Ladies and gentlemen, thank you for standing by. Welcome to the Textron Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President, Investor Relations, Mr. Eric Salander. Please go ahead.

Thanks, Greg, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. With that, I'll turn it over to Scott.

Thanks, Eric, and good morning, everybody. First, I'd like to recognize that we're all operating in extraordinarily challenging times while facing numerous disruptions to our daily routines. On behalf of our company, I'd like to share our deepest sympathies for all those who have been affected by this global pandemic, and we join in thanking those who have been working to keep us safe through the crisis, particularly those on the front lines in the health care community. As we respond to the COVID-19 pandemic in this uncertain time in the world, our number one priority remains the health of our workforce and ensuring that we have a safe work environment during this unprecedented time. Our employees have stepped up across the communities and are constructing plastic face shields and cloth facemasks at aviation and TSV, producing hand sanitizers at Bell and gathering essential items for those who need them at Caltex and Systems. We continue to work in understanding and assessing the impacts of COVID-19 on our businesses, but we still have limited visibility in these times, particularly with respect to how long this crisis will affect our markets. We're implementing actions across the company to manage and mitigate the impact this pandemic is having on our operations. Given the diversity of our segments and end markets, the impacts of COVID-19 have had a wide range of effects on our business operations. For instance, the U.S. government has taken several actions to reinforce the importance of our nation's defense industrial base and has deemed the defense industrial base as part of the nation's essential critical infrastructure. Looking at our defense businesses, Bell and Textron Systems have maintained a steady operational cadence throughout the health crisis, and we expect them to continue to do so. Bell executed very well in the quarter with increased revenue from higher military volume and a 14% operating margin. On the commercial side of the business, we delivered 15 helicopters, down from 30 in last year's first quarter. We did see several deliveries pushed out of the quarter, resulting from customers' inability to accept aircraft due to COVID-19-related travel restrictions. During the quarter, Bell hit another major milestone in its pursuit of the Army's Future Vertical Lift programs when it was down selected for the next phase in both of these strategically important aircraft acquisition programs for the future of Army aviation. On the Future Long-Range Assault Aircraft program, the Bell V-280 Valor was one of the two competitors selected for the competitive demonstration and risk reduction phase over the next 18 months, with the expectation that the Army will award a preliminary design contract in the fourth quarter of next year. The V-280 is well positioned entering this final phase of the acquisition selection process, having now been flying for over two years while continuously demonstrating its speed, agility, and versatility in both piloted and autonomous flight. On the Future Attack Reconnaissance Aircraft program, the Bell 360 Invictus team was selected as one of two competitors for the design, build, and testing of a prototype rotorcraft. The Bell 360 Invictus offering includes the proven high-performance rotor system and fly-by-wire controls from our 525 Relentless in an affordable, sustainable, and highly lethal design. At Systems, while overall operations were strong for the quarter with higher volume across most of our product lines, lower operating margin of 7.9% in the quarter, comparable to 9.1%, was unfavorably impacted by our simulation product line related to the downturn in commercial aviation. We've announced furloughs and suspended operations at our simulator manufacturing facility in Montreal as airlines and training centers have significantly reduced their outlook for the acquisition of training devices amid this health crisis. In the quarter, Textron Marine & Land Systems delivered the first Ship-to-Shore Connector Craft 100 to the U.S. Navy, and Craft 101 is scheduled to enter builders' trials in the second quarter. Also on Ship-to-Shore Connector, the $820 million follow-on production contract for the next 15 crafts was fully definitized in mid-April. This is a critical milestone, and we believe demonstrates the Navy's commitment to the program. This now brings the total number of crafts to be built at Textron Systems to 25 of the 73 crafts 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 from the first quarter of last year. We delivered 23 jets, down from 44 last year and 16 commercial turboprops, down from 44 in last year's first quarter. Entering the quarter, we expected the lower unit deliveries from both the change in the mix of aircraft sold and the availability of completed aircraft as we worked to recover our composite manufacturing operations following the accident that we experienced at the end of 2019. During the quarter, we also experienced delays in aircraft deliveries due to customers' inability to accept their new aircraft in Wichita based on COVID-19-related travel restrictions. We expect these aircraft will deliver as the travel restrictions begin to lift. Looking to the market, aftermarket revenues were down about 3% compared to last year's first quarter. Service activity was strong through the first two months of the quarter but began to slow in March as the effects of the pandemic on air travel continued to expand. Moving to backlog, there was a $290 million decrease from the fourth quarter balance of $1.7 billion, primarily due to a revised demand outlook from a fractional jet customer resulting from the pandemic. As government travel restrictions and other social distancing guidelines were implemented, we experienced a pause in sales activity as face-to-face meetings and demonstration flights became increasingly difficult to conduct. These actions led to the decline in retail order activity in the quarter. On the new product front, the Cessna SkyCourier completed engine ground runs in March and is on track for the first flight in the second quarter. Moving to Industrial, revenues of $740 million were down $172 million from last year's first quarter, largely related to lower volume in our Fuel Systems and Functional Components product line. Auto manufacturers began to shut their factories in response to the COVID-19 crisis at the end of January, beginning in China. As the Tier 1 supplier to the industry, Caltex closed their facilities accordingly. In China, the Caltex facilities have recently come back online and are ramping up based on demand signals from the customers. In Europe and the Americas, the auto OEMs shutdown began in mid-March and are expected to last through early May in most cases, with our facilities restarting accordingly. At Textron Specialized Vehicles, we began employee furloughs in March to address the lower expected demand across our business. Our ground support equipment business has been impacted particularly hard as commercial air travel has slowed and airlines have pulled back on equipment purchases. Production has been suspended, and we will continue to monitor the demand outlook. The outdoor powersports distribution channel, including both retail stores and dealers, has been impacted by the crisis as consumer spending has significantly slowed and many dealers and stores have been required to close due to government shutdown orders and other operating restrictions. Production of off-road products has been temporarily halted. Golf and PTV are continuing to operate with some inefficiencies driven by required social distancing guidelines as they work to meet customer commitments. The team is doing a good job of working through these difficult times. In summary, COVID-19 has had a significant impact on our employees, operations, suppliers, and customers across each of our segments. With the continued uncertainty around the pandemic, we are confident in the actions that we've taken to protect our workers and maintain our businesses while continuing to meet our customer commitments. With that, I'll turn the call over to Frank.

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 pre-tax special charges related to the impairment of intangible assets at Textron Aviation and Industrial due to economic disruptions caused by the COVID-19 pandemic. Excluding those charges, adjusted net income was $0.35 per share, down from $0.76 per share in last year's first quarter. Segment profit in the quarter was $156 million, down from $294 million in the first quarter of 2019. Manufacturing cash flow before pension contributions, a non-GAAP measure, reflected a use of cash of $430 million, which was in line with our first-quarter expectation. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $872 million were down $262 million from a year ago, primarily due to lower volume and mix of $260 million, largely the result of lower Citation jet volume of $154 million and lower commercial turboprop volume of $99 million. The decrease in Citation jet and turboprop volume largely reflected a decline in demand related to the pandemic, disruption in our composite manufacturing production due to a plant accident that occurred in December of 2019, and delays in the acceptance of aircraft related to COVID-19 travel restrictions. Segment profit was $3 million in the first quarter, down from $106 million last year, primarily due to the lower volume and unfavorable impact of $23 million from performance, which includes $12 million of idle facility cost recognized in the first quarter of 2020 due to temporary closures and employee furloughs, resulting from the COVID-19 pandemic. Backlog in this segment ended the quarter at $1.4 billion. Moving to Bell; revenues were $823 million, up $84 million from last year, primarily on higher military volumes, slightly offset by lower commercial volume, principally due to delayed deliveries as a result of COVID-19 travel restrictions. Segment profit of $115 million was up $11 million, largely on higher military volume, partially offset by the unfavorable impact of $8 million from performance and other. The performance and other included $25 million in lower net favorable program adjustments, partially offset by lower research and development costs. Backlog in this segment ended the quarter at $6.4 billion. At Textron Systems, revenues were $328 million, up $21 million from a year ago, primarily due to higher volume across most of our product lines. Segment profit of $26 million was down $2 million as unfavorable performance was largely offset by higher volume. Backlog in this segment ended the quarter at $1.4 billion. Industrial revenues of $740 million were down $172 million from last year, primarily related to lower volume at our fuel systems and functional components product line, as Scott discussed earlier. Segment profit was $9 million, down $141 million from a year ago, largely related to lower volume. We also realized approximately $13 million of unfavorable performance in the first quarter due to manufacturing facility closures and employee furloughs, resulting from the pandemic that was mostly offset by other favorable performance. Finance segment revenues decreased $3 million, and profit decreased $3 million. Moving below segment profit, corporate expenses were $14 million, and interest expense was $34 million. During the quarter, we initiated a number of financing activities to enhance our liquidity position, given the uncertainty in the marketplace. We issued $1.25 billion of debt that included $105 million of commercial paper, $650 million of 3% 10-year notes to refinance current year debt maturities, and a $500 million 364-day term loan credit agreement that was fully drawn on April 2. To further enhance our liquidity position, we received $377 million in proceeds from borrowings against corporate-owned life insurance policies with no stated maturity. Prior to the onset of the health crisis, we repurchased approximately 1.3 million shares in the first quarter at an overall cost of about $54 million. Consistent with the covenant in our new $500 million term loan, we have suspended share repurchases until the outstanding balance under this agreement is repaid. At Finance, we have an upcoming debt maturity in December of 2020 for $150 million, and we expect to refinance that note later this year. Within this current environment, we're focused on cash preservation. We're working closely with our leadership teams across our businesses on a weekly basis to efficiently manage our working capital and eliminate discretionary expenses. We're also evaluating all capital not critical at this time. From a liquidity perspective, we believe we have sufficient funds to meet our obligations despite the uncertain environment. We understand the importance of managing our cash balances, and we've taken actions to enhance our liquidity profile. Our cash balance at the end of the quarter was $2.4 billion, and we maintained an undrawn revolving credit facility of $1 billion, which matures in October of 2024. With that, I'll hand it back to Scott.

Great. Thanks, Frank. While we suspended our earnings guidance for the year due to the uncertainty around the COVID-19 pandemic, I would like to briefly touch upon the outlook for each segment. At Industrial, our Fuel Systems and Functional Components product line is obviously reliant on automotive production recovery. It's still too early to tell how the crisis will impact retail auto sales and ultimately automotive OEM production. But today, we are experiencing recovery in China. And based on current industry expert forecasts and dialogue with our customers, we expect to see Europe and the Americas resume production in the second quarter with production ramping in Q3 and Q4. In the vehicle business, TSV has experienced significant disruptions in the markets. The consumer discretionary aspect of the outdoor powersports business remains difficult, but we are taking actions to minimize our costs and manage working capital through the downturn. At aviation, while we continue to take some orders, the normal pace of interaction with customers has obviously been slowed. We've suspended most new aircraft production through the end of May while continuing to deliver aircraft on existing orders and provide customers with aftermarket services and support. While it will vary by region, we expect to see our sales team start engaging with customers in the latter part of Q2. For our aftermarket business, we expect overall flying hours to begin to pick up in Q2, leading to an increase in activity in our parts and service business in Q3 and Q4. Systems is predominantly a defense-oriented segment and we believe will remain on track to meet our expectations for the year. At Bell, given the strength of the defense business, we expect performance will be consistent with our expectations for the full year. To wrap up, we've demonstrated our ability to execute through significant market disruptions in the past, and we're confident that we're implementing the necessary actions to address this crisis as well. At Industrial, we are committed to our strategy we have in place to strengthen our retail channel through our Bass Pro partnership and the Snowmageddon presale event within the powersports business. At Caltex, we continue to collaborate with our OEM customers as we invest in new technologies for plug-in hybrid electric vehicles and battery electric vehicles that position the business for ongoing opportunities as the automotive industry continues to evolve to the next generation of cars. At Aviation, while clearly a difficult situation, we do believe this cycle has fundamental differences from the challenges we experienced in the 2008-2009 downturn. The secondary market for pre-owned Citation aircraft is much stronger today 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 pre-owned market as an impediment to the sale of new aircraft. The private aviation environment is also different in a couple of ways. We don't see the negative perception associated with the use of private aircraft that was brought on during the 2008 financial crisis. Conversely, we believe private aviation will be viewed more positively today from a health perspective as business travel restarts with the resumption of the economy. We also entered the cycle with a much stronger and more highly differentiated product portfolio, having introduced the Latitude and the Longitude. Additionally, we have a pipeline of aircraft with Sky Courier and Denali that will help to drive future growth in new markets. Our defense businesses are well positioned with our current production contracts in addition to recent awards on development programs at both Systems and Bell that represent opportunities for significant growth in the future. At Systems, we achieved important milestones on existing programs like the Ship-to-Shore Connector program as well as unmanned aircraft and surface vessel programs. Also, we believe the recent award of a development contract under the Robotic Combat Vehicle medium program coupled with awards on several weapons programs present promising opportunities for future growth in the segment. Finally, the recent awards on the FLRAA and FARA Future Vertical Lift programs are the result of our commitment to invest in new products and technologies for future growth. These awards will help us to continue to work with our Army customer to address their specific weapon system requirements and to support the Army Futures Command acquisition strategy to accelerate the deployment of these important programs to the war fighter. That concludes our prepared remarks.

Your first question comes from the line of Sheila Kahyaoglu.

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

That's a great question, Sheila. The timelines for the two programs are quite different. FLRAA is quite advanced; we've been flying the V-280 for over two years. As we enter this new phase under the OTA, the customer has remained consistent with their schedules and has indicated that this 18-month process is expected. We anticipate the next selection and entry into the next phase in the fourth quarter of next year, which is a relatively short timeline. During this period, it's crucial for us to minimize risk and collaborate with the customer to adapt the V-280's foundation to meet the requirements for a weapon system, including the integration of future mission systems, sensors, and weapons. Additionally, we are investing in a new manufacturing technology center, which is essential to show that our craft can be both affordable and capable of meeting the high volumes required for EMD and production. The customer has demonstrated they are on schedule, which makes us optimistic. FARA is at a different stage; we're transitioning from the paper design and proposal stage to building critical components. We expect to have just over two years of flight testing, followed by a process similar to what FLRAA experienced under the JMR program, culminating in a fly-off. This will take a few more years, but again, the customer has been excellent about staying on track, and we feel confident about both programs, which represent significant opportunities if we are selected for the next phases. Regarding R&D, overall R&D spending at Bell will increase significantly. Both programs are split one-third Bell and two-thirds customer cost share. Therefore, on a gross basis, we'll see an uptick in R&D, but since we're transitioning from mostly company-funded to a cost-sharing model, net R&D will actually decrease. It's important to note that this R&D does not go through the revenue line due to the nature of the cost share; we'll incur gross R&D expenses, and the customer contribution will offset that.

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

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

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

That's a great question, and the answer is still unfolding. It's no secret that NetJets is our partner in the fractional market, and we have built a strong relationship with them. They play a significant role in our business by helping us reach the fractional customer base. The NetJets sales force noticed the same trend we did—people paused their buying decisions when the pandemic hit. We have continued to work with NetJets, which is still making several deliveries this year for both Latitude and Longitude. There are contracted aircraft out there, and we are actively collaborating with them. However, they have indicated that until sales improve, they will not be taking delivery of some aircraft we expected this year. The situation in the fractional market is likely to reflect what we're seeing across our entire aircraft sales team; when people can actively engage and conduct business, we will see how things develop. Conversations with Adam show an increase in inquiries and activity for both jet cards and prospective fractional customers. Interestingly, many customers who have never engaged in business aviation before are starting to consider what happens when the economy recovers, anticipating the need to reconnect with customers, suppliers, and facilities. We expect this could attract new entrants into our sector. We've had similar discussions with Wheels Up and Kenny Dichter regarding their club membership and managed models. While this is still anecdotal, there are reasons to be optimistic about increased activity from new players entering the business aviation industry.

Your next question comes from the line of George Shapiro.

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

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

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

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

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

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

But it may require some substantial reductions in subsequent quarters to get down to number of years here, and 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 that's because you don't know where simulation is going to go or did I just miss it?

Well, I think, George, in systems, things are generally going very well, right? The Ship-to-Shore Connector program has hit a couple of important milestones in terms of that program starting to deliver the craft; getting the milestone of the first sales of 100 across the goal line was very important. 101 is not far behind it. We continue to work through those issues on the, I mean, there's still more crafts to deliver, obviously, on the development contract. Definitization of the production contract for the next 15 crafts was a very big deal. We're continuing to see increased hours on, for instance, our fee-for-service unmanned aircraft programs. We've had a lot of key milestones on our unmanned surface vessel programs that's moving into the next phase, which is very good. We did win, we get into development contract, but an important one on the RCV medium and, as I said, other weapons programs, GBSD. So I think both the performance under the current programs that we have are looking very good. The critical new programs that we need to win and execute on are looking very good. The only soft spot really in the Systems world right now is particularly the air transport market on the simulation training side, which is, again, we've shut that down, and we just don't have any demand on the airline side, which is understandable. These guys aren't going to be laying out any kind of CapEx and doing upgrades and the things that are kind of normal flow business in that business right now. But outside of that, both current execution, current programs as well as important new wins were quite strong in Systems in the quarter.

Your next question comes from the line of Robert Stallard.

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

Right now, aviation has just completed a 4-week furlough, which has been extended by another 4 weeks, leading to a total shutdown of 8 weeks. There is some limited activity involving the completion of previously ordered aircraft, but overall, the production lines are mostly idle. The furlough affected the entire workforce, although we are beginning to bring teams back to advance new product programs like the Sky Courier. The main reason for this approach is the lack of clear visibility into the necessary production rate for the rest of the year. We typically assess this by consulting our sales teams and analyzing order flows, but currently, we do not have that information. Thus, the furloughs are intended to give us time to observe the economy's recovery, understand customer travel needs, and determine the appropriate production rate moving forward. There are reasons to be hopeful about the role of business aviation post-pandemic, as people need to travel safely and are uncertain about the commercial airline sector's recovery. While we see positive signals, we must also consider business confidence and companies' willingness to invest in capital expenditures for aircraft acquisition. Hence, we are taking these steps to gain better visibility and plan our production levels as we conclude 2020 and look ahead to 2021.

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

We did something similar in 2008 and 2009. This approach provides a reliable source of cash, albeit with a slightly higher cost than typical borrowing. At that time, we were experiencing significant disruptions in the financial markets, and the Federal Reserve had not yet intervened. Access to capital markets was diminishing, so we wanted to ensure we had ample liquidity in case of a downturn beyond what we have already encountered. This strategy acts as an additional safety net, ensuring we have access to funds. We chose this approach because requesting the cash value from our insurance can take up to six months, so we wanted to mitigate any potential delays that could arise during a liquidity crisis in the markets.

Okay, thank you very much.

Sure.

Your next question comes from the line of Peter Arment. Please go ahead.

Thanks, good morning, Scott, Frank. Scott, considering the unusual circumstances, how have you been evaluating the supply chain? What is your approach to assessing the risks or disruptions you are encountering in your business?

It's a good question, Peter. I believe it's a day-to-day challenge. We haven't encountered any major issues, but there's definitely a mix of different regulations and shutdowns in various states that we monitor daily. So far, we haven't faced any insurmountable problems, but we handle the situation every day. If a supplier is down for a week, we work around that. While Aviation is mostly shut down and a lot of our operations are also affected, Bell continues to operate daily. Our systems are functioning, and we have the golf lines on PTV running again. We do notice some minor supply chain issues, but we can address those. This also applies to our own operations as we're working under unusual conditions, which may lead to some inefficiencies. However, I believe these are tactical matters. The team has done a great job of managing these challenges on a daily basis.

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

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

Your next question comes from the line of Carter Copeland.

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

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

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

Okay. That's very clear. As a follow-up, Scott, I appreciate your insights on the differences in the forward outlook for aviation. Could you elaborate on how you view the outlook for jets compared to turboprops and how you expect them to evolve differently?

Again, a good question. I wish we had better insight to it. Turboprop was hit pretty early in the year because we do so much in Asia. And as Asia kind of works our way through this, we're hoping we'll start to get some better insight into what's going on in the Asian market, which will particularly be impactful, I think, on the turboprop side of things. On the jet side of things, again, I think if you, my thought around this thing, and again, talking to Adam and Kenny and the Wheels Up and NetJets, you see the kind of inquiry and customer activity that they're seeing. Most of this, particularly as new people come into this market, it's most likely they start in sort of that either charter club membership, jet card, but we're going to see it, and we are seeing some of it in fractional, and I think ultimately, you will start to see it in managed aircraft, right, where people conclude that, look, a whole aircraft makes sense for me. And again, it's just like everybody else in this industry. It's based on how many hours a year you need to fly to determine what makes sense for you in terms of which of those kinds of products, if you will, are going into business aviation. But from my perspective, all these things are important, right? So driving utilization, even if it's in memberships and jet cards, is more flying, which is more service. As customers do more equity-based, and again, whether that's a fractional or it's a whole managed aircraft, again, that's obviously very good for us. I just, we just don't know what the timing of that progression looks like. And I'm not sure we'll get a lot better. We love that we're, that Wheels Up and NetJets are seeing this kind of activity and new customers coming into the market will help to give us some time here to see how that sort of trickles through the whole enterprise, if you will.

Your next question comes from the line of Jon Raviv.

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

Well, look, I think part of where we are today versus where we are is our balance sheet is in a much better place, obviously. We don't have some of the challenges that we had a decade ago. I think our investments in new products position us better than we've ever been. As you play through the cycle, I mean, the fact that you have the FARAs and the FLRAAs at Bell, that you've got the Longitude just certified, the Latitude very strong product, things like Sky Courier in the pipeline. You look at what's going on in our Systems business, the things that we've done around investments in the unmanned side, both in the air vehicles, the surface vessels and now the investments we've made here recently both organic and through the acquisition of Howe & Howe on the land side. I just think we're much better positioned. And then that's going to continue to be those strategies in those businesses is how do we make sure that we have the kind of product and service that works that make us a more robust business. And I mean, this is a cycle that no one ever could have imagined, obviously. But I absolutely believe that we'll come out of this in a better place than we've ever been. I mean, things that we've been investing in for years to position us are happening as we speak. I think it's a shame. A thing like a Longitude gets certified and 60 days later the market stops. But look, that's transient, right? I mean, this too shall pass. Things like the FARA and FLRAA down-selects. What's unfortunate is that happened right smack dab in the middle of a global economic shutdown. But that's, again, that's transient. These are programs that have the potential. And obviously, we need to stay very focused and execute very well with the Army customer in order for us to be the guy that ultimately gets selected to go forward on production, and we have to keep focused and working hard to make that happen. But I see these things that are happening, and obviously, the nature of this pandemic is a very transient thing. Now look, there's other businesses where we will look very hard at, are there opportunities to consolidate some things, and say, "Look if I got some plants that are closed, are there more efficient ways to operate and manage." But we're looking at all those things. So the bottom line is, this is a terrible moment in time. And trust me, it's not fun running businesses where your plants are shut down, but this is a transient. And I think we're in a radically different position than we were a decade ago in some of our most important end markets. When you think about the Aviation side, it's just a totally different dynamic coming out of this than coming out of that '08, '09 cycle.

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

So look, Bell Military, obviously very solid for the quarter and we expect it to stay that way. As we've talked about before, we are definitely seeing a transition here over the last year or so, and we'll continue to see that going forward where unit volumes are sort of flat to down a little bit and they're not just a function of the program of record on things like V22 and H1, but there has been significant growth in the aftermarket. Both of those platforms are heavily utilized. Their fleets have grown, and the government frankly is looking for us to play a bigger role in sustaining and maintaining and frankly starting to upgrade some of those fleets. So I think we're well positioned for that, and that was born out here in the quarter, right? So we're seeing solid growth in the aftermarket on those things, and that will help sustain that business and keep it, frankly, in a good place as we transition to whatever those next new platforms may be, obviously focused very much on the FLRAAs and the FARAs of the world. On the commercial side of Bell, we do a lot of parapublic and international sales. Those are largely holding up. Obviously like all these businesses, sales activity right now is lower on some of the things like a 505, for instance, which is a shorter cycle sale, a lot more individuals and small corporate type things. So I expect that to be a little softer. But this is a very small amount of revenue and margin associated with that. It's a fabulous product. But it will go through a cycle not unlike a general aviation sort of business, but so much of the 412, 429, 407 is parapublic, EMS, a pretty well diversified set of end markets, which will be a little more resilient to a cycle like that. With that being said, we are, of course, looking at those order rates and we'll make any production-related adjustments, as appropriate. That's obviously a very big service business as well, which again is very solid and was up in the quarter. People are flying in those markets.

Your next question comes from the line of Ronald Epstein.

Hey, good morning guys.

Good morning, Ron.

Following up on the Bell question, have you noticed much of an impact from the changes in energy prices since oil has dropped significantly? Has this affected Bell yet, and do you anticipate any impact? How are you approaching this situation?

Ron, as you know, we don't have a huge part of the business that's oil and gas related. There are a number of deals that are sort of in the pipeline that are kind of 412 or 429 related. There's a couple of things that were, as I said, that were in the pipeline that we haven't heard about yet, but it's because a couple of these countries are just totally shut down. So whether it affects their strategy or not, I don't know. As you know, a lot of operators, and I don't think this will change in that industry, do put limits on how many hours aircraft have and ages of aircraft to meet their standards to provide service to the oil and gas fields. So there is, that drives demand. I mean, there is regular turnover with a lot of these key customers. And remember, Ron, we're not, today, we don't do a lot of the big offshore stuff, right? It's the Gulf. It's a lot of the nearshore sorts of operations, and those tend to be the lower cost fields, which I think are the ones that are more likely to hang in there. I think it's safe to say right now, you're not going to see a whole lot of deepwater, big dollar investments to get at some of the more expensive oil. But people are still producing, and they're still going to have to run their operations. So I mean, I don't think it's a good thing for the oil and gas market for sure, but it's not one to which we have a huge exposure.

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

Yes. So two things. So first of all, we have zero golf in TXT now. There are no golf properties. The last of that got sold off, in fact, an account closed out and gone last year. So we are officially out of the golf course finance business. So we have no exposure there. Golf, as you know, Ron, the cars themselves are primarily almost all leased. So as clubs reach the end of their leases, they do roll and end those leases. I mean, you can do a six-month extensions and some stuff like that for sure. But the demand in the golf side of the business right now remains very strong. As you know, we introduced the lithium-ion stuff a while back, and that's been a fabulous product for us. Demand is very strong. This year, we introduced a brand-new, we think, market-leading gas product, which is a segment we haven't been a big player for a long, long time. We've seen a nice uptick in demand driven by that. So the golf business is running. My only challenge on golf right now is just building up golf cars. The difficulty there is we, our guys are doing a great job. I was down in Augusta a few weeks ago with them, and we're running the golf line, but what used to be every 2.5 minutes we could produce a golf car, we're running at about 7 minutes right now, and that's because of the social distancing, right? We've got our production work cells where we usually have 3 or 4 folks at every station doing assembly work; I can only have one person in that area at the moment based on the guideline. So, but we're running two shifts making them and shipping them as fast as we can.

Your next question comes from the line of Robert Spingarn.

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

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

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

No. So just to be clear, I mean, I think, again, we're depending on these things in supply and demand. There certainly was some lower volume in the quarter because of people reacting when the whole pandemic thing first got announced, right? Orders that were progressing that you would have expected that you would close things in normal business and convert to orders and sales didn't happen, right? So there is certainly some impact in the quarter on the demand side. What that means in the future is hard to predict because we're really not back doing a whole lot of sales activity. So and as I said, on the cancellation front, no, we did not get phone calls canceling aircraft. In fact, we got calls, people even in cases where they said, "Hey, I can't get there." And we said, well, look, you got to put additional cash, and they did, right? So I mean people want aircraft, and we saw that same dynamic at Bell. So it wasn't a matter of people calling and canceling. It was people not being able to pick it up and take delivery so the only cancellations was, again, we talked about the fractional side. And I think that, again, that's, I don't view, remember, for us, NetJets is very important. Their sales force sells a lot of our aircraft. And so if their sales force can't go out and sell aircraft, that's a problem for NetJets and for us. So I don't see that dynamic of what they're seeing as being different than the dynamic of my own sales force, right, which is having a hard time engaging in the way they would normally engage with customers and I expect that will, that will turn once the sales teams can get back out there and go about their business.

Okay, thank you for the color.

Sure.

Next question comes from the line of David Strauss, please go ahead.

Thanks, good morning.

Good morning, David.

Good morning.

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

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

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

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

Yes, and I would just add, typically we see in the string of orders we've seen for the last couple of years, there is an opportunity to catch up and go through and meet any new demand that arises.

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