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Edited Transcript of TXT.N earnings conference call or presentation 30-Apr-20 12:00pm GMT

Q1 2020 Textron Inc Earnings Call

PROVIDENCE May 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Textron Inc earnings conference call or presentation Thursday, April 30, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Salander

Textron Inc. - VP of IR & Treasurer

* Frank Thomas Connor

Textron Inc. - Executive VP & CFO

* Scott C. Donnelly

Textron Inc. - Chairman, President & CEO

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Conference Call Participants

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* Carter Copeland

Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense

* David Egon Strauss

Barclays Bank PLC, Research Division - Research Analyst

* George D. Shapiro

Shapiro Research - CEO and Managing Partner

* Jonathan Phaff Raviv

Citigroup Inc, Research Division - VP & Analyst

* Peter J. Arment

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Robert Alan Stallard

Vertical Research Partners, LLC - Partner

* Robert Michael Spingarn

Crédit Suisse AG, Research Division - Aerospace and Defense Analyst

* Ronald Jay Epstein

BofA Merrill Lynch, Research Division - Industry Analyst

* Seth Michael Seifman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Textron earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President, Investor Relations, Mr. Eric Salander. Please go ahead.

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Eric Salander, Textron Inc. - VP of IR & Treasurer [2]

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Thanks, Greg, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release.

On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website.

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

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [3]

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Thanks, Eric, and good morning, everybody. First, I'd like to recognize that we're all operating in extraordinarily challenging times while facing numerous disruptions to our daily routines. On behalf of our company, I'd like to share our deepest sympathies for all those who have been affected by this global pandemic, and we join in thanking those who have been working to keep us safe through the crisis, particularly those on the front lines and the health care community. As we respond to the COVID-19 pandemic in this uncertain time in the world, our #1 priority remains the health of our workforce and ensuring that we have a safe work environment during this unprecedented time.

Our employees have stepped up across the communities and are constructing plastic face shields and cloth facemasks at aviation and TSV, producing hand sanitizers at Bell and gathering essential items for those who need it at Caltex and Systems. We continue to work in understanding and assessing the impacts of COVID-19 is having on our businesses, but we still have limited visibility in these times, particularly with respect to how long this crisis will affect our markets. We're implementing actions across the company to manage and mitigate the impact this pandemic is having on our operations. Given the diversity of our segments and end markets, the impacts of COVID-19 have had a wide range of effects on our business operations. For instance, the U.S. government has taken several actions to continue to reinforce the importance of our nation's defense industrial base and has deemed the defense industrial base as part of the nation's essential critical infrastructure.

Looking at our defense businesses, Bell and Textron Systems have maintained a steady operational cadence throughout the health crisis, and we expect them to continue to do so. Bell executed very well in the quarter with increased revenue from higher military volume and a 14% operating margin. On the commercial side of the business, we delivered 15 helicopters, down from 30 in last year's first quarter. We did see several deliveries push out of the quarter, resulting from customers' inability to accept aircraft due to COVID-19-related travel restrictions.

During the quarter, Bell hit another major milestone in its pursuit of the Army's Future Vertical Lift programs when it was down selected for the next phase in both of these strategically important aircraft acquisition programs for the future of Army aviation. On the Future Long-Range Assault Aircraft program, the Bell V-280 Valor was one of the 2 competitors selected for the competitive demonstration and risk reduction phase over the next 18 months, with the expectation that the Army will award a preliminary design contract in Q4 of next year. V-280 is well positioned entering this final phase of the acquisition selection process, has now been flying for over 2 years while continuously demonstrating its speed, agility and versatility in both piloted and autonomous flight.

On the Future Attack Reconnaissance Aircraft program, the Bell 360 Invictus team was selected as one of 2 competitors with the design, build and testing of a prototype rotorcraft. The Bell 360 Invictus offering includes the proven high-performance rotor system and fly-by-wire controls from our 525 Relentless in affordable, sustainable and highly lethal design.

At Systems, while overall operations were strong for the quarter with higher volume across most of our product lines, lower operating margin of 7.9% in the quarter was comparable to 9.1% was unfavorably impacted by our simulation product line related to the downturn in commercial aviation. We've announced furloughs and suspended operations at our simulator manufacturing facility in Montreal as airlines and trading centers have significantly reduced their outlook for the acquisition of training devices amid this health crisis.

In the quarter, Textron Marine & Land Systems delivered the first Ship-to-Shore Connector Craft 100 to the U.S. Navy, and Craft 101 is scheduled to enter builders' trials in the second quarter. Also on Ship-to-Shore Connector, the $820 million follow-on production contract for the next 15 craft was fully definitized in mid-April. This is a critical milestone, and we believe demonstrates the Navy's commitment to the [ground]. This now brings the total number of craft to be built at Textron Systems to 25 of the 73 craft program of record.

At Textron Aviation, we announced employee furloughs in late March to address expected lower demand for new aircraft and related service activities. In the quarter, revenues were $872 million, down $262 million from the first quarter of last year. We delivered 23 jets, down from 44 last year and 16 commercial turboprops, down from 44 in last year's first quarter. Entering the quarter, we expect the lower unit deliveries from both the change in the mix of aircraft sold and the availability of completed aircraft as we work to recover our composite manufacturing operations following the accident that we experienced at the end of 2019.

During the quarter, we also experienced delays in aircraft deliveries due to customers' inability to accept their new aircraft in Wichita based on COVID-19-related travel restrictions. We expect these aircraft will deliver as the travel restrictions begin to lift.

Looking to the market -- aftermarket. Revenues were down about 3% as compared to last year's first quarter. Service activity was strong through the first 2 months of the quarter but began to slow in March as the effects of the pandemic on air travel continued to expand.

Moving to backlog. There was a $290 million decrease from the fourth quarter balance of $1.7 billion, primarily due to a revised demand outlook from a fractional jet customer resulting from the pandemic. As government travel restrictions and other social distancing guidelines were implemented, we experienced a pause in sales activity as face-to-face meetings and demonstration flights became increasingly difficult to conduct. These actions led to the decline of retail order activity in the quarter. On the new product front, the Cessna SkyCourier completed engine ground runs in March and is on track for first flight in the second quarter.

Moving to Industrial. Revenues of $740 million were down $172 million from last year's first quarter, largely related to lower volume in our Fuel Systems and Functional Components product line. Auto manufacturers began to shut their factories in response to the COVID-19 crisis at the end of January, beginning in China. As a Tier 1 industry, Caltex closed their facilities accordingly. In China, the Caltex facilities have recently come back online and are ramping up based on demand signals from the customers. In Europe and the Americas, the auto OEMs shutdown began in mid-March and are expected to last through early May in most cases, with our facilities restarting accordingly.

At Textron Specialized Vehicles, we began employee furloughs in March to address the lower expected demand across our business. Our ground support equipment business has been impacted particularly hard as commercial air travel has slowed and airlines have pulled back on equipment purchases. Production has been suspended, and we will continue to monitor demand outlook.

And outdoor powersports distribution channel, including both retail stores and dealers, has been impacted by the crisis as consumer spend has significantly slowed and many dealers and stores have been required to close due to government shutdown orders and other operating restrictions.

Production of the off-road products has been temporarily halted. Golf and PTV are continuing to operate with some inefficiencies driven by required social distancing guidelines as they work to meet customer commitments. The team is doing a good job of working through these difficult times.

In summary, COVID-19 has had a significant impact on our employees, operations, suppliers and customers across each of our segments. With the continued uncertainty around the pandemic, we are confident in the actions that we've taken to protect our workers and maintain our businesses while continuing to meet our customer commitments.

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

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Frank Thomas Connor, Textron Inc. - Executive VP & CFO [4]

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Thanks, Scott, and good morning, everyone. Revenues in the quarter were $2.8 billion, down $332 million from last year's first quarter, largely driven by lower volume at Textron Aviation and Industrial. During this year's first quarter, we recorded $39 million in pretax special charges related to the impairment of intangible assets at Textron Aviation and Industrial due to economic disruptions caused by the COVID-19 pandemic. Excluding those charges, adjusted net income was $0.35 per share, down from $0.76 per share in last year's first quarter. Segment profit in the quarter was $156 million, down from $294 million in the first quarter of 2019. Manufacturing cash flow before pension contributions, a non-GAAP measure, reflected a use of cash of $430 million, which was in line with our first quarter expectation.

Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $872 million were down $262 million from a year ago, primarily due to low volume and mix of $260 million, largely the result of lower Citation jet volume of $154 million and lower commercial turboprop volume of $99 million. The decrease in Citation jet and turboprop volume largely reflected a decline in demand related to the pandemic, disruption in our composite manufacturing production due to a plant accident that occurred in December of 2019 and delays in the acceptance of aircraft related to COVID-19 travel restrictions.

Segment profit was $3 million in the first quarter, down from $106 million last year, primarily due to the lower volume and unfavorable impact of $23 million from performance, which includes $12 million of idle facility costs recognized in the first quarter of 2020 due to temporary manufacturing facility closures and employee furloughs resulting from the COVID-19 pandemic. Backlog in the segment ended the quarter at $1.4 billion.

Moving to Bell. Revenues were $823 million, up $84 million from last year, primarily on higher military volumes, slightly offset by lower commercial volume, principally due to delayed deliveries as a result of COVID-19 travel restrictions.

Segment profit of $115 million was up $11 million, largely on higher military volume, partially offset by the unfavorable impact of $8 million from performance and other. The performance and other included $25 million in lower net favorable program adjustments, partially offset by lower research and development costs. Backlog in the segment ended the quarter at $6.4 billion.

At Textron Systems, revenues were $328 million, up $21 million from a year ago, primarily due to higher volume across most of our product lines. Segment profit of $26 million was down $2 million as unfavorable performance was largely offset by higher volume. Backlog in this segment ended the quarter at $1.4 billion.

Industrial revenues of $740 million were down $172 million from last year, primarily related to lower volume at our Fuel Systems and Functional Components product line, as Scott discussed earlier. Segment profit was $9 million, down $141 million from a year ago, largely related to lower volume. We also realized approximately $13 million of unfavorable performance in the first quarter due to manufacturing facility closures and employee furloughs resulting from the pandemic that was mostly offset by other favorable performance.

Finance segment revenues decreased $3 million, and profit decreased $3 million.

Moving below segment profit. Corporate expenses were $14 million, and interest expense was $34 million. During the quarter, we initiated a number of financing activities to enhance our liquidity position, given the uncertainty in the marketplace. We issued $1.25 billion of debt that included $105 million of commercial paper, $650 million of 3% 10-year notes to refinance current year debt maturities and a $500 million 364-day term loan credit agreement that was fully drawn on April 2.

To further enhance our liquidity position, we received $377 million in proceeds from borrowings against corporate-owned life insurance policies with no [stated] maturity. Prior to the onset of the health crisis, we repurchased approximately 1.3 million shares in the first quarter at an overall cost of about $54 million. Consistent with the covenant in our new $500 million term loan, we have suspended share repurchases until the outstanding balance under this agreement is repaid. At Finance, we have an upcoming debt maturity in December of 2020 for $150 million, and we expect to refinance that note later this year.

Within this current environment, we're focused on our cash preservation. We're working closely with our leadership teams across our businesses on a weekly basis to efficiently manage our working capital and eliminate discretionary expenses. We're also evaluating all capital not critical at this time.

From a liquidity perspective, we believe we have sufficient funds to meet our obligations despite the uncertain environment. We understand the importance of managing our cash [balances and we've taken actions to enhance] our liquidity profile. Our cash balance at the end of the quarter was $2.4 billion, and we maintained an undrawn revolving credit facility of $1 billion, which matures on October -- in October of 2024.

With that, I'll hand it back to Scott.

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [5]

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Great. Thanks, Frank. While we suspended our earnings guidance for the year due to the uncertainty around the COVID-19 pandemic, I would like to briefly touch upon the outlook for each segment.

At Industrial, our Fuel Systems and Functional Components product line is obviously reliant on automotive production recovery. It's still too early to tell how the crisis will impact retail auto sales and ultimately automotive OEM production. But today, we are experiencing recovery in China. And based on current industry [expert] forecasts and dialogue with our customers, we expect to see Europe and the Americas resume production in the second quarter with production ramping in Q3 and Q4.

In the vehicle business, TSV has experienced significant disruptions in the markets. Consumer discretionary aspect of the outdoor powersports business remains difficult, but we are taking actions to minimize our costs and manage working capital through the downturn.

At aviation, while we continue to take some orders, the normal pace of interaction with customers has obviously [been slowed. We've] suspended most new aircraft production through the end of May, while continuing to deliver aircraft on existing orders and provide customers aftermarket services and support. While it will vary by region, we expect to see our sales team start engaging with customers in the latter part of Q2.

For our aftermarket business, we expect overall flying hours to begin to pick up in Q2, leading to an increase in activity in our parts and service business in Q3 and Q4. Systems is predominantly defense-oriented segment and we believe will remain on track to meet our expectations for the year. At Bell, given the strength of the defense business, we expect performance will be consistent with our expectations for the full year.

To wrap up, we've demonstrated our ability to execute through significant market disruptions in the past, and we're confident that we're implementing the necessary actions to address this crisis as well. At Industrial, we are committed to our strategy we have in place to strengthen our retail channel through our Bass Pro partnership and Snowmageddon presale event with the -- within the powersports business.

At Caltex, we continue to collaborate with our OEM customers as we invest in new technologies for plug-in hybrid electric vehicles and battery electric vehicles that position the business for ongoing opportunities as the automotive industry continues to evolve the next generation of cars.

At Aviation, while clearly difficult situation, we do believe this cycle [has] fundamental differences from the challenges we experienced in the 2008-2009 downturn. The secondary market for pre-owned Citation aircraft is much stronger today as compared to 2008, with significantly fewer aircraft for sale and a dramatically lower number of aircraft under 10 years old. As such, we do not view the preowned market as an impediment to the sale of new aircraft.

The private aviation environment is also different in a couple of ways. We don't see the negative perception associated with the use of private aircraft that was brought on during the 2008 financial crisis. Conversely, we believe the private aviation will be viewed more positively today from a health perspective as business travel restarts with the resumption of the economy. We also enter this cycle with a much stronger and more highly differentiated product portfolio having introduced the Latitude and the Longitude. Additionally, we have a pipeline of aircraft with SkyCourier and Denali that will help to drive future growth in new markets.

Our defense businesses are well positioned with our current production contracts in addition to recent awards on development programs at both Systems and Bell that represent opportunities for significant growth in the future. At Systems, we achieved important milestones on existing programs like the Ship-to-Shore Connector program as well as unmanned aircraft and surface vessel programs. Also, we believe the recent award of a development contract under the Robotic Combat Vehicle medium program, coupled with awards on several weapons programs, present promising opportunities for future growth in the segment.

And finally, the recent awards on the FLRAA and FARA Future Vertical Lift programs are the result of our commitment to invest in new products and technologies for future growth. These awards [will permit] us to continue to work with our Army customer to address their specific weapon system requirements and to support the Army futures command acquisition strategy to accelerate the deployment of these important programs to the war fighter.

That concludes our prepared remarks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Sheila Kahyaoglu.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [2]

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I just want to start out on a positive note because I'm sure we'll hear tons about aviation profitability later. But in terms of the down-select for the Future Vertical Lift programs, these were 2 big milestones, how do you think about the timeline from here? And given the OTA nature of these contracts, how do we think about R&D? Or should spending levels be pretty consistent?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [3]

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Well, it's a good question, Sheila. I think the timelines, obviously, are different for the 2 programs. FLRAA, which is pretty mature, I mean, we've been flying for over 2 years now on the V-280, I think this phase that we're entering into under the OTA, the customer has basically, who by the way has very much stayed totally consistent with their schedules and delivering on announcements and awards and staying on their timeline, has basically said, this is an 18-month process. So we'd be expecting the next selection and entry into the next phase in the fourth quarter of next year is a relatively short timeframe. Obviously, what's important for us in this window is to continue to reduce risk, work with the customer on taking the foundation of what we've created on the V-280 and making sure that we accommodate the requirements to turn this into a weapon system. It obviously has to accommodate mission systems and sensors and weapons into the future.

The other thing working, obviously, in this phase, which is very important for us, we're investing in a brand-new manufacturing technology center. So we've been able to demonstrate what the craft can do. Now we have to demonstrate that it can be very affordable and that it can meet the kind of great volumes that they need when they go into EMD and on into production. So that's what needs to happen here in this 18-month window. And again, I think the customer has demonstrated that they're on track and meeting everything they've said in terms of timeline. So we feel pretty good about that.

FARA is in a different place. Obviously, this is kind of -- we're starting to go from the paper design and proposal, for which we were down-selected. We've already started to build critical components for this program. We'll have a couple of years, a little 2 years to fly this thing. And then it will go through a similar process as FLRAA went through under the JMR program and have a fly off. So that's out there a few years. But again, the customer has been great about staying on their timelines. And I think we feel good about both those programs, which, as you say, are huge opportunities if we're ultimately selected for the next phase of those programs.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [4]

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Do we do...

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [5]

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R&D. Yes. So I'm sorry, on the R&D part, Sheila, so the -- at this point, so R&D spending at Bell on a gross basis will be up pretty significantly. Both of these programs are 1/3 Bell, 2/3 customer cost share. So on a gross basis, we'll see an increase in R&D. But on a net basis, because we're going from largely purely company funded on these programs to a cost share, you'll actually -- you should see a reduction in net R&D. And remember, none of this goes through the revenue line. Because of the cost share nature of the contracts, we'll incur that gross R&D. And then that customer contribution will be netted out against that.

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Frank Thomas Connor, Textron Inc. - Executive VP & CFO [6]

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And Sheila, the timing and the scope of what were now been awarded is consistent with what was in our guidance. We had anticipated these down-selection in our guidance.

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [7]

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Yes. We have both FARA and FLRAA in our original operating plan.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [8]

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Okay. And then if I could ask one on aviation. GD and Embraer were pretty adamant there was no demand deterioration. But your prepared remarks make sense if you can't meet a customer face-to-face, it's hard to sell an aircraft. I was just sort of surprised that the backlog ticked down from that fractional customer. I thought that would be one area that might actually see a pickup in terms of fractional usage?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [9]

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Well, it's a good question, and I think that remains to be seen. So look, I mean, it's not a secret. This is NetJets, right? They're our partner in the fractional market. It's been a great relationship. These guys are hugely important part of our business in terms of going to market and addressing that fractional customer base. So what happened, obviously, the NetJets sales force saw the same thing we saw, right, which was people sort of stopped as the pandemic hit. And so what we've done with NetJets is kind of gone through -- they are still taking quite a few deliveries this year on both Latitude and Longitude. They have aircraft out there that are sold and customer commitments, and we continue to operate and work with them. But they also said, look, until we see the sales turn back on, the aircraft -- other aircraft that we would have expected to take delivery this year, we're going to take out of the book. So I think what will really happen here in terms of the fractional market is not unlike our whole aircraft sales force is once the people are able to get out and engage and continue to work, we'll see how that really plays out.

I think when I talk to Adam, they're seeing a lot of inquiry and a lot of activity in both jet card as well as prospective fractionals because a lot of customers, and frankly, the good news is a lot of customers who have not been business aviation users in the past are thinking about what happens when the economy turns on, and they need to start to get back out on the road to see whether it's customers or suppliers or factories, plants, we expect that you're going to see a lot of new people come into this. And we've seen that in discussions with Adam and the NetJets guys. We had the same discussions in the club membership and managed model with Wheels Up and Kenny Dichter. So I'd say it's anecdotal at this point, but we certainly -- there's some reason to have some optimism here around the fact that we're seeing a lot of activity through those channels that are new players, new folks that we are seeing potentially coming into the business aviation industry.

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Operator [10]

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Your next question comes from the line of George Shapiro.

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George D. Shapiro, Shapiro Research - CEO and Managing Partner [11]

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Just to follow up on Sheila's question. So if you looked at the 0.64 book-to-bill, I mean, how much was that reduced because of NetJets coming out? Because it would seem like NetJets deliveries were going to be a reasonably high percentage of the total this year.

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [12]

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George, we didn't have any other cancellations other than what I just talked about around the NetJets side of things. So we didn't see other cancellations come out. One of the challenges, of course, is we didn't see a lot of new stuff go in because sales activity pretty well came to a halt. And look, it's not 0, I mean, and frankly, even as we come through here in April, deals are getting closed. There's customers out there who certainly had been engaged with us for some time, who've been looking at the aircraft who probably had demo rides, and they're now saying, okay, it's time to move and go ahead and put the order in. But it's a very difficult environment to go out there and develop new customers at this stage of the game until we can really get out there and get face-to-face, folks can do demo rides, they can get to Wichita and look at interiors. As you know, it's a pretty involved sales process. But those were -- the contributing pieces were the cancellations on the fractional side and just, frankly, lack of a lot of new order activity on the retail side.

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George D. Shapiro, Shapiro Research - CEO and Managing Partner [13]

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And how many deliveries weren't you able to make because of the travel restrictions?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [14]

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It was -- I mean total number of aircraft in jets was I mean there was a Longitude, a couple of M2s, a CJ, there were a couple of King Airs, 4 or 5 Caravans, a dozen 172s. It was a relatively small number, but it was pretty much across the whole portfolio. But when you start talking about Longitudes and CJ3s, it's not trivial from a revenue standpoint.

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George D. Shapiro, Shapiro Research - CEO and Managing Partner [15]

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And then maybe one for Frank. The Bell margin was particularly high, especially the lower EACs. You said the R&D, lower R&D offset some of it. I mean do I assume it offset half of it or so? And do the margins really substantially tick down in subsequent quarters because of just to be able to get close to your guidance, which is the high end [up in] 12%?

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Frank Thomas Connor, Textron Inc. - Executive VP & CFO [16]

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Yes. I mean it was a good quarter for Bell. R&D will continue to increase over time as we move through the year. And as Scott said, our expectation for Bell overall is that it's kind of on track, consistent with our original guidance so far.

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George D. Shapiro, Shapiro Research - CEO and Managing Partner [17]

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But it may require some substantial reductions in subsequent quarters to get down to even your high end of 12%?

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Frank Thomas Connor, Textron Inc. - Executive VP & CFO [18]

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Yes. And as you know, Bell has done better than our guidance for a number of years here, and we'll see how the year continues to develop.

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George D. Shapiro, Shapiro Research - CEO and Managing Partner [19]

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And then one last one for you, Scott. Unless I missed it in your commentary about each of the sectors, you didn't give commentary on Systems. Maybe that's because you don't know where simulation is going to go or did I just miss it?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [20]

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Well, I think, George, in Systems, things are generally going very well, right? The Ship-to-Shore Connector program has hit a couple of important milestones in terms of that program starting to deliver the craft, getting the milestone of the first sales of 100 across the goal line was very important. 101 is not far behind it. We continue to work through those issues on the -- I mean there's still more craft to deliver, obviously, on the development contract. Definitization of the production contract for the next 15 craft was a very big deal. We're continuing to see increased hours on, for instance, our fee-for-service unmanned aircraft programs. We've had a lot of key milestones on our unmanned surface vessel programs that's moving into the next phase, which is very good.

We did win -- again it's a development contract, but an important on the [RCV] medium and, as I said, other weapons programs, GBSD. So I think both the performance under the current programs that we have are looking very good. The critical new programs that we need to win and execute on are looking very good. The only soft spot really in the Systems world right now is particularly the air transport market on the simulation training side, which is, again, we've shut that down, and we just don't have any demand on the airline side, which is understandable. These guys aren't going to be laying out any kind of CapEx and doing upgrades and the things that are kind of normal flow business in that business right now. But outside of that, both current execution, current programs as well as important new wins were quite strong in Systems in the quarter.

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Operator [21]

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Your next question comes from the line of Robert Stallard.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [22]

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Scott, on aviation, I just want to clarify really what's going on at the moment. It sounds like the plants are at a low level of activity. And if that's the case, when things come back, do you expect volumes to be moving back to, say, where they were at the start of the year? Or do you anticipate being a fraction of what it was previously?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [23]

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Robert, look, that's the big question. All right. So what we're doing right now, aviation is just completing a 4-week or has just completed a 4-week furlough. We've extended that another 4 weeks. So what's built in right now is an 8-week shutdown. There is some minimal activity in terms of completing aircraft that were already under order for delivery. But for the most part, the production lines themselves are shut down. The furlough included across the whole workforce. We are bringing teams back in and getting the new product programs for, like Sky Courier are going.

But the reason we're doing this, Robert, is we just don't have good visibility into what that production rate needs to be for the balance of the year. We always gauge that based on looking at our sales teams and understanding order flow and what's going on in terms of normal progression of customers moving from inquiry all the way through to taking an order. And we're sort of -- we don't have that right now, right? So we're basically doing the furloughs to buy time to see the economy start to pick back up for people to be able to travel and understand where they are so that we can gauge what do we need to set that production run rate for the balance of the year. So that's -- I mean that is the big question, okay?

So -- and again, I think there's a lot of reasons to be optimistic around what business aviation, what role it plays as you come out of this pandemic, and people do need to travel and they want to do it safely and from a health standpoint, and they don't know what's going to be going on on the commercial airline side about how quickly that comes back, what are the routes, availability, all that sort of stuff. So -- and we certainly see anecdotal things that would indicate that there's reasons for optimism. But you also have to weigh that against business confidence and people and how do they feel about expending that CapEx to acquire that aircraft. So this remains to be seen, and that's why we're doing what we're doing, right? So the furloughs are a mechanism to buy some time and have better visibility so that we can set what we believe are appropriate levels of production as we frankly finish 2020 and how we think about 2021.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [24]

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Yes. Makes sense. And as a follow-up, Frank, you raised some debt against the insurance policies this quarter. As far as I know, it's pretty unusual. Can you give us an idea of what the sort of cost of debt was on this debt? And why you went down this avenue versus more plain vanilla stuff?

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Frank Thomas Connor, Textron Inc. - Executive VP & CFO [25]

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Yes. Well, we did this back in '08, '09 also. It's a ready source of cash. It's got a slightly [higher] cost to it than kind of a more normal borrowing it was, but we did it at a time, frankly, where we were seeing very significant dislocations in the financial markets. The Fed had not yet acted the way it's acted. People kind of were not -- we were seeing access to the markets dry up, and we just wanted to make sure that we had plenty of liquidity in anticipation of a potential downside to, frankly, what we've seen so far. So it's a bit of an insurance policy against our insurance policies, and it is a source of liquidity. The reason that we did it at the time is there is a scenario where if we request that cash value, it can take -- the insurance companies have up to 6 months to provide it. And so we wanted to make sure that we got in front of any type of delay if there was really a liquidity disruption in the markets.

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Operator [26]

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Your next question comes from the line of Peter Arment.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

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Scott, I guess, unprecedented times. I mean how are you -- have you been doing a lot of assessments of the supply chain? How do you assess the risk or disruptions that you're seeing across your business?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [28]

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It's a good question, Peter. And look, I think it's a day-to-day fight, right? I mean, we haven't seen any major issues. But without a doubt, there's such a patchwork of different rules and degrees of shutdown in different states that we track this every day. And so we haven't seen anything that's an unsolvable problem, but we're managing it every day. You have a supplier that's down for a week or so, and we work around that. So again, remember, for sure, aviation is largely shut down vehicle. I mean a lot of our stuff has already shut down. But Bell operates every day. Systems is operating every day. We do have the golf lines. PTV back up and operating. And while we see small flare-ups on supply base issues, we're able to resolve those. And frankly, that goes for our own operations, Peter, right? It's -- you're operating under unusual circumstances and some inefficiencies here and there. But I think it's a -- these are tactical issues. And the guys have done a really nice job of staying on top of it and kind of working through it every day.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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Yes. And just quickly on aviation. Just can you update us where you are on the post the composite facility, the accident there, where things stand there?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [30]

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Yes. Sure. Look, the guys, again, did a fabulous job. We basically have the composites operation back up to 100%. So at this stage of the game, we're kind of working on the catch-up activities. We've been doing some operations in there to catch up on critical components. So there's still work we need to do to bring all of our sort of in-house organic capability back up to speed, particularly on the autoclaves, but the composite layup facility and all that detailed work is fully back up and operating, but we're having to ship stuff mostly across town. Spirit, we're using a lot of their autoclave capacity. So Tom and his guys have made that available to us. So we're running. We're running in at 100%. So I think that's a problem that's largely behind us. Although as I said, we still have some inefficiencies because of having to use autoclave capacity across town that ultimately will get new [into the place] and be able to get back to normal operations. But for now, it's okay.

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Operator [31]

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Your next question comes from the line of Carter Copeland.

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Carter Copeland, Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense [32]

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Frank, I wondered if you could help me understand the -- in the Bell results in the quarter, the -- I assume the FLRAA booking, you were able to book some revenue associated with work that had been done to date. And just maybe help us understand how that did in terms of the results and how we're thinking about the phasing of revenues and margins from here? Because I imagine that was a big event for those guys.

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Frank Thomas Connor, Textron Inc. - Executive VP & CFO [33]

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Well, it doesn't impact revenue. What it does impact is net R&D. So again, kind of there's significant gross R&D effort going on at Bell vis-à-vis both FARA and FLRAA, but particularly on FLRAA, we had invested in advance of that award and so we did see some benefit in the quarter associated with the award and effectively the government sharing that offsets then our gross R&D effort that resulted in a lower net R&D effort. That's why I said kind of earlier that we'll see net R&D at Bell rise as we move through the year as a result of both increased effort, but also not having some of that catch-up that benefited the first quarter.

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [34]

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We've got a couple of questions. And just so people understand, this does not go through revenue, right? It is a cost share. It was in our plan. We still had lower R&D in Q1 because of the -- what we expected to be ramping, the level of significantly ramping the gross R&D through the course of the year which will happen to execute on FLRAA and FARA. And our net piece will also ramp through the year as a result. But it's not something you'll see go through the revenue line.

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Carter Copeland, Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense [35]

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Okay. All right. That's very clear. And then just as a follow-up, Scott, I wondered you -- I appreciate the commentary, the differences in the forward outlook for aviation. But if you kind of parse that, how you're thinking about the forward outlook for jets versus turboprops and how that play out differently, I'd appreciate the color.

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [36]

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Again, a good question. I wish we had better insight to it. Turboprop was hit pretty early in the year because we do so much in Asia. And as Asia kind of works their way through this, we're hoping we'll start to get some better insight into what's going on in the Asian market, which will particularly be impactful, I think, on the turboprop side of things. On the jet side of things, again, I think if you -- my thought around this thing, and again, talking to Adam and Kenny and the Wheels Up and NetJets, you see the kind of inquiry and customer activity that they're seeing.

Most of this, particularly as new people come in to this market, it's most likely they start in sort of that either charter club membership, jet card, but we're going to see it, and we are seeing some of it in fractional, and I think ultimately, you will start to see it in managed aircraft, right, where people conclude that, look, a whole aircraft makes sense for me. And again, it's just like everybody else in this industry. It's based on how many hours a year are -- do you need to fly to determine what makes sense for you in terms of which of those kinds of products, if you will, are going into business aviation.

But from my perspective, all these things are important, right? So driving utilization, even if it's in memberships and jet cards is more flying, which is more service. As customers do more equity based -- and again, whether that's a fractional or it's a whole managed aircraft, again, that's obviously very good for us. I just -- we just don't know what the timing of that progression looks like. And I'm not sure we'll get a lot better. We love that we're -- that Wheels Up and NetJets are seeing this kind of activity and new customers coming into the market. We'll have to give it some time here to see how that sort of trickles through the whole enterprise, if you will.

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Operator [37]

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Your next question comes from the line of Jon Raviv.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP & Analyst [38]

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Scott, you mentioned how Textron has historically been able to manage through these sorts of crisis and issues. And certainly appreciate that you're in a much stronger spot, much different spot today than just over a decade ago. But how are you thinking -- I mean, you're sort of pulling from the history of the company and your previous experience. How are you seeing about how you want the company to emerge once this is all done? Is it maybe deemphasizing certain parts of the business deemphasizing others? Appreciate that defense is clearly a lot more sticky kind of no matter what happens. Just how are you thinking with the perspective of your long career? How you want things to emerge on the other side?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [39]

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Well, look, I think part of where we are today versus where we are is our balance sheet is in a much better place, obviously. We don't have some of the challenges that we had a decade ago. I think our investments in new products positions us better than we've ever been. As you play through the cycle, I mean, the fact that you have the FARAs and the FLRAAs at Bell, that you've got the Longitude just certified, the Latitude very strong product, things like Sky Courier in the pipeline.

You look at what's going on in our Systems business, the things that we've done around investments in the unmanned side, both in the air vehicles, the surface vessels and now the investments we've made here recently both organic and through the acquisition of Howe & Howe on the land side. I just think we're much better positioned. And then that's going to continue to be those strategies in those businesses is how do we make sure that we have the kind of product and service that works that are -- make us a more robust business.

And I mean, this is a cycle that no one ever could have imagined, obviously. But I absolutely believe that we'll come out of this in a better place than we've ever been. I mean, things that we've been investing in for years to position us are happening as we speak. I think it's a shame. A thing like a Longitude gets certified and 60 days later the market stops. But look, that's a transient, right? I mean, this too shall pass. Things like the FARA and FLRAA down-selects. What's unfortunate is that happened right smack dab in the middle of a global economic shutdown. But that's -- again, that's a transient. These are programs that have the potential. And obviously, we need to stay very focused and execute very well with Army customer in order for us to be the guy that ultimately gets selected to go forward on production, and we have to keep focused and working hard to make that happen.

But these are -- I see these things that are happening and obviously in the nature of this pandemic is a very transient thing. Now look, there's other businesses where we will look very hard at, are there opportunities to consolidate some things, and hey, look, if I got some plants that are closed, are there more efficient ways to operate and manage. Look we're looking at all those things. So -- but I think the bottom line is this is a terrible moment in time. And trust me, it's not fun running businesses where your plants are shut down, but this is a transient. And I think we're in a radically different position than we were a decade ago. And some of our most important end markets, when you think about the aviation side is just a total different dynamic coming out of this than coming out of that '08, '09 cycle.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP & Analyst [40]

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And then just thinking about Bell, which seems to be obviously a good new story in the quarter, the military is very strong, just thinking about the next couple of years there, though, obviously, know that the V-22 numbers come down. But I know you've talked about the aftermarket type work bullying that somewhat. So can you just remind us of the trajectory of Bell military? And then also, what are we seeing in Bell commercial right now, especially with something like the 525?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [41]

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So look, Bell military, obviously, very solid for the quarter, and we expect it to stay that way. We -- as we've talked about before, we are definitely seeing a transition here over the last year or so, and we'll continue to see that going forward, where unit volumes are sort of flat to down a little bit. And that's just a function of the program of record on things like V-22 and H-1, but there's been significant growth in the aftermarket. Both of those platforms are heavily utilized. The fleets have grown, and the government, frankly, is looking for us to play a bigger role in sustaining and maintaining and, frankly, starting to upgrade some of those fleets. So I think we're well positioned for that, and that was borne out here in the quarter, right? So we're seeing solid growth in the aftermarket on those things, and that will help sustain that business and keep it, frankly, in a good place as we transition to whatever those next new platforms may be, obviously, focused very much on the FLRAAs and the FARAs of the world.

On the commercial side of Bell, we do a lot of parapublic and international sales. Those are largely holding up. Obviously, like all the businesses, sales activity right now is slower on some of the things like a 505, for instance, which is a shorter cycle sale, a lot more individuals and small corporate-type things, I expect that to be a little softer, but this is a very small amount of revenue and margins associated with that. It's a fabulous product, but it will go through a cycle, not unlike a general aviation sort of business. But so much of the 412, 429, 407 is parapublic, EMS, a pretty well diversified set of end markets, which will be a little more resilient to a cycle like that. With that being said, we are, of course, looking at those order rates, and we'll make any production-related adjustments as appropriate. That's obviously a very big service business as well, which, again, is very solid and was up in the quarter. People are flying in those markets.

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Operator [42]

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Your next question comes from the line of Ron Epstein.

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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [43]

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Maybe just following up on the Bell question. Have you seen much of an impact? Or is it too soon on what energy prices have done given oil completely collapsed. Has that had any impact on Bell yet? Do you expect it to? How are you thinking about that?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [44]

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Ron, as you know, we don't have a huge part of the business that's oil and gas related. It's -- there's a number of deals that are sort of in the pipeline that are kind of 412 or 429 related. There's a couple of things that were, as I said, that were in the pipeline that we haven't heard about yet, but it's because couple of these countries are just totally shut down. So whether it affects their strategy or not, I don't know. As you know, a lot of operators, and I don't think this will change in that industry, do put limits on how many hours aircraft have and ages of aircraft to meet their standards to provide service to the oil and gas fields. So there is -- that drives demand. I mean, there is regular turnover with a lot of these key customers.

And remember, Ron, we're not -- today, we don't do a lot of the big offshore stuff, right? It's the Gulf. It's a lot of the nearshore sorts of operations, and those tend to be the lower cost fields, which I think are the ones that are more likely to hang in there. I think it's safe to say right now, you're not going to see a whole lot of deepwater, big dollar investments to get at some of the more expensive oil. So but people are still producing, and they're still going to have to run their operations. So I mean -- I don't think it's a good thing for the oil and gas market for sure, but it's not one to which we have a huge exposure.

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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [45]

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All right. Got you. And then maybe just as a follow on, Textron Finance, right, obviously, is a shadow of what it once was, particularly in the last downturn. But sadly, the golf industry has been put on ice for a while here. I mean have you seen that impact Finance? Because I still -- there's still some golf properties kind of wrapped up in there. Has that impacted finance? And how has that impacted E-Z-GO?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [46]

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Yes. So 2 things. So first of all, we have 0 golf in [TSE] now. There are no golf properties. The last of that got sold off, actually an account closed out and gone last year. So we are officially out of the golf course finance business. So we have no exposure there. Golf, as you know, Ron, the cars themselves are primarily almost all are leased. So as clubs reach the end of their leases, they do roll and end those leases. I mean you can do a 6-month extensions and some stuff like that for sure. But the demand in the golf side of the business right now remains very strong. As you know, we introduced the lithium-ion stuff a while back, and that's been a fabulous product for us. Demand is very strong. This year, we introduced a brand-new, we think, market-leading gas product, which is a segment we haven't been a big player for a long, long time.

We've seen a nice uptick in demand driven by that. So the golf business is running. My only challenge on golf right now is just build enough golf cars. And the difficulty there is we -- our guys are doing a great job. They're working. I was down in Augusta a few weeks ago with them, and we're running the golf line, but what used to be every 2.5 minutes, we could produce a golf car, we're running at about 7 minutes right now, and that's because of the social distancing, right? We've got our production work cells where we usually have 3 or 4 folks at every station doing assembly work, I can only have one person in that area at the moment based on the guideline. So -- but we're running 2 shifts making them and shipping them as fast as we can.

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Operator [47]

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Your next question comes from the line of Robert Springam (sic) [Robert Spingarn] .

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [48]

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I want to ask a question. This could either be for you, Scott or for Frank. But I wanted to talk about the fact -- a follow-on from really all the earlier questions. We've talked a lot about supply-side disruption from COVID-19, what it's been doing in the factories and furloughs. And obviously, it's very difficult to work through. But I was hoping we could balance this with the demand destruction that might be here. And I thought it might be helpful to look at your delivery exhibit and focus on jets delivered, which are down around half first quarter to first quarter and then the same for the commercial helicopters. Can you quantify or parse out how much is factory shut down? How much was the accident? How much is perhaps weakness in demand that crept into the quarter defaults or what have you? Can we talk about that?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [49]

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Sure. I can give some color on it. I mean, at aviation, it's -- I mean, it's roughly 1/3, 1/3, 1/3, let's say, right? I mean there's stuff that we expected that we would not be able to deliver based on the interruptions on our composite facilities which, again, is a transient, and we're back to 100%. We're still playing some catch-up there, but I think we're getting that back under control. There's about 1/3 of it were aircraft where people just couldn't take delivery of the aircraft given travel constraints, and there is probably another 1/3 of stuff that we would have expected orders that would have closed in the quarter and aircraft that would have delivered that just aren't closing because we're not out selling. And I think those largely will -- clearly, the ones that can deliver on travel restrictions will push out into the subsequent quarter, the order activity needs to pick up as we can get back to sales. And clearly, we'll get caught up on the impact due to the composite stuff. So I don't want to go through all the direct numbers, but it's roughly split amongst those things, all of which I think are transient. In terms of what...

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [50]

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They're all supply side, right, not being able to show up to pick up your airplane is a COVID-19 problem, the factory shut down, the accident and so forth. So it sounds like on the demand side, you haven't really seen it yet other than the cancellation of [some backlog]. But has anybody defaulted? We heard from a competitor that there were some defaults in the quarter.

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [51]

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No. So just to be clear, I mean, I think, again, we're [inning] these things in supply and demand. There certainly was some lower volume in the quarter because of people reacting when the whole pandemic thing first got announced, right? Orders that were progressing that you would have expected that you would close things in normal business and convert to orders and sales didn't happen, right? So there is certainly some impact in the quarter on the demand side. What that means in the future is hard to predict because we're really not back doing a whole lot of sales activity.

So on -- and as I said, on the cancellation front, no, we did not get phone calls canceling aircraft. In fact, we -- calls -- people even in cases where they said, "Hey, I can't get there." And we said, well, look, you got to put additional cash, and they did, right? So I mean people want aircraft, and we saw that same dynamic at Bell. So it wasn't a matter of people calling and canceling. It was people not being able to come pick it up and take delivery. So the only cancellations was -- again, we talked about the fractional side. And I think that, again, that's -- I don't view -- remember, for us, NetJets is very important. Their sales force sells a lot of our aircraft. And so if their sales force can't go out and sell aircraft, that's a problem for NetJets and for us. So I don't see that dynamic of what they're seeing as being different than the dynamic of my own sales force, right, which is having a hard time engaging in the way they would normally engage with customers, and I expect that will turn once the sales teams can get back out there and go about their business.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [52]

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So what I'm getting at, Scott, is what I'm worried about is that it's not so much that the salespeople can't logistically get deals done during this thing, but that the demand is actually worse than we think. And I know you've characterized this period differently than the prior 2 downturns, but it's hard to ignore the fact that in the prior 2 downturns, the light and mid-jet segments were down 50% over a couple of years. And I'm just wondering if there's a hidden demand destruction that we're looking at here because we're going into a period of austerity, which generally accompanies these recession recoveries, people sharpen the pencil. There's a little less willingness in the Boardroom to buy the airplane. And I'm curious to see if you're seeing any evidence of that yet?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [53]

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No. Look, we're not out there selling. So I mean, we don't. I mean, you might be right. I don't know. For sure, I'm not putting you on my sales team. But this is the great unknown, guys. And again, all I can do is your facts and your perspective, if you looked at what happened coming out of '08, '09 are undisputable. I mean I completely understand. And there were a lot of things that were going on in '08 and '09, right? You had a massive destruction of wealth. You had huge volumes of aircraft that had been built in the 4, 5 preceding years. So you had tons of virtually brand-new airplanes, only a couple of years old with very low hours, which were the same model of airplane that you were still in production with that you were selling against.

And not to underplay, there was a huge political bias in that '08, '09, '10 timeframe of people hiding their business jets, right? I mean, it was just such a different dynamic. But again, these are all just opinions. We don't know. And I don't want to -- I want to be very clear. We -- this is why we can't forecast yet and why we're trying to buy some time to get enough of this behind us to get a better perspective on what's going on in the market and what that demand environment will look like before we make permanent changes one way or the other to our production rates. We just don't know. I'm not disagreeing with you. I mean I understand your perspective. I just don't know.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [54]

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Yes. And I'm not trying to be overly negative. I am simply looking at what's happened before and the fact that we -- and it is unknown, but we could be in a period of austerity coming out of this thing, and I would think that might matter.

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [55]

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Well, if that turns out to be the case, it will matter, and we will absolutely react accordingly. But as we sit here today, we just don't know. There's bull cases, there's bear cases, and there's stuff in the middle. And that's all we're trying to do, guys, is get to a point where we can have a much better fundamental understanding of what that demand environment looks like to make decisions on how to run the business going forward.

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Operator [56]

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Next question comes from the line of David Strauss.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [57]

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Scott, I think NetJets has been out there publicly saying that not only from you all, but total industry deliveries, they're now looking at roughly 25 this year versus the plan had been 60. Is that decline, I guess, percentage-wise, roughly in line with what you're looking at versus what your initial plan was with NetJets?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [58]

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I would say that's in line with it. I think what Adam put out is consistent with the conversations we've had and what I talked about in terms of how we worked with them to revise our outlook and backlog for the balance of the year. So what they put out there is absolutely consistent with the dialogue that we've had and the work that we've done to realign that delivery. So as he indicated, look, there are still quite a few deliveries here for the balance of the year, but it reflects the market as they see it today. And again, I'm not sure if that's how the market's going to look 30 days or 60 days from now, but it's how it looks today.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [59]

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And with that in mind, how quickly can you pivot if they come back to you and turn things back on, how quickly can you pivot and increase deliveries back towards NetJets?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [60]

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Well, obviously, particularly for Latitudes and Longitudes, we had a pretty good visibility, again, based on that backlog and where we're going. So these aircraft are there, right? I mean they're not all 100% completed, but they are -- and some of them were waiting for some of these composite parts. But we could clearly increase number of deliveries in those categories of aircraft based on that. So that would be a problem we would be perfectly happy to work on.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [61]

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Okay. And then Frank, any sort of help you can give us with thinking about working capital from here? Obviously, it was a big use in Q1. I would assume that was mainly at industrial and aviation. But how might working capital play out from here through the rest of the year?

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Frank Thomas Connor, Textron Inc. - Executive VP & CFO [62]

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Yes. I mean, overall, net working capital was not a big use in the quarter. Obviously, cash flow was kind of -- when I talk about that, I mean, year-over-year. So it was similar in terms of our normal seasonality. From a cash flow perspective, I think we would expect that we would see some use of cash in the second quarter, and then we'd be positive in the back end of the year. I mean there are a lot of variables around this, obviously, given the uncertainty that we've been talking about. But assuming we see some restart of the economy and businesses get back going and our factory start-up and our expectation, again, is some use of cash flow in the second quarter and then positive cash flow in the back end of the year and kind of normal liquidation of inventory reflecting in that as we move through the year. We have certainly decelerated things coming in. And that will allow for good liquidation of inventory in the back half of the year.

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Operator [63]

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Your next question comes from the line of Seth Seifman.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [64]

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So I think I got one more here. Maybe you spoke, Scott, about Ship-to-Shore at the beginning, I think, and the number of craft that you built. So with a fair number of those builds and probably starting to get down the learning curve, is there a cash profile there that we should kind of be aware of in terms of some collections that you guys can make as those crafts get delivered and kind of when does that happen?

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Scott C. Donnelly, Textron Inc. - Chairman, President & CEO [65]

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I don't know if there's anything there dramatic, Seth. I mean, obviously, we've been -- keep in mind, one of the things is we've been operating on undefinitized contract on the production now for quite some time. So in fact, about half of the program has been executed under that. So now we're fully definitized, but there's nothing there that would make it look very different than what you'd expect in terms of revenue, cash collection. The payment terms are quite standard for a government contract at this point so.

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Eric Salander, Textron Inc. - VP of IR & Treasurer [66]

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Okay. Greg, that will do it for now.

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Operator [67]

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