Q1 2020 Earnings Call
Ladies and gentlemen, thank for standing by welcome to the Textron earnings Conference call. At this time, all participants are to listen only mode. Later, we will conduct a question and answer session instructions will be given at that time. If you should require assistance during the call. Please press Star then zero.
As a reminder, this conference is being recorded I would now like turn the conference over to your host Vice President Investor Relations Mr., Eric Selander. Please go ahead.
Thanks, Greg and good morning, everyone before we begin I'd like to mention we will be discussing future estimates and expectations. During our call. Today. These forward looking statements are subject to various risk factors, which are detailed in our resi SEC filings and also in today's press release.
On the call today, we have Scott Donnelley, Textron's, Chairman and CEO and Frank Conner, Our Chief Financial Officer.
Earnings call presentation can be found in the Investor Relations section of our website with that I'll turn it over the course Scott.
Thanks, Eric and good morning, everybody first I'd like to recognize we're all operating an extraordinarily challenging times well facing numerous disruptions were daily routines.
We have more company I'd like to show our deepest up these for all those who've been affected by the school pandemic, we join it like.
Those when working people say the crisis, particularly those in the front lines on health care community as we respond to Cooper 19 pandemic missed one certain talking in the world or number one priority remains the health of our workforce.
Sure I know, we have a safe work environment. During this one person at a time.
Our employees have stepped up across communities that are constructing philosophy shields call face masks that aviation TSB.
Yeah, Sanitizers, a bell yelling essentially guidance for those new Caltech some systems.
We continue to work in understanding and assessing the impacts Workover 19 is probably in our businesses.
We still have limited visibility in these times, particularly with respect to how long this crisis, we'll talk to our markets.
We're implementing actions across the company to manage and mitigate the impact to spend that make us having on our operations.
Given the diversity of our segments that end markets the impacts of growing 19, how about a wide range of effects on our business operations.
For instance, the U.S. government has taken several actions that continue to reinforce the importance of our nation's defense industrial base has deemed the defense industrial base as part of the nation's essential critical infrastructure.
Well, you know defense businesses Bell and Textron systems are maintained a study operational cadence throughout the health crisis, and we expect them to continue to do so.
Oh, excuse me very well in the quarter with increased revenue from our military volume.
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 the quarter, resulting from customers and ability to accept aircraft due to covert 19 related travel restrictions.
During the quarter Bill hit another major milestone has pursued the army's future vertical what programs. When it was down selected for the next phase in both of these strategically important aircraft acquisition programs for the future formulation.
On the future long range assault aircraft program, the Belviq to Eddie Bauer was one of the two competitors selected for the competitive demonstration and risk reduction phase over the next 18 months.
Expectation that the army will order preliminary design contract Q4 next year.
Richard is well positioned entering this final phase with the acquisition selection process has now been flying for over two years, while continuously demonstrating its speed agility and versatility in both piloted an autonomous white.
On the future talked reconnaissance aircraft program to build through 16 victory steam was selected as one or two competitors, where the design build and testing prototype rotorcraft.
All 360, Invictus offering includes the proven high performance rotor system and farberware controls more five to five relentless.
Portable sustainable and highly for 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 unfavorable impact of our simulation product line related to the downturn in commercial aviation.
We've announced furloughs was suspended operations are simulator manufacturing facility in Montreal as airlines and training centers up significantly reduced our outlook for the acquisition of trading devices amid this health crisis.
In the quarter Textron renal and systems delivered the first shipping shore connector graft 100 to view US Navy craft went to one scheduled to enter those trials in the second quarter.
Also on should the short conductor the 820 million dollar follow on production contract for the next 15 crap was well within a tight in mid April.
This is a critical milestones and we believe demonstrates naves coming into the program.
This now brings the total number of craft rebuild textron systems to 25 of the 73 craft program of record.
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 for the first quarter last year.
Over 23 Jets down from 44 last year and 16 commercial turboprops down from 44 last year's first quarter.
During 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 the end of 2019.
During the quarter. We're also experienced delays in aircraft deliveries due to customers that ability to accept their new aircraft in which to all based on core were 19 related travel restrictions. We expect these aircraft will deliver as the travel restrictions begin to look.
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 two most of the quarter for began to slow in March as effects of the pandemic on air travel continues to expand.
Moving to backlog there was a 290 million dollar decrease from the fourth quarter balance of 1.7 billion, primarily due to a revised demand outlook from a fractional jet customer, resulting from a 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 from Skycar completed engine ground runs in March as 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.
As it related to lower volume in our fuel systems and cultural proponents product line.
Manufacturers began to show up their factories in response to the over 19 crisis at the end of January beginning in China.
As a tier one supplier to the industry caltex closer facilities accordingly.
In China Celtic Celtics facilities have recently come back online.
Wrapping up based on demand signals from the customers.
In Europe in the Americas, the auto Oems shutdown began in mid March and are expected to last through early may in most cases large facilities restarting accordingly.
I Trust Textron specialized vehicles, we got began employ referrals in March to address the lower expected demand across our business.
Our ground support.
Equipment business has been impacted particularly hard.
Commercial or travel has slowed and airlines have pulled back on equipment purchases.
Production hasn't been suspended and we will continue to monitor them and outlook.
And outdoor power sports and distribution channel, including both retail stores and dealers has been impact by the crisis as consumer spending has significantly slowed and many dealers in stores have been required to close due to government shutdown orders and other operating restrictions.
Production will be offered products has been temporarily halted.
Golfing Ptv are continuing to operate with some inefficiencies driven by required social distancing guidelines as they work to meet customer commitments.
Team is doing good job of worked through these difficult times.
In summary covered 19 has had a significant impact on our employees operational suppliers and customers across each of our segments.
Continuing on certainly from a pandemic, we're confident in the actions were 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 Brian.
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 coven 19 pandemic.
Excluding those charges.
Adjusted net income was 35 cents per share.
From 76 cents per share in last year's first quarter.
I've been 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 cap measure reflected the 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 the Textron aviation.
Revenues in Textron aviation of 872 million or down to 162 million from a year ago, primarily due to lower volume in the mix of $260 million.
Largely the result of lower Citation Jets volume up 154 million and lower commercial turboprop volume of 99 million.
The decrease in citation Jets 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 covert 19 travel restrictions.
Net profit was 3 million in the first quarter down from 106 million last year, primarily due to the lower volume.
And on favorable 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 coven 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 to cobot 19 travel restrictions.
Segment profit of 115 million was up 11 million largely on higher military volume, partially offset by the and by the unfavorable impact of 8 million from performance another.
The performance. It 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 on favorable performance was largely offset by higher volume backlog at the 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 140 mill $41 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 profit decreased 3 million.
Moving below segment profit corporate expenses were 14 million and its interest expense was 34 million.
During the quarter, we initiated a number of financing activities to enhance our liquidity position given any 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 a 364 day term loan credit agreement that was fully drawn on April the second.
To further enhance our liquidity position, we receive 377 million 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 a covenant in our new 500 million dollar term loan we have suspended share repurchases until the outstanding balance under this agreement is repaid.
At financed we have an upcoming debt maturity in December of 2020 per 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 expenditures and deferring those projects that are not critical at this time.
From a liquidity perspective, we believe we have sufficient funds to meet our obligations and fund our operations. 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 one.
Billion dollars, which matures on October in October of 2024.
With that I'll hand, it back to Scott.
Thanks Frank.
What we suspended our earnings guidance for the year do the uncertainty around the covert 19 pandemic I would like to briefly touched upon the outlook for each segment.
At industrial or fuel systems, and cultural components product line is obviously reliant on automotive production recovery.
It's still too early to tell how the crisis will impact, although retail auto sales and ultimately automotive OEM production.
But today, we are experienced recovery in China and based on current industry forecast in dialogue with our customers, we expect to see Europe and the Americas resumed production in the second quarter with production ramping in Q3 in Q4.
In the vehicle business TSV has experienced significant disruption in the markets.
Numerous discretionary aspect of the outdoor power sports business remains difficult.
We are taking actions to minimize our costs managers working capital through the downturn.
At aviation, while we continue to take some orders the normal pace of interaction with customers has obviously been slow.
We suspended most new aircraft production through the end of May well continue to deliver aircraft on existing orders and provide customers aftermarket services and support.
Well it will vary by region, we expect to see our sales team started 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 in Q4.
Systems was probably defense oriented segment.
We believe will remain on track to meet our expectations for the year.
At Bell given the strength of 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're committed to our strategy, we have in place to strengthen our retail channel through our best Pro partnership and Snowmageddon presale event with the powers within the power sports business.
Capex, we continue to collaborate with our OEM customers as we invest new technologies for plug in hybrid electric vehicles and battery electric vehicles that physician business for ongoing opportunities as the automotive industry continues to evolve to the next generation of cars.
At aviation will clearly difficult situation. We do believe this cycle has fundamental differences from the challenges we experienced in the 2008 to nine downturn.
The secondary market for pre owned citation aircraft as 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 premium market as an impediment to a sale new aircraft.
The private aviation environment has also different as a couple of ways. We don't see the negative perception associated with use of private aircraft that was brought on during the 2008 financial crisis. Conversely, we believe in private aviation will be viewed more positively today from help perspective as business travel restarts with the resumption of the economy.
We also enter the cycle with a much stronger and more highly differentiated product portfolio have introduced the latitude and longitude.
Additionally, we have a pipeline of new aircraft for the Skycars and Ali the will help drive future growth in new markets.
Our defense businesses are well positioned with their current production contracts. In addition to recent awards on development programs with both systems and bell the represent opportunities for significant growth in the future.
Systems, we achieved important milestones on existing programs.
The ship the short connector program as well as unmanned aircraft and surface vessel programs.
Also we believe the recent award of a development contract on 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 floor for future vertical 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 is important programs of the warfighter.
That concludes our prepared remarks, operator, we can open the lines for questions.
Okay, ladies and gentlemen, if you'd like to ask your question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if you're using the speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one than zero at this time and one moment. Please for your first question.
Your first question comes from the line of.
Hi, Algo. Please go ahead.
Good morning Stat Bank. Thank you for the time.
Morning.
Just wanted to start out on a positive note because I'm sure we'll hear times about aviation profitability later, but.
In terms of the down flat for the future vertical left programs. These for cubic milestones. How do you think about the timeline from here and given the LTAC nature of these contracts how do we think about R&D.
Spending levels pretty consistent.
Well. It's good question show I think the timelines obviously are different were the two programs flora.
She is.
Pretty mature and we've been flying for over two years now on the B to 80 I think.
This phase that we're entering into under the DTA.
The customer has basically.
By the way has very much they totally.
Consistent with their schedules and delivering on announcements awards and staying on their timeline.
As basically said this is an 18 month.
Process, so you'd be expecting.
The next selection and entry into the next phase in the fourth quarter of next year.
It is relatively short timeframe, obviously, what's important for us in this window is to continue to reduce risks work with the customer on.
Taking the foundation of what we've created on the B to 80, and making sure that we accommodate the requirements to turn this into a weapon systems that obviously has to accommodate mission systems and sensors and.
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 in DMD 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 Taiwan. So so we feel pretty good about that far as in a different place. Obviously this is kind of we're starting.
So to go from the paper design and proposal, which for which we were down selected we've already started to build critical components for this program will.
Have a couple of years a little two years to fly this thing and then it will go through a similar process as far went through.
Under the gym, our 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 both both those programs, which are as you say are huge opportunities. If we are ultimately selected for the next phases programs.
Do we R&D.
So im sorry on the R&D partial 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.
One third bell to third customer cost share. So on a gross basis, we'll see an increased R&D, but on a net basis, because we're going from largely purely company funded on these programs to cost share you'll actually should see a reduction in net R&D and remember none of us goes through the revenue.
And because 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.
And Sheila the.
Timing and the scope of what we're now been awarded is consistent with what was in our guidance. We had anticipated. These down selection our guidance, yes, we have both Laura on flora in our original operating plan.
Okay. Thank you and then if I could ask one on aviation GDN Embraer were pretty adamant there was no demand deterioration but.
Your prepared remarks makes sense, if you can't meet a customer base today's it's hard to selling aircraft I just sort of surprised at the backlog ticked down from that fractional customer I got that would be one area that might actually see a pickup in terms of fractional usage.
Well that's a good question and I think that remains to be c.. So I mean, it's not a secret. This has not yet is right there our partner in the fractional market. It's been a great relationship. There. 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 net jets salesforce and the saw the same thing we saw right, which was people sort of stop.
As the pandemic, yet and so what we've done with net jets as kind of gone through on there still taking quite a few deliveries this year on both latitude and longitude.
Aircraft out there there are sold and customer commitments and we continue to.
Operate and.
And work with them, but they also said looking what we see the sales turned 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 happened here in terms of the fractional market.
Is not unlike our whole aircraft sales force is once.
People are able to get out and engage and.
We continue to work, we'll see how that really plays out I think when I talked to Adam.
They're seeing a lot of inquiry a lot of activity in both jet card as well as perspective, fractionals, because a lot of customers and frankly, the good news is a lot of customers who have not been.
This aviation users in the past our thinking about what happens when the economy turns on the need to start to get backed out on the road to see whether its customers are suppliers or factories plants.
We expect that.
Youre going to see a lot of new people come into this and we've seen that in discussions with Adam and the metric guys. We had the same discussions in the in the club membership.
Managed model.
Wheels up and Kenny Dichter so.
Hey, it's anecdotal at this point, but we certainly theres. 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.
Okay. Thank you very much.
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Your next question comes from the line of George Shapiro. Please go ahead.
Hi, Good morning, just one George Qual.
A follow up on Sheila's question. So if you looked at that 0.64 book to Bill.
I mean, how much was that reduced because of net jets coming out because it would seem like net jets deliveries were going to be reasonably high percentage of the total this year.
Oh, Yeah, George there, we didnt have any other cancellations other than what I just talked about around the net jets side of things so.
We didn't see other cancellations come out on the challenges of course, we didn't see a lot of just off the wind because sales activity.
Very well came to halt.
If not zero, I mean, and frankly, even as we come through here in April.
Deals are getting closed theres customers out there, who certainly had been engaged with us for some time.
In looking at the aircraft to probably had demo rides and they're now saying, okay thats it.
It's it's time to move and go ahead and put the order end, but it's 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 to face to face folks can do demo rides that can get the which tall and look at interiors.
You know, it's a pretty involved.
Sales process, but those were the contributing pieces where the.
Where are the the cancellations on the fractional side and just frankly lack of a lot of new order activity on.
The retail side.
How many deliveries were you able to make because of the travel we switch ins.
It was it was.
Total number of aircraft in Ingests was.
No I mean, there was.
I wanted to a couple of Mtwos CJ there were couple of King airs.
Four or five caravans 1172. It was it was a relatively small numbers, but it was pretty much across the whole.
Portfolio, but when you start talking about launched twos and.
CJ threes units.
Approval from revenue standpoint.
Okay, and then maybe one for Frank Yeah. The Bell margin was particularly high, especially the lower EA season, you said the.
R&D lower R&D offset some of it I mean, I assume that offset half dozen or so and do the margins really substantially ticked down in subsequent quarters because of.
Yes, just to be able to get close to your guidance, which the high end up being 12%.
Yes, I mean, it was it was a good quarter for bell.
R&D will.
Continue to increase overtime 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 forth.
Well I made a requires some substantial reductions in subsequent quarters to get down to.
Hi on the 12%, Yes, then.
As you know bell has done better than our guidance for a number of years here and.
Well, we'll see how the year continues to develop.
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 thats because you don't nowhere simulation is going to go lower.
Then I just missed it.
Well I think Jordan systems.
Things are generally going very well right. The ship to shore connector program has hit a couple of important milestones in terms of program starting to deliver the craft getting a milestone of the first.
Sales of 100 across the rollout was very important 101 is not far behind it.
We continue to work through issues on the.
Theres still more craft to deliver obviously on the development contract definitive information of the of the production contract for the next 15 craft was.
Was a very big deal.
We're continuing to see increased hours on for instance, our fee for service on manned aircraft programs. We've had a lot of key milestones on our on our unmanned.
Surface vessel programs us moving into the next phase, which is very good.
We did when we get into development contract, but an important on the on the RCB 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 critical new programs that we need to win and execute on our looking very good the only soft spot really in the system right now is.
Particularly the air transport market on on the simulation training side, which is.
Again.
We've shut that down and we were we just don't have any demand on the.
On the airline side, which is understandable these guys aren't aren't going to be laying out any kind of capex and do and upgrades in the things that are kind of normal flow business in that and that's in that business right now but.
Outside of that.
Current execution current programs as well as important new wins.
Were quite strong systems in the quarter.
Okay. Thanks very much.
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Your next question comes from the line of Robert Stallard. Please go ahead.
Hi, good morning warning.
Scott on aviation.
Just kind of unrealized gain was one of them out of it sounds like the plan saw AD load level activity and if that's the case when things come back do you expect volumes to be moving back to say, where they were the started the year or do you anticipate add being a fraction of body was previously.
Robert that's the Big question all right. So what we're doing right now aviation is just completing of four week or has just completed a four week furlough, we've extended that another four weeks. So whats built in right now.
Is it we've shut down there is so minimal activity.
In terms of completing aircraft that were already under ordered for delivery, but for the most part the production lines themselves are.
Our shutdown.
Although the furlough included.
Across the whole workforce work, where we are bringing twos back in and.
Getting the new product programs for Flexcard curve going but.
The reason we're doing this Robert is we just don't have good visibility into what that production rate used 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 the 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 so we're basically doing the furloughs to buy time.
I want to see the economy start to pick back up for people to be able to travel and understand where they are so that we gauge what do we need to set that production run rate for the balance of the year.
So.
Thanks I.
I mean that is a big question, Okay. So and again I think theres 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 the and from a health standpoint, and they don't know what's going to be going on on the commercial airline side about.
So how quickly that comes back what are the roots availability as you all that sort of stuff.
So and we certainly see anecdotal things that would indicate that there's reasons for optimism, but you also if the weigh that against business confidence in people and how they feel about extending that capex.
Now to acquire that aircraft so.
You know it's this is this remains to be C and that's why we're doing what we're doing right. So the furloughs are our mechanism to buy some time and have better visibility so that we can.
What we believe are appropriate levels of production as weak because we think frankly finished 2020 and how we think about 20 to 21.
Yes makes sense as a follow up Frank.
You raise some debt against the insurance policies this quarter I'm, sorry that as pretty unusual I can you give us an idea of what was the cost of debt was on this.
This debt and why you went down this avenue. This is more end plain vanilla stuff.
Yes, well, we did this back to innovate own idle also it's.
So ready source of cash.
It's got a slightly higher cost to it than kind of a.
More normal borrowing was but we did it at a time both were frankly, where we were seeing very significant dislocations in the financial markets. The fed had not yet acted the way. It's acted people we'd all kind of we're not we're seeing access the market's dry up and we just want to make sure that we had plenty of liquidity in anticipation of a bit.
Essential downside to frankly, what we've seen so far.
So it's a bit of.
Insurance policy against our insurance policies in it so 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 six 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.
Okay. Thank you very much.
Your next question comes from the line of Peter Arment. Please go ahead.
Thanks, Good morning, Scott Frank.
I guess unprecedented times I mean, how are you.
Have you been doing a lot of assessments of the supply chain, how do you sense that risk disruptions that youre seeing across your businesses.
So good question, Peter and I think it's a it's a day to day, we fight right I mean, we haven't seen any major.
Issues, but without a doubt.
We there's such a patchwork of different rules and degrees of shutdown in different states.
We had we tracked this everyday and so we havent seen anything that's a.
I want them solvable problem, but we're.
We're managing every day you have a supplier this down for a week or so in.
We work around that so.
Railroad for sure aviation is largely shutdown the vehicle I mean, a lot of our stuff was larger shutdown, but Nobel operates everyday systems is operating everyday we do have the golf lines.
In Ptv backup and operating while we see no small flare ups on supply base issues were able to resolve those and then finally frankly that goes for own operations for you to right. It's your operating under unusual circumstances, and some inefficiencies here and there, but I think it. So these are tactical issues and mix the guys have done a real.
Nice job of.
Staying on top of it.
Kind of working through it every day.
Yes, and just just quickly on aviation just update US where you are on the post the composite facility the accident, there where things stand there yes sure look the guys that are again did a fabulous job, we basically have the composites operation backup 200%. So at this stage of the game. We're we're kind of worked on the catch up.
Activities, we've been doing some operations in there to to catch up on critical components. So.
We're still work we need to do to bring all of our sort of in house organic capability backup to speed protect you on your autoclaves, but the composite lay up facility and all that detail work is fully back up and operating but we're having to ship stuff most across town spirits were using a lot of our autoclave capacities of Tom and his guys have made that.
Available to us so.
We're running we're running at 100%. So I think that's a problem, it's largely behind us although as I said will we still some inefficiencies because of having to use our capacity across town that ultimately will get new ones in place and be able to get back to normal operations, but for now it's okay.
Appreciate the color. Thanks.
Your next question comes from the line of Carter Copeland. Please go ahead.
Hey, good morning, guys.
Morning.
I think I wondered if you could help me understand the in the bell results in the quarter.
The I assume the flora booking.
You have a book some revenue associated with work that had been done to date and just maybe help us understand that did in terms of the results.
How we're thinking about the phasing revenues and margins from here because I imagine that was a big event for those guys.
It doesn't impact revenue what is what it does impact is net R&D. So again kind of there's there's significant gross R&D effort going on at Bell.
Vis-a-vis, both far and Laura, but particularly on far off we had invested in advance of that award and so we do see some benefit in the quarter associated with the award and effectively the government and sharing that offset than our gross R&D effort differ railroads.
All to M&A, a lower net R&D effort Thats why I said kind of earlier that we'll see net R&D at Bell rise as we move through the year as result of both increased effort, but also not having some of that catch up that benefited the first quarter.
Okay.
Got a couple of question are there. So people understand this does not go through revenue right. It is a core share it was in our plan.
We still have lower R&D in Q1, because of what we expected to be ramping the level.
Typically ramping the gross R&D through the.
Most of the year, which will happen to execute on flora and FARA and our net piece will also ramp through the year as a result, but.
It's it's not something you'll see go through the revenue line.
Alright, Thank you Thats very clear.
And then just as a follow up Scott I Wonder if you I appreciate the commentary the differences and the forward outlook for aviation, but if you kind of parse that when how you're thinking about the forward outlook for jets versus turboprops.
And how that that May play out differently I appreciate the color. Thanks guys.
Yeah.
Good good question I wish we had better insight to electorate turboprop was hit pretty early in the year, because we do so much in Asia.
And as Asia kind of work their way through this where we're hoping it will start to get some better insight into what's going on in the in the Asian market.
Which will particularly be impactful I think on on the turboprop side of things on the just side of things again I think if you have my thought around this thing and again talking to Adam and Kenny and that the wheels up and net jets, you see the kind of inquiry and customer activity that they're seeing.
Most of this particularly as new people come into this market is 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 and manage aircraft where people will conclude that look a whole aircraft makes sense for me to get US just like everybody else in this industry. It's based on how many hours a year or are you do 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 <unk>.
Business aviation, but it's from our mom or 5% to 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.
We'll do more equity based and again whether thats.
Fractional or it's a whole managed aircraft again thats.
It's obviously very good for us I, just we just on what the timing of that progression looks like and I'm not sure. We'll get a lot better look we love that we are the that wheels up and net jets are seeing this kind of activity and new customers coming to the market will have to give us some time here to see how that sort of trickles through the whole.
Enterprise if you will.
Great. Thanks, Scott.
[music].
Your next question comes from the line of Jon Raviv. Please go ahead.
Hi, good morning, Thanks for the time.
Scott You mentioned, how textron has historically been able to manage through these sorts of prices.
And issues and certainly appreciate you're in a much stronger spot much different spot today than just over a decade ago, but how are you thinking that new sort of pulling from the history of the company in 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 business deemphasizing others.
I appreciate that defense is clearly a lot more sticky kind of no matter what happens how you're thinking.
With the perspective of your of your long career.
How you want us to emerging other side.
Well look I think part of where we are today versus where or as our balance sheets in a much better place. Obviously, we don't have some of the challenges that we had a.
A decade ago, I think our investments in new products positions is better than we've ever been as you play through the cycle I mean.
The fact that you have the the farmers in the floors of Bell that you've got the launch to certify the latitude very strong product things like Scott occur in the pipeline.
You look at what's going on in our in our systems business. The things that we've done around investments and the unmanned side both in.
The air vehicles will surface vessels and now the investments we've made here recently.
Both organically and through the acquisition how long the on the on the land side I.
I just think we're we're much better position and then that's going to continue to feel strategies in those businesses is how do we make sure that.
We have the kind of product and service networks that are make us a more robust business and let me just as a cycle that no one ever could have imagined obviously, but.
I, absolutely believe it will come out of this.
In a better place we've ever been things that we've been investing in for years to position us.
Our our happening as we speak Alex its shame thing like a launch to get certified and 60 days later the market stops, but look guys. That's a transient I mean this is this this too shall pass.
Things like the foreign far down selects elements unfortunate to that happened right smack Dab in the middle of.
Global economic shutdown, but thats again thats 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 guys. Ultimately us 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 obviously in the nature of this pandemic is a very transient thing now look there's other businesses where were we will look very hard at are there opportunities to consolidate some things and.
Hey look if I got some plants are flows or are there more efficient ways to operate manage.
Look we're we're looking at all those things so.
But I think the bottom line is this is.
Terrible moment in time.
And Trust me, it's not fun running businesses, where your plants or shutdown, but this is a transient and I think we're we're in a low.
Radically different position than we were a decade ago in some more most important then markets. When you think about the aviation side is just a totally different dynamic coming out of this then coming out of that OEM onein cycle.
Yes, I think if that perspective.
And then just thinking about bell, which seems to be obviously good history in the quarter on the military is very strong.
Just thinking about the next couple of years, there, though obviously noticed the V 22 numbers come down I know you've talked about the aftermarket works Boeing that somewhat.
So can you remind us of this the trajectory of del military and then also what are you seeing bell commercial right now, especially with something like the five to size.
So look belt Bell military obviously very solid for the quarter and we expected to stay that way, we as we've talked about before we are are definitely seeing a transition here over the last year, 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 a record on things like V 22.
And each one but theres been significant growth in the aftermarket both of those platforms are heavily utilized the fleets have grown and.
And the government frankly is looking for us to play a bigger role sustaining in maintaining and frankly starting to upgrade some of those.
Those fleets I think we're well positioned for that and that was that was born out here in the quarter right. So we're 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.
Maybe obviously focused very much on the floors and and the for the world on the commercial side a bell.
We do a lot of.
Power public and international sales of those are largely holding up obviously like all these businesses sales activity right. Now is is slower on some of the things like a five all five 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 there is a very small.
Amount of revenue and margin associated with that as a fabulous product, but it will go through a cycle not unlike.
General aviation sort of sort of business, but so much of the for Htwo for 20 947.
Is.
Power public Dms 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.
Thats, obviously, a very big service business as well, which again is.
This is very solid and was up in the quarter people are people are flying in those in those markets.
Thank you.
Your next question comes from the line of Ron Epstein. Please go ahead.
Hey, good morning, guys.
Okay.
Maybe just.
Following up on that.
No question.
Have you seen much of an impact or is it is it too soon.
On.
Energy prices have done given oil completely collapse.
That had an impact on value that you expected to how you're thinking about that.
As you know, we don't have a huge part of the business its oil and gas related.
It's theres a number of deals that are sort of in the pipeline that are kind of for 12 or.
For 29 related there's a couple of things that we're as I said that we're in the pipeline that we havent heard about yet, but it's because couple of these countries are just totally shut down so whether it affects their 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.
To put limits on how many hours aircraft have and ages of aircraft to meet their standards sort of 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 on were not today, we don't do a lot of the big offshore.
Stuff right, it's the golf, it's a lot of the nearshore.
All sorts of operations and those tend to be the the lower cost.
Field, which I think are that 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.
People are still producing and they're still going out there on their operations. So.
I mean don't speak 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.
Gotcha and then.
Maybe just as a.
A follow on.
Extract finance right, obviously as a shadow it once was particularly in the last downturn.
But sadly the golf industry has been put on price.
For wireless here I mean have you seen that impact finance, because I still there's still some.
Cost properties kind of wrapped up in there has that impacted finance.
How's that impacted.
Easy go.
So yes, so two things so first of all we have zero golf in TSC now there are no golf properties the last of that got.
Sold off actually in count closed out in.
Last year so we.
Our officially out of the golf course finance business. So we have no exposure there.
Golf as you know run the cars themselves.
Our primarily almost almost all our leased so as clubs reached the end of their leases. They do they do roll and in those leases I mean, you can do a six months extensions and some stuff like that for sure but.
The demand and the golf side of the business right now remains very strong.
As you know, we introduced lithium ion stuff, while back and Thats 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 us for a long long time, we've seen a nice uptick in demand driven by that.
So the golf businesses is running now my only challenge on golf right. Now is just build enough golf course and.
The difficulty there is we are guys are going to great job, they're working as Dominic also few weeks ago women.
We're running we're running the golf line, but what used to be every two and half minutes, we could produce a golf car, we're running at about seven minutes right now and that's because the social distance right we've got to.
Our production work cells, where we usually have three or four folks.
At every station doing assembly work I can only have one person in that.
In that area at the moment based on on the.
On the on the on the on the guideline so.
But we're running two ships, making them in shipping them as fast as we can.
Okay, great. Thank you.
Sure.
Your next question comes from the line of Robert Springer. Please go ahead.
Good morning.
Good morning, I want to ask question and this could either be or are you Scott or for Frank but I wanted to talk about the fact follow on from really all the earlier questions. We've talked a lot about supply side disruption from cobot 19, what has been doing 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. The 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 shot down how much was the accident how much is perhaps.
Weakness in demand the crept into the quarter defaults or what have you.
Can we talk about that.
Sure I can give some color on a muted at aviation it's.
It's all its roughly a third a third lets 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 tonight, we're back 200%, we're still playing some catch up there, but I think we're getting that back under control.
Owners of about a third of it were aircraft where people just couldn't.
Just take delivery aercap, given travel constraints and there's probably another third of stuff that we would have expected orders that would have closed in the quarter.
And aircraft that would've deliver that.
Just.
Holding because we're not out selling.
And I think those largely will clearly the ones that couldn't deliver on the travel restrictions will push out.
Into the into the subsequent quarter the order activity.
Needs to pick up as we can get back to sales and clearly we will get caught up on the the impact due to the composite stuff. So.
We'll go through all the numbers, but it's roughly split amongst those things all of which I think our.
Our transient Oh in terms of what to organize order hot.
They are all supply side right.
Not being able to shelf to pick up your airplane is a cobot 19 problem the factory shutdown the accident. So for us so it sounds like on the demand side, you haven't really seen it yet other than the cancellation is some backlog has anybody defaulted, we heard from a competitor that there were some defaults in the quarter no. So just to be clear I mean, I think it yes.
Bidding these things in supply and demand there. There's there are certainly you a song.
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 and normal business.
And convert 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 lot of.
Of of sales activity so.
On an as I said on the cancellation front, while we did not get phone calls cancel and aircraft in factory calls people even in cases, where this ahead I can't get there. We said, we'll look as 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 in canceling.
It was people not being able to.
Pick it up in and take delivery. So the only cancellations was again, we talked about the fractional side.
I think that again Thats I don't I don't view remember.
For us net net just a very important there salesforce sells a lot of our aircraft and so theres Salesforce tank were up sell aircraft. That's that's a problem for not just on for US. So I don't see that dynamic of what they're seeing as being different than the dynamic in my own salesforce right, which is having a hard time engaging in the way they would normally engage.
With customers and I expect that will that will turn once the sales teams can get back out there and go about their business.
What I'm getting at Scott is what I'm worried about is that it's not so much that the salespeople.
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 different.
Differently than the prior to downturns, but it's hard to ignore the fact that in the prior to downturns the light mid jet segments were down 50%.
Over a couple of years and Im 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 theres, a little less willingness in the board room to buy the airplane.
And.
Ill.
Serious to see if you're seeing any evidence of that yet.
No look we're not out there.
Selling so I mean, we we don't I mean, you might be right I don't know for sure I'm not putting on myself, but.
This is.
This was the great unknown guys and again all I can do is you're faxon. Your perspective, if you looked at what happened coming out of it Oyo nine are.
Our undisputable I mean, I completely understand and there were a lot of things were going on in a way to know not right you had a massive.
Destruction of Wells you had.
You had huge volumes of aircraft that had been built in the four or five preceding years. So you had tons of.
Actually 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 the we're selling against.
And not to be underplayed, there was a huge political bias.
In that auto 910 timeframe of people hiding their business Jets right. I mean, it was just a such a different dynamic.
Again. These are all just opinion, we don't know and I don't want I want to be very clear we.
This is why we can't forecast, yet and why we're trying to buy some time.
Good enough for 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 two our production rates.
Okay, and we just don't know I'm not disagreeing with you I mean I understand your perspective.
I just don't know.
Yes, im 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.
Starrett coming out of this thing and I would think that might matter.
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 we just don't know Theres bookcases, there's their cases and there's stuff in the middle and that's all we're trying to do guys get to a point, where we could have.
So much better fundamental understanding of what that demand environment looks like.
To make decisions on how to run the business.
Going forward.
Okay. Thank you for the color sure.
Next question comes from the line of David Strauss. Please go ahead.
Thanks, Good morning.
I wanted to.
Scott I think net yet been out there publicly seem that.
Not only from you all but total industry deliveries there now looking at roughly.
25, this year versus the plan had been 60 is that yes is that decline I guess percentage wise roughly in line with what what you're looking at versus what your initial plan was with net jets.
I would say Thats in line with 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.
In backlog.
For the balance of the year, so what they put out there is absolutely consistent with the dialogue that we've had in the work that we've done to realign that that delivery. So there as the indicates look there are still quite a few deliveries year for the for the balance of the year.
But it reflects the market as they see it today and again I'm not sure Thats, how the market is going to look 30 days or 60 days from now, but it's outlooks today.
And with that in mind, how quickly can you pay that if they if they come back you in turn things back on how quickly can you pay that in.
Increased deliveries back back towards net jets.
Well, obviously, particularly for latitude and longitude we had a pretty good visibility again based on that backlog and we're going so these aircraft are.
Are there right I mean are not 100% completed but.
And some of them, we're waiting for some of these composite parts, but.
We could clearly.
The increase number deliveries in those.
Degrees of aircraft based on that so.
I'd be that'd be a problem, we would we would be perfectly happy to work on.
Okay.
And then.
Frank any sort of help you didn't give us when I think.
Thinking about working capital from here, obviously it was a.
Big you've seen in in Q1, I would assume that was mainly in industrial and the mediation, but.
How how might working capital play out from from here through the rest of the year.
Yes, I mean overall working net working capital was not a big use in the quarter, obviously cash flow was kind of negative 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 ended 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 in businesses get back going in our factory start up in it and our expectation again is.
I am uses 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.
Yes, thanks, guys.
Your next question comes from the line of step Seifman. Please go ahead.
Hey, good morning.
So.
One more here.
Maybe you spoke.
Scott about.
Shipped to shore at the beginning I think and the number.
That itself so.
Fair number those bills and Paul is starting to get down.
The learning curve.
Is there.
Is there a cash profile there that we should kind of be aware of in terms of.
Collections that you guys can make as the.
As those crap get the letters and kind of when whether that happens.
I don't know if there's anything there dramatic so I mean, obviously we've been.
Keep in mind, one thing is we've been.
Operating on Undefinitized contract on the production now for quite some time so in fact.
All about half the.
The program has been executed under that so now we're fully definitive but.
There's nothing there that would make it look very different on what you'd expect in terms of.
No revenue.
Ill.
Cash collection payment terms are quite quite standard for us for government contract at this point so.
Got it okay, great. Thanks for all the call it as Brian.
Okay great.
That will do it for now.
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