textron inc (txt) earnings report: q1 2016 conference · pdf filecompany name: textron inc...

CompanyName:T extronIncCompanyTicker:T XTSector:IndustrialGoodsIndustry:Aerospace/Defense

EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.24BPriceasofEventDate:39.79

©2014TheStreet,Inc.Al l R ightsReserved Page1of21

TEXTRONINC(TXT)EarningsReport:Q12016ConferenceCallTranscriptThefollowingTEXTRONINCconferencecalltookplaceonApril20,2016,08:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

DougWilburne;Texteron;InvestorRelationsScottDonnelly;Texteron;Chairman&CEOFrankConnor;Texteron;CFO

OtherPart icipants

CaivonRumohr;Cowen;AnalystRobertStallard;RBC;AnalystSamPearlstein;WellsFargo;AnalystSheilaKahyaoglu;Jefferies;AnalystJasonGursky;Citigroup;AnalystPeterSkibitski;DrexelHamilton;AnalystCarterCopeland;BarclaysCapital;AnalystJulianMitchell;CreditSuisse;AnalystGeorgeShapiro;ShapiroResearch;AnalystSethSeifman;JPMorgan;AnalystMylesWalton;DeutscheBank;AnalystJeffSprague;VerticalResearch;AnalystJustinBergner;Gabelli;AnalystRonaldEpstein;BoAMerrillLynch;AnalystNoahPoponak;GoldmanSachs;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheTextronfirstquarterearningsconferencecall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecorded.

Iwouldnowliketoturntheconferenceovertoyourhost,VicePresidentofInvestorRelations,Mr.DougWilburne.Pleasegoahead.

DougWilburne (InvestorRelations):

Thanks,Operator.Goodmorning,everyone.

Beforewebegin,I'dliketomentionwewillbediscussingfutureestimatesandexpectationsduringourcalltoday.Theseforward-lookingstatementsaresubjecttovariousriskfactors,whicharedetailedinourSECfilings,andalsointoday'spressrelease.




Onthecalltoday,wehaveScottDonnelly,Textron'sChairmanandCEO;andFrankConnor,ourChiefFinancialOfficer.

OurearningscallpresentationcanbefoundintheInvestorRelationssectionofourwebsite.

Textron'srevenuesinthequarterwere$3.2billion,up$128millionfromlastyear'sfirstquarter.Incomefromcontinuingoperationswas$0.55pershare,up19.6%from$0.46reportedinlastyear'sfirstquarter.Manufacturingcashflowbeforepensioncontributionswasa$222millionuseofcash,comparedto$125millionuseofcashinlastyear'sfirstquarter.

Withthat,I'llturnthecallovertoScott.

Scott Donnelly(Chairman&CEO):

Thanks,Doug.Goodmorning,everybody.Revenueswereup4.2%inquarter,reflectingthesuccessofourstrategyofinvestingforgrowth,bothinnewproductsandacquisitions.Segmentrevenuewasupinindustrial,aviationandsystems,whileessentiallyflatatBellconsistentwithourexpectations.

AtBell,wedelivered6V-22s,flatwithlastyear'sfirstquarter,10H-1sup4unitsfromlastyear,and30commercialhelicoptersdownfrom35ayearago.

Onthecommercialside,wehadagoodshowingatHeli-Expo,wherewedisplayedactualflighttestarticlesofournew525Relentlessand505JetRanger,thoughbothofwhichgeneratedsignificantinterest.Attheshow,wesignedaLetterofIntentfor10525swithGuangxiDiwangGroup,aChineseinvestmentcompany.Morerecently,wealsosignedanLOIwithPTWhiteskyAviation,anIndonesianoperatorfor30505s.

Developmentonbothprogram'sproceedingwell.Thethreetest505helicoptershavecompletedover700testhours,withcertificationandfirstdeliveriesexpectedlaterthisyear.The525hastwoaircraftinflighttest,withathirdunitexpectedtoentersoon.

TheRelentlessismeetingorexceedingallofitsperformanceobjectives,includinghavingdemonstratedatopspeedinexcessof200knots.Theeffectivenessof525sintegratedfly-by-wiredesignhasbeenevidentduringthetesting,bytheaircraft'ssuperiorin-flighthandling,maneuverabilityandstability.Combined,thesefactorsshouldsignificantlycontributetothevalueofthisaircraftforourcustomers.

AtHAI,wealsoannouncedthenewBellCustomerAdvantagePlanorCAP,whichprovidesourcustomerstheopportunitytolockinpredictable,costeffectivemaintenancefortheiraircraft.

OurCAPproductdeliversbroadcoversolutionsforourcustomer'sdailyoperation,whichinturnprotectsthevalueoftheirinvestmentwhileincreasingaircraftavailability.Wewerealsonamednumberoneinhelicopterserviceandsupportforthe22ndconsecutiveyearbyProPilotmagazine.

OntheH1front,wehavereceivedrecentordersfromtheDoDfor61additionalunits,including9FMSunitsforPakistan.Thistakesproductionthroughthefirstquarterof2019.TheremainingUSDoDprogramofrecord,andsignificantadditionalforeignmilitarydemandprovideasolidlong-termoutlookforthisprogram.

Movingtosystems,revenueswereupmodestly,primarilydrivenbyhigherunmannedsystemsvolume.Duringthequarter,ourTextronmarineandlandsystems,wereceiveda$174millioncontractforfiveadditionalship-to-shoreunitstobedeliveredin2020.Earlierthismonth,wewerealsoawardedacontractfor60COMMANDOSelectarmoredvehiclestobedeliveredthisyearinIraqandColumbia.

OntheCanadianTAPVprogram,we'reontrackfordeliveriestobegininthethirdquarter,aswe




successfullycompletedthecustomerreliabilitytestingprogramtwoweeksago.AtTRUsimulationandtraining,wewerejustawardedanothercontractbyBoeingtodesignandmanufacturesimulatorsfortheirnewesttwin-aisleairplane,the777X.

Movingtoindustrial,wesawa9.2%increaseinrevenue,reflectingourcontinuedinvestments.Duringthequarteratspecializedvehicles,welaunchedournewestBadBoyproduct,theOnslaught550,amid-size4x4ATV.AtJake,weannouncedtheHR700,whichistheworld'sfirst14-footwiderotarymower,providingincreasedproductivityforourprofessionalturfcarecustomers.

Attoolsandtest,newproductsinourelectricutilityspacearedrivingsignificantgrowthinthiscategory.AtKautex,ourSelectiveCatalyticReductionproductsandgeographicexpansiondrovegrowthinexcessofglobalvehicleproductionrates.

MovingtoTextronaviation,wedelivered34jetsinquartercomparedto33lastyear,and26KingAirscomparedto25lastyear.Oursalessuccessaffirmsthatourstrategyofinvestinginnewproductsisresonatingwithaircraftbuyers.Duringthefirstquarter,wealsoreceivedEuropeancertificationfortheLatitude,aswellastheProLineFusion-equippedKingAir250and350.AdvancedsalesofLatitudefractionalsbyNetJetstotheirendcustomershavebeengoingverywell,andwelookforwardtostartingdeliveriesofthenewaircraftlaterthissummer.

Tosumup,wehadagoodstarttotheyear,asdemandinourendmarketsfinishedthequartergenerallyconsistentwithwhatwewereexpecting.Operationally,wealsohadanothergoodquarter,asweachievedmarginimprovementsateachofourmanufacturingsegments.Wecontinuetobelievethatwewillbeabletogeneratesolidoverallgrowthinrevenue,earnings,andcashthisyear.

Andwiththat,I'llturnthecallovertoFrank.

FrankConnor (CFO):

Thankyou,Scott.Goodmorning,everyone.

Segmentprofitinquarterwas$280million,up$21millionfromthefirstquarterof2015ona$128millionincreaseinrevenues.Let'sreviewhoweachofthesegmentscontributed,startingwithTextronaviation.

AtTextronaviation,revenueswereup$40millionfromthisperiodlastyear,primarilyduetohigherjetvolume.Segmentprofitwas$73million,upfrom$67millionayearago.Backloginthesegmentendedthequarterat$1billion,$47millionlowerthanattheendofthefourthquarter.

MovingtoBell,revenueswereessentiallyflat,ashighermilitaryrevenuesoffsetlowercommercialrevenues.Segmentprofitincreased$6millionfromthefirstquarterof2015,primarilyduetoimprovedperformance.Atsystems,revenueswereup$9million,primarilyduetohigherunmannedsystemsvolumes,whilesegmentprofitwasup$1million.

Industrialrevenuesincreased$80millionduetohigheroverallvolumesandtheimpactofacquisitions.Segmentprofitincreased$9million,alsoreflectingthehighervolumesandtheimpactofacquisitions.Financesegmentrevenuesdecreased$2million,andprofitdecreased$1million.

Movingbelowthesegmentline,corporatesegment--orourcorporateexpenseswere$32millioncomparedto$43millionlastyear,reflectingtheimpactofalowerstockpriceonourshare-basedcompensationexpense.Interestexpensewas$33million,flatfromlastyear.

Duringthequarter,weissued$350millionin10-yearnotesatarateof4%.Thiswaseffectivelypre-fundingtheretirementof$250millionin45/8%notesthataresettomatureinSeptember.Wealsorepurchased6.2millionsharesofstockduringthequarter,returning$215millionincashtoshareholders.




Towrapupwithguidance,weareconfirmingourexpectedfullyearEPSfromcontinuingoperationsof$2.60to$2.80ashare,andcashflowfromcontinuingoperationsofthemanufacturinggroupbeforepensioncontributionsof$600millionto$700million.Thisconcludesourpreparedremarks.

SoOperator,wecanopenthelineforquestions.

QUESTIONS&ANSWERS

Operator :


CaivonRumohrfromCowenandCompany.

CaivonRumohr (Analyst-Cowen):

Yes,thankyouverymuch.

Soyouraviationvolumewasup,butyourinventorystepupwasdown.Maybegiveussomecolorintermsofwhytheprofitabilitywasn'talittlebitbetter?


Well,Cai,Ithinkthat,youlookatthefirstquarter,therevenueincreasewasfairlymodest.Sointermsofleverage,we'retalkingaboutsortofwhatIwouldcallthelawofsmallnumbers,okay?

We,Ithinkhadprettygoodexecutionbytheteam.WehadanawfullotofR&Dspendingfrankly,aswe'regettingreadytodothefirstLongitudeflighthere,comingupintheearlypartofthissummer.

Andso,evenwiththestepupasyounoteinthere,whichwasprobably$5million,$6millionsomethinglikethat,thatwasmorethanoffsetbyafairbitofR&DspendingtogetreadyforLongitude.Sothere'snothingfundamentallydifferentIdon'tthink.ThemixobviouslywasmorebiasedtowardsLatitudesthansomeofourlegacyaircraft,butthat'ssomethingweexpected,andtalkedaboutinthecontextofouroverallguidanceforthesegmentleveragefortheyear.AndIthinkthat'swhatweareseeingplaythrough.


Andthen,thelastfollow-up,soshouldweassumethattheLatitudeisamixnegative,intermsofyourshipment?Andalso,couldyoucommentonthelevelofusedaircraftlossesifany?


Soyes,Ithinkthat,aswe'vetalkedabout,IthinktheLatitudemixwillbeaslightdragintermsofournormalgrossmarginflowthrough.Weexpectobviously,thatshouldimproveovertime.

It'sstillagoodproductforus,butit'salittlebitloweronthemixsidethansomeofourotheraircraftatthispoint.Usedaircraft,thereweresomelossesinthe[store],buttheyaredeminimus.Imean,they'renotamaterialnumber.


Thankyou.





Sure.

Operator :

RobertStallardfromRBC.

RobertStallard (Analyst-RBC):

Thanksverymuch.Goodmorning.


Goodmorning.


Scott,there'sbeenalotofnegativityinthelastcoupleofmonthsaboutthebusinessjetdemandenvironment,usedinventoriesseemtohavegoneup,pricingsoftened.Iwaswonderingwhat[Cessna]isseeingoutthere,intermsofcustomerinterest,andhowconfidentyouareinyourforecastfor2016inthisdivision?


Robert,Iwouldsaythat,ifwelookatthefirstquarter,there'snoquestionthatJanuaryandFebruarywereprettyroughsledding.Theturmoilinthemarketandthegeneralsentiment,Imean,Ithinkcausedalotofpeopletosortofstopandwaittoseewhatwasgoingon.ButifwewentinthroughMarch,andI'dsaycontinuingnowintoApril,themarkethasbeenprettygood.Imean,we'dalwaysliketoseeitstronger,butthemomentumthatwefeltinthelatterpartoflastyear,certainlytookapausethroughJanuaryandFebruary,buthasreturnedtoaprettydecentmarkethereinMarch,goingintoApril.


Andthenasafollow-up,Frank,obviously,youhighlightedthebuybackwasstronginQ1.Doyouexpectittomoderategoingforward,andwouldyoubemoreinterestedacquisitionsperhaps?

FrankConnor (CFO):

Well,aswesaid,Imean,we'llcontinuetotakealookatwhattheacquisitionopportunitieslooklike,ourcashflowneeds,andbe--returntoexcesscapitaltoshareholders.Asyousay,wedidalotofthatinthefirstquarter.We'llcontinuetolookatkindoftheappropriateuseofcapital,aswegothroughtheyear.Butweareaheadofthegame,intermsofour--certainlyourplantoatleastoffsetdilutionatthispoint.


That'sgreat.Thanksverymuch.

Operator :

SamPearlsteinfromWellsFargo.

SamPearlstein (Analyst-WellsFargo):

Goodmorning.Justfollowinguponthatlastcommentaboutthesharecount.Doyoustillassumeit'sgoingtobethe277millionshares,ornowthatitwasheavierinthefirstquarter,willthatbelowerfortheyear?




FrankConnor (CFO):

Itshouldbelowerfortheyear,byaboutthenumberoverthenormaldilution,sokindof[3million-ish].Weboughtabout[3million]morethanournormalemployeeplandilutionwouldreflect,anditwouldbelowerbyaboutthatamount.


Okay.Andthen,canyoutalkalittlebitaboutBell,andwhatyou'veseenasfarasdemandonthe412s,anddoestherelativelystrongerdollarhurtyouinthosesales?AndIguess,I'mwonderingwithtwodeliveriesinthefirstquarter,arewestillontrackfor12ofthem?


Sam,Ithinkthatthecommercialmarketisstillchallengingforsureonthehelicopterside,andexchangerates,theUSdollardoesn'thelpusparticularly.Butthe412,Iwouldsay,ourlineofsightontheyearfortheguidanceweprovidedwhichwasaround12,Ithinkisfirmingup.SoIthinkwefeelprettygoodaboutthat.Andthere'scertainlyopportunitiesoutthere,aswelookintotheoutyears,andthere'sdealsthatstillneedtoclose.

Butthere'sstill--it'sagreathelicopter.Itservesitspurposeverywell,andit'sgotagreatcustomerbase,andthere'sstillpeoplelookingatexpandingandincreasingtheirfleetsof412s.SoI'dsay,wehaveaprettyreasonablelineofsightontothe2016,andareworkingopportunitiesthataregoingoutinto2017and2018atthispoint.


Thankyou.

Operator :

SheilaKahyaoglufromJefferies.

SheilaKahyaoglu (Analyst-Jefferies):

Hi.Goodmorning.Thanksfortakingmyquestion.Iguess,onR&D,canyoutalkabouttheexpectationsforR&Dforthefullyear,maybeonasegmentbasis?Andthenalso,intermsofheadcount,Ithinkyouaddedheadcountacrossthreeofthefoursegments,withtheexceptionofBell,andmaybewhatthatadditionalcapacityisfor?


Well,Sheila,IwouldsaythetotalyearR&Disprobablygoingtobeprettyconsistentwithwhatweguided,whichweonlydoforthetotalcompanylevel.There'salwaysalittlebitoftiminginthisthing.Imean,clearly,withgettingreadyfortheflighttestprogramsandwhatnotatAviationontheLongitudeprogram,wespentadisproportionateamountofthatintermsoftherunrate,ofgettingreadyforflighttest.Sotheotherprogramsarerunningaboutasweexpected.

There'sreallynochangetotheguidance.The525flighttestprogramsaregoingverywell,butandareconsumingexpenseataboutthepaceweexpected.TheV-280isgoingverywell.We'vehadsomenicesignificantmilestonesinthefabricationofthatfirstunitforflightnextyear.SoIthinkourguidanceforthetotalyearremainsunchanged.Wejusthadsomehigherspendinghereinthefirstquarter,particularlyataviationgettingreadyfortheLongitudeprogram.





Okay.Andthen,ontheheadcount?


Theheadcountnumbers,Idon't--I'mnotsure--Idon'thavetheexactnumbersinfrontofmeSheila.Idon'tthinkthere'sanybigmaterialchanges.Theonlyplacewe'vehadreallymaterialchangesinheadcountunfortunatelyhavereallybeenaroundBell,andthat'smostlybeendialingbacksomeoftheproductionrunratesinMirabelonthecommercialhelicopterfront.Otherthanthat,it'sbeen,Ithink,relativelystableinmostofthebusinesses.


Okay.Andthen,justafollow-uponthedemandquestionaskedearlier.It'sprettyoriginal,butcanyoujusttalkaboutpricing,andmaybeifthecompetitiveenvironmenthaschangedatall?


In--?


In--moreso,inaviation,Iguess?


Yes,aviationhasbeenfairlyflattishonayear-over-yearbasis,Sheila.There'sacouplemodelsthathaveseenalittlebitofanuptickinprice,acouplehavebeenalittlebitdowninprice.Butoverall,notabigimpactinpricing,reallyacrossthewholeCompany.Pricinghasbeenrelativelyflat.AsIsaid,Ithinkpartofitjust,wehadtobealittlebitpatienthere,aswewentthroughacoupleprettytoughmonths,andhanginthere.Butthedemandenvironment,whichisreallykindofintheendwhatdrivesit,pickedupinMarch,andfeltprettygood.


Great.Thanks.

Operator :

JasonGurskyfromCiti.

JasonGursky(Analyst-Citigroup):

Yes,goodmorning.I'mgoingtogobacktoBell.Scott,canyoutalkalittlebitaboutthenextmulti-yearontheV-22?Therehasbeensomerecentpressreportsoutthereabouthowthat'sshapingup.Ifyoucouldprovidealittlebitofcoloronyourthoughtsonthat,thatwouldbehelpful,particularlyaroundthevolumes?


Sure.SoI'dstartbysaying,thatit'searlyinthatprocess,sowe'vealreadystartedtoworkwiththecustomeronprovidinginformation.Rightnow,thechallengeisit'saprettybroadrangeofvolumes,dependingon--astheyareworkingontheirbudgetforthoseoutyears.Andobviously,it's--there'samixofwhattheywanttodowiththeprogramofrecordfortheMarineCorps.You'veseensomearticlesoutthereabouttheAirForcehavinginterestinsomeadditional[CVs].There'stheNavy[COB]program,andhowthatstartstodrivedemand,aswellascreatingsomeoptionalityaroundFMSopportunities.




Sorightnow,it's--whenwe'reprovidingnumbers,it'sacrossaprettybroadrangeofunits.Soit'satthispoint,I'dbereluctanttoputanumberoutthere.Seriously,Idon'tthinkthere'sanythingwewouldwanttoguidetoyet,togiveyouguysanidea,becauseit'sjust--therangeofopportunityisjusttoohigh,intermsofwherethatnumberfallsout.Itcould--it'sjust--they'rerunningthenumbers,runningthefinancials,andaskingusforalotofinputonaprettybroadrangeofpossiblenumbersofunits.


Okay.Letmeaskitadifferentway.WithoutFMS,doesthetopendofthatrangeallowyoutoholdcurrentproductionrates?


No,Idon'tthinkit'slikelythatwewouldholdcurrentproductionrates.Itgoingtobe--itwillbesouthofthat.Ireallydon'tseeapotentialoutcomethatwouldbethecurrentproductionrate.Soweareplanningforanotherdecrementdown,whenwegetoutthereintothat2019,2020timeframe.Butit's,wejustdon'tknowhowbigthatdecrementisgoingtoberightnow.WhenyoulookatNavy[COB],that's40someunits.There'sstill20someintheMarineCorpsprogramofrecord.TherecouldbeacoupleCVs,therecouldbesomeoptionalitybuiltinforFMS,butIdonotthinkthattheexpectation[should]beabletorunatthecurrentrunrates.


Okay,understood.Andthen,thefollowon,theLOIsthatyougotbothonthe505andthe525,canyoujustreminduswhenthoseconvertintoactualcontracts?Whenwillyoustarttellingus,orhaveabetterideaofwhatyourrampisgoingtolooklikeondeliveries,forbothofthoseaircrafts?JustthetimingoftheLOIscanbringtocontracts?Well,Ithinkwe'llstarttoseeconversionon505contracts,andprobablystartinghereprettysoon.Thoseaircraft,we'llbelookingattheinitialdeliverieslikelyinthefourthquarter.Sothere'salreadyconversationsgoingonwithcustomersthatwillconvertthosetoactualcontracts.Iwouldsayonthe525,youwon'tlikelyseethatuntilsometimeasyougetclosertocertificationinmidsummerorsolastyear,nextyearratherwitha--justbecauseourcertificationexpectationsarekindoflatesummer,earlyfallbeforewewouldstartfirmingthoseupfordeliveries,bytheendoftheyear.Okay,great.Thanks,guys.


Sure.

Operator :

PeterSkibitskifromDrexelHamilton.

PeterSkibitski(Analyst-DrexelHamilton):

Goodmorning,guys.


Goodmorning.


Hey,Scott,geographically,excuseme,isNorthAmericakindofstilltheonlygameintown?Ithinkyou'vebeenrunning--Idon'tknow--75%ofyourCitationdeliverieswereNorthAmerica,andIthinkasimilaramountatBellCommercial.I'mjustwonderingifthat'sthestatus,andifthere'sanychangethatyou




detectintheNorthAmericamarketversusthreeorfourmonthsago?


Well,certainlyontheaviationside,it'sstillmoreorlessUS-driven.Ithinkjetsthisquarterwereprobablyabout80%USdeliveries,about20%internationaldeliveries.Ifyoulookatourturbopropproduct,betweentheKingAirandtheCaravans,thosearemorelike50/50USandinternational.Andthat'smoretypicalforthoseproducts.

Ithinktheturbopropsaredoingwell.Caravans,particularlyinChinaarestrong.Sowe,butIwouldsay,however,herethatwe'restartingtoseesomemomentumpickupalittlebitinEurope.SoIthinkyou'llstarttoseesomeincreasedjetdeliveriesoverthere,andturbopropagainstayingfairlybalancedbetweenUSandinternational,aswegothroughthebalanceoftheyear.


Okay.Okay,gotyou.Andthen,alastone,justwonderwhatyourexpectationwasonthisAirForcenuclearhelicopterprogram?Ithinkbasicallyyouguysaretheincumbent.It's,Ithink,afewbilliondollarsprobably,andtherehasbeenalotofchatterthattheywouldsole-sourceittoacompetitor.I'mjustwonderingwhatyourexpectationisthere,andifyouhadanythoughts?


Well,look,we'reprobablyseeingandhearingthesamethingsthatyou'rehearing.Itsoundslike--Imean,wearetheincumbent,butthosehelicoptershavebeenthere,thoseareHueysfromalongtimeago.Andatleasttherequirementsthatwe'veseenoutthere,wethinktheyarelookingforalargerandadifferenthelicopter.Sowe'reseeingandhearingthesamechatter.Itsoundslikethey'relookingatgoingsole-sourcetoanotherproductatthispoint.


Okay.Okay,understood,thankyou.


Sure.

Operator :

CarterCopelandfromBarclays.

CarterCopeland (Analyst-BarclaysCapital):

Hey,goodmorning,guys.


Hey,Carter.


JustScott,quicklywonderedifyoucouldgiveussomecoloronwhatyousawinservicerevenuesacrossaviationandBellinthequarter?


Soontheaviationside,itwasprettyconsistentwithwherewebeen.Ithinkitwasaround35%of




revenue.Onthehelicopterside,I'msorryIdon'thavetheexactpercentagehereinfrontofme,butitwasdownabityear-over-year.Andagain,Ithinkthat'sjustreflectingthatwecontinuetoseelowerutilization,inparticularlyintheoilandgassegmentinthemarketplace.


Yes,whendoyouthinkyoureachabottomonthat?Imean,clearly,there'ssomedestockinginthatendmarket.Sowhendoyoustarttolapsomeoftheeasiercomparesthere?


Hardtosay,Carter.Imean,Iwouldbejustmakingatotalguess.ButIthinkalotofit'sgoingtohavetodoobviouslywithwhathappenswithoilprices,andwhentheguysstartutilizingtheassets.Icantellyou,downintheGulf,wherewehaveanawfullotof412sthatareoperatingwiththeoilpricesbeingdown,thingshavebeenslower.

Frankly,somecustomershavebeenslowtopaysomeoftheoperatorsthatwework.Soasaresult,thoseguyswillputaircraftontheground,ortheywillbackoffingeneral.Butit'sgottogothroughitscycle.SoI'mnotprobablytherightguytoopineontheoilpricesandwhatthatrecoverylookslike.ButIthinkitwilltiemoretothatgoingforward.


Great.Andthenonsystems,justaquickfollow-up.Anymorecoloryoucangiveusontheunmannedrevenueinthequarter?Dotheyhaveanegativemiximpactforthemargins?


No,Ithinktheunmannedisprobablyinlinewithtypicallywhatweexpectformarginsinthatbusiness.We'veseenfairlyhighutilizationonourfee-for-serviceprogramswhicharegoingwell,andtheaircraftareperformingwell,andexecutingthecontractsthatwehave.We'vecontinuedtodelivertheupgradesfortheShadowB2program,andthoseareflowingthroughexactlyasweexpected.

Andwe'vegotsomedecentbusinessdevelopmentworkgoingonforsomeinternationalsalesandthingslikethat.SoIthinkeverythingintheunmannedworldisgood.Themargins,obviouslywewerethisquarterfairlylightatmarineandlandsystemsbecausewe'lllargelygeneratealotoftherevenuehereinthethirdandfourthquarterassociatedwiththeCanadianTAPVprogram.Obviously,gettingthatmilestoneandthetestcompletewasabigdealforus.SoIthinkeachoftheunitsaredoingwell,andarewhereweexpected.Butunmannedisgoodbusiness,andmarginsconsistentwithourexpectations.


Great.Thanksalot.


Sure.

Operator :

JulianMitchellfromCreditSuisse.

JulianMitchell(Analyst-CreditSuisse):

Hi,goodmorning.Justwantedtostartwiththefirstquestiononaviationmarginsbecause,IguessinQ1,




youweretalkingearlierabouthowthemarginswereacoupleofhundredpointsshortofthefullyearmargintargetinaviation,basedoffamixofleverage,volumeleverage,andalsoR&D.Aswethinkabouttherestoftheyear,andhowyoumakeupthat200bips,shouldwethinkaboutthatasfairlyevenlysplitbetweenR&Dtailingoff,andleveragerecovering?Oristheresomesortofweightingbetweenthetwo?


Julian,Imean,Ithinkit's--Iwouldn'treadawholelotintotheQ1numbers,right?Imean,therevenuewasup$40million.Soleverageon$40million,acouplemillionofa--afewmillionofR&Dandacouplemillionofthisorthat,justmakessuchahugeswing.SoIdon'tthinkthere'sanythingthatIwouldlookatthefirstquartergranted--yes,justintermsofspecificallyR&D,theR&DspendingisprobablysomewhatdisproportionateintermsoftheoverallimpactonmarginshereinQ1,thanitwouldbeinthelatterquarters.

ButImean,Ireallydon'tthinkthere'sbeenanythingfundamentalwelookatintheleverageissueinthefirstquarter,asbeingindicativeofwhat'sgoingtohappeninQ2,3,and4.Soourguidancethatweprovidedyouguysaroundsortofthatwindowofoveralloperatingmarginpercent,Ithinkwe'reontracktodothat,andtherevenueside.SotheleverageisgoingtobeprettyconsistentIthink,withwhatwetoldyou.Andagain,thenumberinQ1issuchasmallincrementalontherevenue,thatIdon'tthinkyoucanreadawholelotintoit,intermsofleverage.


Veryclear.Andthen,myfollow-upwouldbearoundthemanufacturingcashoutflow.Thatwasabouta$100millionhigheryear-on-year,thevastmajorityofthatduetoworkingcapitalsteppingup.Butatthesametime,yourbuybackspendinQ1suggestsyou'reveryconfidentofthatcashflowswingingaround.Somaybejustgivealittlebitofbackground,astowherethatbigworkingcapitalbuildreallycame,anddoyouthinkweshouldseethemanufacturingcashflowswingpositiveinthesecondquarter?

FrankConnor (CFO):

SoIthinkfirstofall,onanabsolutebasis,youguysknowwegenerallyconsumecashinthefirstquarter.Wetendtohaveinventorybuildassociatedwithproductsthatdoselloff,good,betteranddifferentaviation,andBelltendtohavemorehighersalesinthelatterpartoftheyear.Soonanabsolutebasis,there's--Idon'tthinkthere'sanythingterriblysurprising.

Intermsoftheyear-over-yearcomparative,wedohaveasituationwithrespecttocustomerdeposits,primarilyalmostexclusivelyfrankly,onthemilitarysideofBell.Whereasaresultofperformance-basedpaymentsoverthelastcoupleofyears,wehadafavorablepositionintermsofworkingcapital,whichwillunwindthroughthecourseofthisyear,andthat'sagoodpartofwhatyou'reseeinghereinthefirstquarter.Butthosenumbersareabsolutelyconsistentwithwhatweguidedtoyouguysintheoverallcashnumbers.Sowe'llseethatworkingcapitalimpactthroughthecourseoftheyear,butagain,completelyplannedandconsistentwithexpectation.Andso,wehavenochangeinourconfidenceintermsofouroverallcashflowfortheyear.


Veryhelpful.Thankyou.

FrankConnor (CFO):

Sure.




Operator :

GeorgeShapirofromShapiroResearch.

GeorgeShapiro (Analyst-ShapiroResearch):

Yes,Scott,IwantedtopursuealittlebitmorethisR&D.Soyoumadeacommentfirstthing,thattheR&Dspendwasmorethanoffset,whatwasmaybe$5millionstepupinBeech.Couldyouquantifyhowmuchmoreitoffset,andthenhowmuchlowertheR&Dmightbeinthesubsequentquarters?


Sothedynamicswehaveinthequarter,George,forsurewehavethelastquarterreallyofanyofthestepupimpactonaccountinginaviation.Thatwasabouta$5millionnumber.AndallI'msayingisthatourspendingontheR&Dsideonayear-over-yearbasistobecomparative,wasanumberthatwasquiteabitbiggerthanthat.Soitwas--ifyoutakethosetwosignificantpieces,itwasdilutivetoourmarginrateoroverallleverageifyouwillonayear-over-yearbasis.

Butagain,they'reineithercasearethesehugenumbers.It'sjustwhenyou'relookingata$40millionincreaseinrevenue,thedifferencebetween$4millionbetterinmarginand$8millionbetterinmargin,and10%leverage,20%leverage,you'retalkingaboutacouplemilliondollars.Soit's--noneofthesenumbersarebignumbers.


Yes,Irecognizethat.I'mjustwondering,sodoesR&D--$10millionversussay,thestepupbeing[$5million]inthequarter?I'mjusttryingtoroughlycalculatewhatthatimpactmightbe?Andthen,howmuchhigherR&Dwasthisquarter,thanwhatyoumightexpectittobeinsubsequentquarters?


George,itwasontheorderofabout$10million.Imean,Ithinkformodelingpurposes,that'sabouttherightnumbertoputinthere.Again,it'snotaparticularlybignumber,andwedon'texpectittochangeouroverallCompanyR&Doverthewholecourseoftheyear.It'sarelativelysmallnumber.Butit'sonthatmagnitude.


Okay.SodoesR&Dgodownalittlebit,theninthesubsequentquarters?


Yes.Butagain,notbyaverybignumber,becauseitwasonlyupbyaverysmallnumber.


Right,understood.AndFrank,justtoqualify,thetaxratewasmorelike30%thisquarterversusthe31%guide.Arewegoingtostillsee31%,oris30%abetternumber?

FrankConnor (CFO):

I'djustkeepusing31%.Itobviouslydependson,attheendofthedaykindofwhatourinternationalversusdomesticmixis,andwewon'tknowthatuntilwemovefurtherthroughtheyear.ButI'dcontinuetouse31%.





Okay.Andthen,onelastone,Scott.Ordersthisyearversuslastyear'sfirstquarterareuplike$90millionorsooralmost10%.Wasthatstillprimarilydomestic,ordidyouseemoreoftheordersfrominternationalatallthisquarter?


Iwouldsay,onthejetside,mostoftheordersinthequarterwereUS.Ithinkwe'llseeamoreinternationalmixhere,certainlyaswe'reproceedingthroughAprilintoQ2.


Okay.Thanksverymuch.


Sure.

Operator :

SethSeifmanfromJPMorgan.

SethSeifman (Analyst-JPMorgan):

Thanksverymuch,andgoodmorning.I'llreallybegforyourindulgencehere,toaskonemorequestionaboutaviationmargins.Whichisjustthatifyoulookatwhat'simpliedfortheremainderoftheyear,itlooksfairlyflatwithwhatyoudidinQ2,Q3andQ4overalllastyear,excludingtheinventorystepup.Andso,tohaveflatmarginsyear-on-yearinaviationfortherestoftheyear,whenitwouldseemlikemoreLatitudedeliveriestoNetJetwouldbeaheadwind,what'ssortoftheopposingfactorthatallowsyoutokeepthosemarginsflat?


Well,Ithink,ingeneralperformanceinthebusinessis--Imean,theguysareexecutingwell,andwedohavesomevolumethat'sincreasedonayear-over-yearbasis,andwestillhavegoodgrossmarginproducts.Sothatdoescreateleveragetohelpoffset,someofwhatmightbeabitofanegativemixonayear-over-yearcomparativebasis,intermsofthemixofaircraftso.


Okay,great.Andthen,justasafollow-upalsointermsofthepickupinactivitythatyou'veseeninMarchandApril,intermsofwhereitisoracross,wouldyousaythatit'sacrossplatformsoristhereanyplacewhereit'sconcentrated?AndoneofthereasonsIask--Iknowwe'retalkingaboutsmallnumbers,soit'shardtotell.Butifyoujustlookatthehighend,theSovereignandexdeliverieswerefairlylowinQ1.IknowQ1islight,butisthataplacewhereyou'reseeingkindofincrementalweaknessindemandrelativetotheotherplatforms?


It'sprobablysomeofwhatyou'reseeingis,withtheLatitudeinthere,wedoseesomeaircraftthatmaybeayear,twoyearsagocouldhavebeenaSovereignarenowgoingtobeaLatitude.Sotheaircraftintermsoftheirrangeandperformancearedifferent.Andforalotofourcustomers,theSovereignisstilltherightanswer,andthat'swhywestillseereasonablesalesofSovereign.Butforsure,whenwelookatthetotalnumberofaircraftinthatSovereignspace,someofthosearenowbecomingLatitudes.

Sosomeone'sinthemiddleofthecountryorthey'reinEurope,ortheyareinaplacewherethat[2,800]




permileswillgetyouthere,they'retendingtoerrthesideofaLatitudeversusaSovereign.SothatexplainskindofwhereIthinkweareonSovereigns.Andon10s,aswe'vesaidthat'safairlyuniqueproduct.Ithasbeenaverypopularproductovertime,butit'sarelativelysmallnumberofunitseachyear.


Great.Thankyouverymuch.


Sure.

Operator :

MylesWaltonfromDeutscheBank.

MylesWalton (Analyst-DeutscheBank):

Thanks.Itsoundedlikeinthefourthquarter,theKingAirsmaybewerealittlebitdisappointingontheinternationalside.ButIguess,Scott,someofyourcommentarythere,soundslikeyouhadseenapickupasexpected,andstillexpectyear-on-yeargrowthinKingAirs?


Yes,Imean,Ithinkwe'veseentheKingAirmarketbeenprettysolidinmostapplications.I'dsayit'salittlelighteronspecialmissionsthanithasinthepast,andthat'salittlebitwhatwesawinthefourthandthefirstquarterthisyear.Butremember,wealsohadtheconversiongoingfromtheoldcockpittothenewmodelthatcameoutverylatelastyear.Andso,gettingthatintoproduction,andgettingthelastoftheoldermodelssold,andnowmakingthatconversiontothenewmodelalsohadsomeimpactonvolume.Butfrankly,withthenewmodeloutthereissellingwell.WejustgotcertificationinEurope,whichis[EASA]isabigdealforus.SoIthinkwefeelprettygoodabouttheKingAirmarketandwhereit'sgoing.


Okay.Andthen,justaclarificationonthemargins.Thepensiontailwindyear-on-year,Iwould'veexpectedwouldhavebeen$10millionto$15millionacrossthesegments,andmaybeAviationwas$5millionofthat.Isthatabouttherightwaytothinkaboutthetailwindfrompension?


No,itwasprobablysomewherearoundthat$10millionnumber,butmostofthatisactuallytakenatcorporate,justthewaywe--well,Imean,wespreaditout,butitwouldn'tbe$5millionataviation.It'sgoingtobeasmallernumberthanthat.SoIwouldn't--Idon'tknowhavetheexactnumberinfrontofme,butit'sarelativelysmall.

FrankConnor (CFO):

There'sabenefit,butit'sspreadaroundtheorganization.


Right.





Okay,thanks.

Operator :

JeffSpraguefromVerticalResearch.

Jef f Sprague (Analyst-VerticalResearch):

Thankyou.Goodmorning,gentlemen.


Goodmorning.


Justacoupleofquestionsoncashflow.Frank,thanksforthecoloronthe--ormaybeitwasScott,butonthemilitarydynamics.ButIwasjusttryingtothinkaboutthequarterhere.Accountsreceivableandinventorieswerebothactuallyup.IwouldguessthatBellissueisactuallyinsomeaccruedaccountssomewhere?Canyouspeaktowhatwasgoingonintheaccountsreceivablesandinventoriesinthequarter?


No,the--well,theissueItalkedaboutonBellisintheworkingcapitalline,Jeff.Sothat'swhereit'sreflected.


Yes,I'mjustlookingattheabsolutegrowthandreceivablesandinventoriesinthequarter.

FrankConnor (CFO):

Jeff,justtobeclear,thecommentoncustomerdepositswasafirstquarterlastyeartofirstquarterthisyear,versusaendofyearlastyeartothisquarter,so--


Okay.Allright,fine.Andthen,justshiftingtopension,doyouforeseecontinuedcontributionsatthislevel,oristhereapotentialthatthoseneedtomoveupintheoutyears?

FrankConnor (CFO):

Well,itobviouslyjustdependsonreturnsanddiscountratesandeverythingelse,butwedon'tseemeaningfulcontributionsbeyondtheselevelsinthenear-term,unlessthere'ssomesignificantchangeinthemarketdynamics.


Andthen,Iwasalsojustwonderingonthe--backtothetaxrate,Frank.There'sthisFASBchangeonstockcompthatcanbeadoptedthisyear.It'snotrequireduntilnextyear,butweareseeingafewcompaniesadoptthat.Isthatbeingconsideredthisyear,andisthatsomethingthatcouldmeaningfullyimpactyourtaxrateifyouadopt?

FrankConnor (CFO):

No,Ithink,we'relookingatit,butasIsaid,stickwiththe31%astherightplacetothinkaboutthings.





Andthen,justonelastone.CouldyougiveussomeideaofwhatpercentoftheaviationbacklogistheNetJetLatitudes,orsomewaytojustthinkaboutthat?


No,wedon'tgetintothatlevelofdetailonthebacklog,Jeff.ButtheonlythingI'dsayaroundtheNetJetthingis,thatwereallydon'tputstuffinfromNetJetintothatbacklog,untilwehaveagreeddeliverydates,andtailnumbersandthatstuff.SowewillincrementallyaddNetJetstothatbacklog,onlywhenweandNetJetsayshey,look,thisiswhenIwantdelivery,thisisthedate,thisisthetail.Andso,there'sonlyasmallpercentageofthatoverallorderisinbacklogtoday.Andthatwillgrow,thenumberweputintherefairlylinearly,astheystarttakingdeliveries,andstartcommittingtothenextaircraftdeliverydate.


Right.Thankyouforthecolor.

Operator :

JustinBergnerfromGabelli&Company.

Just inBergner (Analyst-Gabelli):

Goodmorning,Scott.Goodmorning,Frank.


Goodmorning.


Iwantedtoaskaquestionontheindustrialbusiness.WoulditbepossibleforyoutogiveusasenseastohowthedifferentpartsoftheIndustrialsegmentgrew,relativetothat6.5%organicconstantcurrencygrowthinthatbusiness?


Yes,wecanprovidesomecoloraroundthat.The--Ididn'thavethatnumberrightinfrontofme,butifyoulookedattheoverallgrowthratesfor--I'mnotsurehowtobreakitoutexactly--ourspecializedvehiclebusinesshadprettyreasonablegrowth.Wehadarelativelyflatmarketinourtoolsandtestworld.

Again,there's,justdynamicswithinthat,whichwekindoftalkedalittlebitabout.Ithinkwearedoingverywellintheutilityspace.Alotoftheothertoolsthatwerehighlyconsumedbyalotoftheoilandgasexplorationkindofguysobviouslycontinuestobesoft,butnet,therewassomegrowthinthatsegment.Wehadverysolidgrowthontheautomotivesideofthingsonayear-over-yearbasis,andtheturfcareworldwasrelativelyflat.


Thankyou.That'shelpful.Giventhatthefirstquarterintheindustrialbusinessistrackingslightlyaheadofyourfullyeargoal,shouldwethinkabouttheindustrialbusinessasbeingasegmentthatcouldexceedyourearlierguidance?Oraretherepartsofthebusinessyoudon'texpecttobequiteasstrongasyoulookthroughtherestoftheyear?




FrankConnor (CFO):

Well,Ithinkwefeelprettygoodaboutwherewearerightnow.Theguysinprettymuchallofthebusinesseshadaprettysolidquarter,butit'sprobablyalittleearlyintheyeartofeellikewewouldmateriallychangetherangeonwhatwetoldyou,withrespecttothesegment.Socertainly,onthetrackthey'reonrightnow,they'dbetowardsthehighendofit.ButI'dsay,it'sprettyearlierintheyeartoo.


Thankyou.


Sure.

Operator :

RonaldEpsteinfromBankofAmerica.

RonaldEpstein (Analyst-BoAMerrillLynch):

Hey,goodmorning,guys.


Goodmorning.


Justmaybeacouplequickdetails.Youguysannouncedyouwonthe777XflightsimulatoratMechtronix,socongratulationsonthat.Howbigisthatpotentially?Imean,howdowethinkaboutthatfortheMechtronixbusiness?


Well,it'sagoodquestion.Sothe--andIhavetobecareful,becauseIdon'tknowexactlyallthatwasdisclosedwithourcustomer.Butcertainly,thescopeofthatcontractistoprovidethesimulatorsfortheiruse,aswellastheirtrainingcenters.Andbeyondthat,obviouslyalotofBoeing's777customerswillbuytheirownsimulatorsfordoingtheirownpilottraining.SoIthinkthatthescopeofthecontractthatwehaveisforthesalesdirectlytoBoeing.Butobviouslyfromourperspective,well,that'sagreatcontractandwe'rethrilledtohaveit,italsogivesuswethinkthepositioninthemarketplacethatweshouldwinourfairshareofendcustomersfromBoeing,whobuytheirownsimulators.SothecontractvalueisspecificallyassociatedwithBoeing,plusfutureopportunitiesthatarestilltobedetermined.


Nowjustmaybeforclarity,andthanksforthat.Butthisisabigger--Mechtronixhistoricallywasn'tasbigaplayer,right,inlargecommercial,right?Thisisanicenewsegmentofbusinessforthem,correctorno?


No,itis.Sotrue,whenweboughtMechtronix,obviouslypartoftherationalefortheacquisition,waswefelttheyhadsometerrifictechnology,averycapableteam,andagreatproduct.Buttheywereaverysmallcompany,andtheyhavehadsomechallenges,andgotalittleoverleveragedatonepoint,andranintosomefinancialtrouble.Andthathurtsyouinthatmarket,becausewhenyoulookatbigcustomers,whetherit'saBoeingoralotofthemajorairlinesintheworld,theseassetsarelikeanaircraft.




Theyareverylong-lived,right?Socompanieswanttoknowwhenyou'rebuyingafairlyhighdollarcapitalitem,thatyou'regoingtobeabletobearoundandprovidetheserviceandsupportandupgradesandsuchovertime.AndIdothinkoneofthethingsthathamperedtheminthemarketplacewas,asaresultoftheirfinancialstrugglestheyhadsomeuncertaintyaroundthem.Soitwasn'tatechnicaloraproductproblem,itwasabusinessviabilityissue.Andobviously,whenweacquiredthemandsortofputourbalancesheetandreputationbehindit,thatkindofgotridofthatsortofbarrierwithalotofcustomers.Sotheteamuptherewonthe737MAXacoupleyearsago.Ithinkthatthey'veexecutedvery,verywellonthat.

TheBoeingfolks,obviouslyhavebeenveryhappywithhowtheteamhasperformedonthe737MAX,andthatgavethemconfidencetothenalsomakeustheirpartneronthe777X.Soifyouexecutewellandperformwell,itcanthrowasnowballintherightdirection.Butforsure,partoftheunderlyingthesisofthedealwasthat,wethoughtyouhadaCompanythathadalotofgreattechnology,agreatproduct,agreatcapability,butitneededtohavealittlemorecertaintyandstrengthfromafinancialstandpoint.AndIthinkwe'veprovidedthat.


Yes,cool.Thankyouforthat.Andthen,onemore,myfavoriteairplane,theScorpion,wheredowestandoninternationalinterest,potentialorder,thatkindofthingforit?


SoIthinkthere'safairbitofinternationalinterest.Westillhavealotofcustomersthataretalkingtous.We'vehadtheaircraftalloverthecountry.We'vehadalotofcustomersflyingit,reallythenextmajormilestoneforus--well,there'sreallytwo.Oneisthatwe'vehadacouplerelativelyminorthingsthatwewantedtochangeintheproductionconfigurationoftheaircraft.We'vecompletedthatengineeringwork,andwe'reinthemanufacturingprocessrightnowbuildingthat,let'scallit,theconformingproductionversionoftheaircraft.Customersobviouslywanttoflythat,andseethatbeforetheywouldplaceanorder.

Andtheotherissueforus,wasalwaysaroundairworthiness,andhowdoyougetacertification.AndasIthinkyou'veheardpublicly,thereisnowanAirForceprogram,They'restandingupaprogramofficewheretheywillconductairworthinesscertificationsofaircraftthatwerenotfundedindevelopmentbytheAirForce.Andso,we'vealreadysubmittedourapplicationinthatprocess,sothat'ssortofawork-in-progressaswell.Sowethinkthisallkindofdovetailswithgettingthefirstconformingarticlebuiltandreadytoflyhere,inprobablyearlytomidsummer.Andtheairworthinessprogramwillgetunderway,andtheAirForceultimatelywillprovidetheairworthinesscertificationofthataircraft,whichisabigdealtoallofourperspectivecustomersso.


Sure,sure,sure.Okay,cool.Thanks.


Sure.

Operator :

GeorgeShapirofromShapiroResearch.





Yes,justacoupleofquickfollow-ups.SoFrank,thecorporateexpensebeing$32million,yousaiditwasduetotheshareprice.Doesthatthoughchangeatthispointyourthinkingoncorporateexpensebeingaround[$160million]fortheyear?

FrankConnor (CFO):

No,I'dstickwiththesamenumber,George.


Okay.Andthen,justtomakesure,youcommentedaftermarketwasabout35%ofrevenueseachyear,whichwouldimplyabout3.5%to4%growthintheaftermarket?

FrankConnor (CFO):

That'sprobablyaboutright.I'dsay,lowtomidsingle-digitatthispoint.


Okay,andyouhad$164millionofacquisitionsinthequarter,Scott.Maybeifyoucouldjustlistwhattheywere,becauseyoumakeacoupleofsmallones,andit'shardtokeeptrackofthem?


Well,theprincipaldealsinthequarterwereAbleEngineeringwhichweannounced.ThisisarepairandoverhaulbusinessthatdoessortofamixofbothBellproduct,aswellassomefixedwingproducts.Soweacquiredthatearlyinthequarter.That'snowintegratedintoouraviationservicesnetwork.Butit'sprovidingbothwork--actuallyrightnow,probablymoreBellthananythingelse.Sotheyhadacompanythathadgreatrelationswithanumberofourcustomers,thatlookedatamixofhowtheymaintaintheirfleetwithacombinationofbothnewpartsaswellassomepartsthatcanbeoverhauled.We'veenteredthatbusinessthroughthatacquisitionwithAble,andfranklythat'sgoneverywellsofar.

Wealsoacquiredinthefirstquarter,acompanycalledATAC.Thisisacompanythatprovidestacticaltraining,andprincipallyundercontracttotheUSNavy,sosupportingourcurrentcustomers.WeflymissionsthatallowtheNavyandtheMarineCorpstonotutilizetheirownasset,toprovidethingslike[tactical]training,controllertraining,aswellasadversaryforcesforschoolslikeTopGun,aswellasalotofotheraggressorforcestoemulateenemyaircraftinexercisesconductedbytheUSNavyandtheMarineCorps.ItalsohasahistoryofdoingsomeworkfortheAirForce,there'sanumberofopportunitiesoutthere,thatwethinkwecontinuetogrowinthatspace.Andit'saniceaugmentationforus,intermsofhowweaddresscustomers,bothintheUSaswellasinternationallytoprovidetrainingcapability.

Therewasalsoaverysmallacquisitionwedidinthequarter.AlotoftheserviceandsupportthatwasdoneontheTRUsimulationtradingplatformsinparticular,theactualsimulatormaintenancewhichisanimportantpartofthebusiness,thathadbeeneffectivelyoutsourcedforquitesometimetoasmallcompanythatwasdoingthat.Wethinkprovidingtherightlevelofserviceofsupportiscriticaltothoseproductsovertime,anddidn'tfeelcomfortablethatweshouldbedependentonathird-party.Soweacquired,anditwasbasicallyacquiringthosepeople,sothatthey'renowpartoftheCompany,asopposedtohavingathird-partyconductingthatserviceandsupport.


SotheM&Aimpactonaviationat1.3%thatyoumentionedintheslides,andwasthatallduetoservice,sotheorganicservicenumberissomewhatlessthanthe3.5%to4%Ijustmentioned?





Yes.Butagain,it'snotahugenumbereither,George,butalittlebitsmaller.


Okay.Okay,thosearemyfollow-ups.Thanksverymuch.


Sure.

Operator :

NoahPoponakfromGoldmanSachs.

NoahPoponak(Analyst-GoldmanSachs):

Hey,goodmorning,everyone.


Goodmorning.


Sothe34jetdeliveriesinaviation,ifItakeout7Latitudes,it's27exLatitudedeliveries,andlastyearitwas33total,withnoLatitudes.Sothere'sa6--aunitdeclineof6unitsyear-over-yearexLatitudeinthelegacybusiness.HowshouldIthinkaboutthatrateofchange,howitrunratesthroughtheremainingquartersoftheyear?


Ithinkit'sstillgoingtoberelativelyflattish.Ithinkwhatyou'reseeingthereisthatthe--inthefirstquarter,asIsaidJanuaryandFebruarywereprettyslowmonths,withallofthestuffgoingonwiththemarketandwhatnot.Butthe--I'dsaytherateofhowtheteamisdoingintermsofsalesthatwillcertainlypickupinMarchthroughApril,andwewouldexpectwewillcontinuetopickupabitthroughthecourseoftheyear.SoIdon'tthinkthatwe'reviewingitasverydifferentthanweoriginallythoughtwhenweguided.


Okay.Imean,shouldIbethinking--roughorderofmagnitude,Ihadsomethingcloseto30Latitudedeliveries,socallthat,up15fortheyear.Ifthat6runrated,thatwouldbecloseto25,givingyouanetspreadofup10.Isitinthatballpark,oritsortofsoundslikeyou'resayingthatnegative6couldimprovethroughtheyear?


Idon'tthinkthatwecangointothatlevelofgranularityatthispoint.Imean,we'regoingtobeup--IthinkwemightbeupalittlebitmoreinLatitudes.ButthemixwhenyougetdownintoM2sandCJ3s,andit's--Ijustdon'tthinkthatit'sgoingtobemateriallydifferent.

FrankConnor (CFO):

SoIthink,Noah,ouroriginalguidance,intermsoftoprevenue,we'restillontrackforthat.We'restillontracktoseemostofthegrowthcomingfromLatitude.Andattheendoftheday,weexpectlatestitwouldbeapproximatelyflatplusorminus.





Okay.AndIthinkyousaidyou'dexpecttheLatitudetobemix,slightlymixnegativetotheoverallsegmentmarginthisyear.Doyouexpectittobenegativeorpositivetothemixnextyear?


IthinkthatI'mnotreadytodo2017guidance,Noah,thedetails.(laughter)SoIthinkwe'll--wedon'tknowyet,nextyearorwhatwe'regoingtolookatintermsofthemixofNetJetversusnormalretailsales.SoIthinkitwouldbeprobablyprematuretotalktoomuchaboutthat.


Okay,yes,understood.It's--thebusinessismovingaround.Ijustthoughtmaybeonthatairplane,youmighthavemorevisibilityfurtherout,butunderstood.Thankyou.


Sure.

DougWilburne (InvestorRelations):

Allright,Greg,thatconcludesourcallfortoday.Thankyou,ladiesandgentlemenforjoiningus.

Operator :


Thatdoesconcludeyourconferencefortoday.

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