year. So I think absolutely, that bodes well for future quarters. And frankly, part of our raise on our guide is an anticipation that we'll see better performance than what we had guided in terms of the Aviation full year number.

I guess - and then on that point, putting up the first quarter margin kind of similar to what you'd expected for the year, I mean, I would think with higher volumes Q2 and Q3 and then especially Q4, is there some color you can give us around where you think the Aviation margin might come out now, given that it seems like it should clearly be higher than the initial guide?

Well, I think you're right, Seth. It will be higher. We're probably not going to go back and reguide the percentages in each one of the segments. But when you think about the guide that we put in, I think you can expect in terms of how you model a part of that, is our expectation is that we'll see stronger margins on the Aviation side. And the other is, obviously, we also had a very strong first quarter on Systems. And I think well, that's also part of our raise in the guide is we'll probably do somewhat better on a margin rate at Systems than our original guidance as well.

And we do have a question from the line of Sheila Kahyaoglu with Jefferies.

So my first question is on Bell. Can we just talk about the magnitude and timing of the future vertical lift investment? I'm guessing it's all FLRAA now. Is the FARA investment sizable and comparable to FLRAA? And then on FLRAA, are you done on the company-funded R&D side?

So right now, part of the challenge of the increased R&D spending in 2021 is that we have both FARA and FLRAA activities going on. So the FARA program has kind of ramped to full speed ahead here. And obviously, we've initiated - starting to produce the first aircraft and to get the first flight in the latter part of next year. So we're seeing a lot of FARA activity, and that's all under OTA, which is a 1/3 cost share that we have with the government. And then that FLRAA program, so that $290-or-so million dollars that were just awarded, that program sort of runs from now through next March. And that's also a 1/3 company-funded program as well. So that's part of the headwind we have on the R&D front right now, Sheila, is that you have both FARA and Phase 2 of FLRAA going on simultaneously.

Okay. Cool. And then maybe just a bigger picture question on Aviation because the backlog was so good. There's DoorDash, Uber, Netflix, you name it, a technology element in every industry. So I guess with Aviation, as some of these charter and fractional operators mature in their technology models or whatever it might be, are you seeing a change in your customer composition, say, over the next 5 years, where these guys become a bigger customer portion for you because they're emerging not only wheels up because they've been very good to you guys for a while. But in general thought, are you seeing that?

Well, we haven't seen a mix shift really at this point. I mean, obviously, there's a good part of our business that's been with Wheels Up on the fixed-wing side. As you know, we just announced doing the same on the rotorcraft side with Bell helicopters going into the Wheels Up fleet. We're continuing to see terrific strength through our NetJets relationship. I mean, I think the NetJets guys are also doing very well in the fractional side of the business. So we're seeing strong demand there as well. But we haven't seen to be a big mix shift over. So you're seeing strength right now and everything from charter operators to the membership kind of providers like the Wheels Up up through that fractional providers like NetJets. So it seems like the growth in the demand is across all those different business models right now.

And we have a question from the line of Noah Poponak with Goldman Sachs.

Scott, 1Q is usually your seasonally lightest order quarter in Aviation. Do you expect that order number to improve sequentially as you move through the year?

Well, Noah, I think our level of sales activity is continuing to be strong. So I would expect that in the market, given the demand that we're seeing, I expect to see continued strength through the course of the year. Now as we've talked about before, we do expect to start to see more sort of those corporate flight departments and larger corporate operators as you see more business travel coming back, and I think we're starting to see that, right? So there's folks that were not flying and corporate departments that weren't - frankly, were largely shut down for a lot of the pandemic have started to come back, and so there's more dialogue there as well. So I'm not sure we would guide our book-to-bill at this point, but it's - the demand environment is remaining strong, which is good.

Okay. The end market has had some head fakes over the last few years. And the data would look better and then maybe kind of stall out. The leading indicator data right now looks particularly good. But the pandemic seems to have brought in new flyers where there's maybe some questions around whether or not they go back to commercial once the virus is in a better place. Just overall, a bigger picture, I mean, we see the data, you talk to the customers. How are you thinking through sustainability here versus something that could reverse on us again?

Well, when we're seeing people buy aircraft, right? So that's not something that someone's likely to revert back out of that. So if someone's made the commitment and bought a fracture, bought a whole aircraft, and I think those folks are going to stay in the market. Are there some people that might be using charter kind of on-demand stuff that might revert back to commercial? Absolutely. But I think over time, you see people that come into this market, they can afford to be in the market. And once they become accustomed to the convenience and the productivity of it, I think almost those people are going to tend to stay with it.

Okay. And then just on the Systems margin, it ramped in the back half of last year, landed where it did in the first quarter. Maybe just level set us on how you're thinking about the durable, sustainable margin over time at Systems.

Well, I think it is very durable. I mean, I think the team has been executing really well. As you know, over the last a couple of years, we had a lot of investment that was going into programs like the ATAC F1 program, and you had to make that expense and that investment ahead of winning those contracts in order to be eligible for those contracts. So we went through a period of having those expenses with no revenue. Those assets are now gainfully employed and out there generating revenue and margins. So some of those swings, I think, are helping to strengthen the margins in the business. I think overall, the performance of the business has been quite strong. As you know, we're transitioning. We'll see this as we go forward on the transition from the development side of the ship-to-shore and the production side of the ship-to-shore, which clearly will have better margins than the development side. So I think as you look at those macro things, this is a performance that has a lot of good performing elements to it. And I expect they will continue to perform really well. As I said earlier, I think part of our guide increase is that we expect that we will probably have margins that are stronger than what we originally guided on the Systems side. I'd say also that business is pursuing an awful lot of new opportunities that will continue to come to roost over the course of the next couple 2, 3 years. So I think they're in a really good place. I do think we'll have a little bit of headwind, Noah, as we get in the back half of the year here on some of our fee-for-service in Afghanistan. That wind-down will take down some of our sites. I think we've been very conservative about how we run that business in terms of asset values. But - and I think there are opportunities to redeploy those to other locations, which I think will happen, but you probably have a little bit of a gap between the sites that are operating today and the future sites. So it's not a big impact, but it's enough that it will reduce a little bit of revenue and margin here probably in the back half of the year. But I would expect to continue to see really good strong margins and good strong performance in that segment.

And we do have a question from the line of Carter Copeland with Melius Research.

Scott, kind of an unorthodox question, but one, I'd really love to get your perspective on this. Obviously, a lot of capital out there supporting VTOL, eVTOL investments in SPAC land and whatnot. And I wonder, as you look at your technology portfolio inside Bell and all the various projects you might have in some phase of R&D and you think about what to fund and what not to fund and kind of that whole relative hierarchy, is there a model that makes sense to maybe pull some of that stuff out and put it in a vehicle like that and accelerate funding or take advantage of the ample capital that's out there in the market and all that sort of excitement? How do you think about that?

It's a good question, and I think it's a little early for us to make that call. We have some very strong R&D capability. We have a lot of technology, frankly, that already exists in the company, obviously. That's a space that, as you know, we've been looking at for a while. We continue to look at it. And look, we take a view so we actually know how to make aircraft. We know how to make VTOL aircraft. The architecture you see that's likely to be the winner in some of this urban air mobility space, frankly, our small tiltrotors. And we actually know how to make tiltrotor. So a lot of the technology we obviously have on the shelf are stuff that our guys are very capable and are working on. We actually know how to certify our craft in many of these categories. But the issue for us is, what's the right time to here. And in fact, a lot of that's driven by the battery technology. We want to make sure that when we make a move in the space, however, the structure of that move is that we know where the technology is around the propulsion system. This has always been hugely important in our industry. We would never go undertake a new airplane, fixed-wing or vertical takeoff and landing without having the right propulsion system to make sure that it's going to be successful. And I think largely, that comes down to the battery technology. So we've got teams, obviously, that have been following that and working on that, and we'll make our move when we think it's the right time. And as to what the structure that might look like, that's sort of to be determined at this point.

Is it safe to say you prefer it to be organic and wholly owned in that regard?

Well, I don't think we're committed one way or the other. I mean, I think clearly, we own the technology. And we're - we know we can go do it in terms of is there a structure that's more preferable than another. I mean, I think we'll look at all options at this point. We want to make sure that we have the right technology and the right ability to make a successful product. And right now, that's really more in the R&D phase as opposed to worrying about capital structure.

And we do have a question from the line of George Shapiro with Shapiro Research.

Scott, the release says that mix was a big help in the Aviation profit in the quarter. But if I look at the mix, I mean, it's not clear why. I mean, M2 is 4 deliveries higher and Sovereign was actually 1 delivery less. King Airs were less in the quarter. So if you could just expand a little bit on what the favorable mix actually was.

So the mix favorability really has to do within the aftermarket, what's the mix of parts versus service center labor. We saw a strong part demand which has been rebounding from where it was, and that's a good mix for us.

And yet, you said the aftermarket was down, what I assume a couple of percent.

Well, it was down very, very modestly, but more importantly, the mix within that aftermarket was more heavily weighted to parts than service.

Okay. And if I look at the implied orders this quarter and go back in time, orders are pretty similar in Q1 of '19. They were actually somewhat below Q1 of '18. And then we kind of petered out after that. So what's your confidence that this time, it's not going to peter out like we saw some in '18 and '19?

George, all I can tell you is we're at the level of activity, we're seeing a number of customer dialogues. It's strong right now. I can't really represent where it's going to be 6 months from now or 9 months from now. I mean we think that the macro environment has been - we've talked about this for the last couple of quarters, it's is as strong as we've seen. And by every metric, when you look at a number of new people coming in, we're - as I said, we're seeing flight hours now that are back up over where they were in 2019, not just comparing to 2020. The used young aircraft that are available for sale, the pricing environment, it's all positive. I promised to tell you 3 months from now, 6 months from now, 9 months from now, how we feel 3, 6 or 9 months from now.

And then my last quick one, why isn't the guide for the year substantially low? I mean you did $0.70 this quarter. If you just annualize that, you get to the low end of your new guidance, and we know that this quarter is the weakest quarter for Aviation probably pretty substantially. So what are you figuring weakens in subsequent quarters to offset the Aviation strength that's given you only a guide of $2.80 to $3?

Well, George, I think we're - we raised our guide because of outperformance here in Q1, and our expectation is that we'll continue to see strength in Aviation and some stronger profitability in Systems. And that's kind of how we're looking at it right now. Obviously, as the year goes on, I think we're going to still be a little bit conservative here in terms of making sure that the economies around the world don't have any issues that the pandemic recovery continues. Right now, everything feels very strong. And it's - again, the end market demand, whether it's in our industrial or aerospace and defense businesses feels good, but we'll continue to keep an eye on that as the year plays out.

We do have a question from the line of Jon Raviv with Citi.

A question on - just on biz jet. What's the general lead time when you guys look at production rates going higher? And what could that mean for margin? Essentially, what needs to happen to get back to that double-digit number, which we've been thinking about not too long ago. How much of that's in your control?

Well, look, I think that generally speaking, we look at about a 6, 9-month sort of lead time. Obviously, there are some longer lead items in there around engines and stuff like that, but we maintain an awful lot of close dialogue with those critical suppliers to understand what flexibility we would have to tweak production rates up or down. And that's a real-time process, right? It's not like it's an annual thing. We maintain that dialogue on a very regular basis. And that gives us some flexibility that I think is out in that 6-to-9-month window.

And then just on the margins, Scott. What you got to do maybe to get to those double-digit numbers, which you've been talking about not too long ago.

Look, as the volume, we're still running at fairly low volumes. And I think that these are - tend to be pretty good gross margin products. So as we see that volume grow in the business, a lot of that drops to the bottom line. And that's clearly the path to get back to that double-digit margin business.

Got it. And then on capital deployment, repo in the quarter, a bit light, still carrying a pretty big cash balance. How are you thinking about M&A or other capital deployment options at this point? And if M&A, where would you focus and what kind of size you're looking at?

Well, again, any M&A activity would be something that we think that comes along as appropriate. Our focus has certainly been more in that A&D space, and that's the areas where we'll continue to look. As to the capital deployment, we continue to focus on stock buyback as sort of our default opportunistically. Again, we're a little conservative in Q1, just to get - see how the economy is doing and how the businesses are doing and performing, and we would expect to clearly see that ramp as we go through the year.

And we do have a question from the line of Robert Stallard with Vertical Research.

Scott, Ingersoll Rand announced they were selling their special vehicles business quite recently for a pretty good price. And I was wondering, if you've seen any expressions of interest in your portfolio?

We're not going to comment at all on the specifics of any kind of M&A activity at this point.

Is this something you would be open to thinking about?

We're not going to comment at all on M&A activity at this point.

Okay. Maybe something else then. Frank, just a couple of small ones for you. You mentioned that I think it was other was an item in - I think it was TS this quarter. I was wondering if you could give us some more color on that. And then maybe not wanting to sound like George, but you didn't raise the cash guidance for the year. And I wonder if there's any specific reason for that.

Yes, look, the other piece of that, there's no other. It's just the category. It's the way we talk about it in the Q. So that's just part of the description of that category. So everything else was kind of clean in terms of price performance, everything. So there was no other piece. But in terms of cash flow, we obviously saw a very good cash flow performance in the first quarter. We expect that to continue. We're probably leaning towards the high end of our guide or the higher end of that range certainly, given the provision to earnings, but we left the cash number where it is for now.

And we do have a question from the line of Cai von Rumohr with Cowen.

So at Aviation, your margin was up to your full year target. You mentioned aftermarket, but could you give us some color on other factors and the relative importance? For example, price on your aircraft, preowned profits or losses, R&D, those kind of things because you still haven't explained very well why the numbers were quite so good at Aviation.

Cai, I think the part margins is true in all of our industry. It tends to be the strongest. So that mix is a significant contributor. We did see positive price over inflation, which is good. We saw positive pricing, I think, that what we'll see going into our order book, which is good for future quarters. I think you'll start to see, frankly, given the environment that's been out there, our balance of used aircraft is dropping and the pricing environment in terms of what it takes to move those aircraft has been improving. And so all of those factors are contributors to seeing a healthier margin come back into the business. And as you know, we need to see increased volume coming back into the business to get up to where we were back to a 10% margin in '19. And I think as we see that volume grow through this year and into next year, that's where we're heading. So it's not one spot, which is actually good, right? It's been good mix, it's good pricing on product. And most importantly, it's going to - as a result of strong book-to-bill, lead to higher volumes.

So if that's the case, I mean, basically, you're clearly going to blow away your 5.5% margin target for the year. And you said that Systems is kind of better than you thought. So your guide looks low, but what am I missing? Is there something else that's going south to offset the obvious goodness in Aviation and Systems?

No, there's not. I think things are good. And we'll continue to keep an eye on it through the course of the year. As your friend George noted, we never know what the order rate is going to be 30 days, 90 days, 120 days downstream. So if we continue to see the kind of strength that we're seeing in the end market and the demand, I'm sure there's opportunity for us to further raise that guide.

And the last one, to follow up to Carter's question, people are throwing money at people who have never built planes before. You guys actually have some technology that's relevant to the whole urban mobility. Assuming you have clients who clearly, are oriented that way, what's it going to take? I mean, do you feel that you could miss an opportunity by not moving and taking some money and kind of getting into the fray quicker? Because I assume the guy who has a reasonable product and gets certified first is going to have a first-mover advantage.

Well, Cai, I'm not worried about missing anything here. I think our ability to execute on the design and development of an aircraft and the certification of an aircraft is quite proven. We've done this many times. I think we're sitting on an enormous amount of technological capability in terms of what we've done in the past and obviously, the technology of our teams. I mean, it takes some really talented people to go design and build and certify an aircraft, the fixed-wing or VTOL. We do think there's a potential for a very, very large market out there in that urban air mobility, but you have to make sure that all the technology you need to have in place to have a useful aircraft is there. And as I said earlier, I think in my mind, it largely comes down to around the battery technology. So we have a great team of people. As you know, we created a sort of a breakout of a group called the eAviation that Rob Scholl is running for right now and pulling together the efforts and technology and engineers from across both the fixed-wing aviation, those at Textron Aviation as well as at Bell, some key resources out of our Systems business. So we are actively working on this. But again, you have to have the right propulsion system to make this work. And that's really going to be the gating item. And that's one that we're working on, and we're keeping an eye on it. But look, am I worried about some of these guys that have never certified an aircraft obviously going to dominate a market? I'm not worried about that at all. We're working on this, but we don't need to be wildly public or out there making crazy claims at this stage of the game. We're executing, and we'll pick our time and place to do it. And I think we could have a very successful business in that space.

Our last question comes from the line Kristine Liwag with Morgan Stanley.

Scott, following up on these E-Z-GO questions. It's clear that you have aircraft technology and certification down. But a lot of these new entrants are planning a vertically integrated solution where they also own the direct-to-consumer access point, operations and manufacturing. Should you go into this industry, what's your appetite to expand into the other parts of the value chain and provide your own vertically integrated solution versus staying within manufacturing?

Well, that's very much to be determined, okay? To be honest with you, I personally don't understand it. We've been in this game for a long time and why someone who produces in services and sells aircraft needs to also operate the aircraft. I mean I'm not opposed to the idea, but there's a difference between designing and building and certifying aircraft and operating aircraft day in and day out. I think maybe people don't fully appreciate what that business model is and how you have to run such a business. I mean, look, we look at people like Wheels Up. We look at people like NetJets. I mean, look, operating big Part 135 operations is not easy. It's a big business. It's a complex business, and it's - that's totally different than designing and building and certifying an aircraft. So I'm not saying that the existing term of someone who's totally vertically integrated can't exist, but I don't know why - I guess, I don't know why it has to be that way. Well, frankly, I guess my view would be why it's exclusively one way or the other. So look, we're working, as you know, with guys like Wheels Up. I mean Kenny and our companies have a really good relationship. He's obviously a master of providing that on-demand lift and aircraft in aviation today and running a big complex 135 operation. And I think there's probably as much opportunity to help accelerate these kinds of end markets. They're working with the expertise that's out there as opposed to trying to reinvent the wheel, frankly.

That's helpful. And then, Scott, if you were to think about when the earliest year would be where we would see a fully operational UAM, E-Z-GO flight, revenue passenger flight for customers, when do you think that would be?

Well, this is why we haven't put a date out there, right? Because I think it's going to be gated largely around what's the battery technology is there to support making a useful vehicle. And when I say a useful vehicle, I mean, something that can have a kind of range practical in terms of what we know needs to be there from a certification standpoint, what needs to be there in terms of margins, and that's the piece that, frankly, is why I'd say. That's in my mind, the pacing item and what will drive that date. Now does that mean you can't fly something sooner than that? Of course, you can fly something sooner than that. But to certify it and really put it into an actual real Part 135 passenger carrying operation, that's the piece, that's the question mark. And that's why, again, I'm not worried about the timing of this. I think you do the work. And you pull the trigger when you think that you're going to have something that's a certifiable practical useful air vehicle.

Okay. Brad, that concludes the questioning queue.

And with that, ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and for using AT&T TeleConference special services. You may now disconnect.