達信公司 (TXT) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron second quarter 2012 earnings call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Doug Wilburne.

Please go ahead.

Thanks [Tricia], 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.

Moving now to second quarter results starting with slide number 3. Revenues in the quarter were $3 billion up 10.7% from a year ago.

Our income from continuing operations was $0.58 per share, which compares to earnings per share of $0.29 in the second quarter of 2011.

Moving to cash flow, second quarter manufacturing cash flow before pension contributions was $121 million, and from that, we contributed $21 million to our pension plans.

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

Thanks, Doug, and good morning, everybody.

Our second quarter performance reflects continued growth in our commercial aircraft and industrial markets and improved operating execution across our businesses.

We also continued to secure a number of key program wins and made strategic product announcements in the quarter that should further contribute to growth in the long term.

Starting with Textron Systems, our marine and land systems business won the Canadian Tactical Armored Patrol Vehicle Program.

This contract calls for delivery of 500 vehicles beginning in 2014 with an option for 100 more, as well as an initial five-year support contract.

This was an important win as it extends our production of armored vehicles through at least 2015.

This win also establishes a new family of our proven mine-resistant vehicles that we can now market to other customers around the world.

Our TMLS business also won the Navy Ship-to-Shore Connector competition, which starts with detailed design and construction of a test and training craft to be completed by early 2017.

The contract also provides options for the deliveries of up to eight initial production units through 2020.

So the total value of this contract could amount to $570 million over the remainder of the decade with even more significant opportunity when the program enters full rate production.

And finally, at our unmanned aircraft systems business, we recently received a $358-million award for engineering support and upgrades to retrofit 45 shadow systems, with deliveries of these units beginning late in 2013.

So despite a difficult DOD environment, over the past several months, we've won several significant new programs that help solidify the long-term outlook at systems.

Moving to our finance segment, we had another successful quarter of liquidations as we reduced non-cap to finance receivables by another $160 million, including a $70-million reduction in our Golf Mortgage portfolio representing 19 loans.

Our non-cap to finance receivable portfolio now stands at $619 million.

Shifting to our industrial business, operating performance was solid with revenues up 5%.

Volumes in our industrial businesses reflect strength in the North American and Asian auto markets offsetting European softness.

Moving over to Cessna, we delivered 49 jets in the quarter, up from last year's 38, reflecting modest recovery and our success in the current market.

We also had a number of strategic developments over the past several months at Cessna.

First, we announced our new long-range, super mid-sized Longitude business jet during the eBay show in Geneva.

With a 4,000-nautical-mile range and a speed of Mach 0.86, the Longitude will be designed to make non-stop flights between city pairs like New York and Paris, London to Dubai, or Beijing, Moscow.

At a price of just under $26 million, we believe the Longitude will be the best valued 4,000-nautical-mile, super mid-sized business jet available in the world.

We also continued to make progress during the quarter with flight testing on our new Citation M2 and Citation Ten.

Finally, our newly announced Latitude was selected by NetJets to become part of their fractional fleet offering, which should add significantly to the long-term demand for this aircraft.

And to wrap up with Bell, on the military side, we delivered nine V-22s and six H-1s versus nine V-22s and eight H-1s in last year's second quarter.

We saw a significant increase in our commercial business, with 47 units delivered in the second quarter, up 25 from last year's 22 deliveries.

This growth reflects the overall strength in global helicopter markets as well as the ramp-up in our 429 program and the success of 407-GX.

To wrap up the quarter, overall manufacturing revenues were up 10% with manufacturing net margins improving 120 basis points.

We believe this validates the investments we've been making over the past couple of years in new product development, our sales capabilities, and manufacturing productivity.

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

Thank you, Scott, and good morning, everyone.

Manufacturing segment profit in the quarter was $288 million, up $59 million from the second quarter of 2011 on a $269 million increase in manufacturing revenue.

Let's look at how each of the segments contributed starting with Cessna.

Revenues at Cessna were up $111 million on a year-over-year basis, reflecting higher jet deliveries.

Segment profit was up $30 million, primarily due to the higher volume.

At Bell, revenues were up $184 million primarily due to higher commercial helicopter volume.

Segment profit increased $32 million, reflecting the higher volume in a favorable mix in our commercial business.

At Textron Systems, revenues were down $63 million, primarily due to lower volumes in our weapons and sensors and land and marine businesses.

Segment profit decreased $9 million, reflecting the lower volumes and deliveries on lower-margin contracts.

Industrial revenues increased $37 million, reflecting higher volumes across most of the businesses, partially offset by unfavorable foreign exchange.

Segment profit increased $6 million, primarily due to the higher volume.

Moving to finance, total finance receivables ended the quarter down $256 million from the prior quarter.

Non-accruals ended the quarter at $252 million, a decrease of $38 million from the prior quarter.

And 60-day-plus delinquencies were $169 million, up $26 million from the first quarter, primarily reflecting a few aircraft accounts.

Moving to corporate items, corporate expenses, were $20 million down significantly from the first quarter, primarily the result of lower prevailing share price which reduced compensation-related expenses.

Interest expense was $35 million, even with the first quarter.

Our average share count during the quarter was 295.5 million shares, which was 19.7 million shares lower than last year's second quarter, primarily reflecting the benefit of having repurchased a large portion of the Company's outstanding convertible notes.

To conclude, we are maintaining our full-year EPS guidance of $1.80 to $2 a share, with cash flow from manufacturing operations before pension contributions of $700 million to $750 million.

That concludes our prepared remarks, so Tricia, we can open the lines for questions.

(Operator Instructions) We will go to the line of Heidi Wood with Morgan Stanley.

Please go ahead.

Yes, good morning.

Nice quarter, guys.

Can you walk us through the strong improvements we're seeing in this quarter in Cessna?

I think -- I can't recollect precisely, but I think Scott Ernest has now been there for a year.

Can you tell us what has been changing with him and his team that has most effective in these results?

Well, Heidi, you're right.

Scott's been in place for just over a year, and I think some of the changes that he's made in establishing real business segment P&Ls within the jets and propeller and military and service sector, and the teams, the people we put into those leadership jobs are doing a great job on focussing both on where we're going in the future, product development, plans, marketing strategy, but also a stronger focus on their P&L and understanding their costs, understanding conversion costs, supplier costs, warranty, really looking at the products a little more holistically along each of those product lines.

And I think the focus on that and trying to drive profitability back in the business is something that they're doing very well, and I think that's what we're seeing in the results.

Didn't we expect then, Scott, in the second half, a steady climb in profits, then, as he and his team gained greater traction?

Well, I think that you're going to see, obviously, the continued focus on the cost, but do I think we'll start to see a little more pressure on R&D spending as we continue to ramp up all of the exciting stuff that we've announced.

We actually have to go spend the money to make those things happen.

There's a couple of other headwinds, but there's going to be things that push back and forth through the quarter.

But I would say I don't think there is any change in their focus around cost, and that'll continue to support our margins, but are going to have some headwinds around some of our R&D spending.

And last question, obviously, given the conservatism in your guidance, you're baking in an implied deceleration in the back half of the year.

Can you walk us through some of the puts and takes that drive that conclusion?

Heidi, obviously, coming through the first half of the year, we feel pretty good about where we are relative to how we expected the year to progress, but I'd have to say that we still look at the back half of the year in terms of what is going on with the economies around the world and a lot of uncertainty and have to factor in that that will cause concern with a lot of our customers as well.

And so we still have, as we have had now for the last few years, an awful lot of activity, particularly at Cessna, which requires sales, orders that then convert to sales in a relatively short period of time.

And I think there is enough uncertainty out there in the economy, in the markets around the worlds, that it is best to still anticipate it is going to be a tough back half.

Great.

Thanks very much, Scott.

Our next question is from the line of Robert Stallard with Royal Bank of Canada.

Please go ahead.

Good morning.

Good morning.

Scott, I was wondering if you could give us your views on revenues for the full year and whether there's been any changes in the allocation by division?

No, there really isn't, Robert.

I think things are really -- there is no reason to change the kind of guide that we've given you guys at the beginning of the year around each one of the businesses.

Bell, obviously, I think is on track.

Cessna is certainly on track.

Systems, as we sit here today, is probably a little behind.

We guided the revenue around that business to be flattish for the year.

We're a little behind where we were, obviously, this time a year ago.

I think that's reflective of just the general slow-down of getting things through the DOD process.

But obviously, with some of the wins that we've had in the past few months and some FMS activities, I think we have reasonable line of sight to expect the revenue to catch up on that business and finish the year about flattish as we originally guided.

Okay.

And as a follow-up on Cessna, you've given us the backlog number for the quarter.

I was wondering if you could give us an idea maybe of how orders and cancellations might have panned out this quarter?

Well, there were some -- certainly, still some cancellations in the quarter.

I would say gross orders were pretty good.

We still have some cancellations, and people just frequently -- why we just still see cancellations at this point, and frankly it's still driven by some orders that were in the backlog that date all the way back to the 2007 NBAAs and CJ4 launches, and as you know, the backlog was way out for that model at that time, and so as deposits come due, there still are some that are dropping out of that area.

So I would say principally when you look at cancellations, that is what is driving it.

The rest of the cancellation numbers are sort of immaterial.

Thanks so much.

And our next question is from the line of George Shapiro with Shapiro Research.

Please go ahead.

Good morning.

Just follow up on that, Scott.

Was the gross book-to-bill at 1 or above 1 in the quarter, then?

I think if you look at gross, it was just barely above 1.

Okay.

And what happened to the aftermarket at Cessna?

How much did that grow in the quarter?

The aftermarket was up in mid single digits.

On a comparable basis, it wasn't as strong as we have been seeing, but we had a very strong comp from the second quarter of '11 because of a lot of fleet refurbishment activity that was going on.

But it was still healthy mid single digits.

And you had very strong incremental margins.

Is that just the volume, or did the large number of XLS deliveries help that?

And why shouldn't we expect that incremental to continue if you adjusted for the higher R&D?

Well, I think if you look, for sure gross margins continue to be good, and I don't see a change in that going forward.

But as I said, we are going to see more R&D coming into this thing.

And we're still at a point here where the numbers are relatively small and plus or minuses, whether it's inventory adjustments, things like that, have an influence that is bigger than we would like just because the number is relatively small at this point.

So at this stage of the game, I certainly feel good about what the (inaudible) delivered on the quarter.

We'll continue to drive hard, but at this point, I would say I don't see a reason to guide outside of the margin range that we gave you for the total year.

And George, the comps going forward at Cessna are going to be a little tougher, too.

As Heidi pointed out, the new management team got underway a little over a year ago, and so some of that immediate impact started to flow in the third and fourth quarters of last year.

Okay.

Very good, guys.

Thanks.

Good quarter.

Sure.

Thank you.

And our next question is from the line of Jason Gursky with Citi.

Please go ahead.

Good morning, everyone.

Good morning.

Just a couple quick clarification questions.

First, on TFC and the outlook for the rest of the year and looking into 2013.

Obviously, we've had some better-than-expected performance relative to your initial guidance of break-even for the year.

Can you give us some updated thoughts on the outlook, not just for this year, but as we move into next year, given what you know today?

Well, I think that most of what we're seeing that has been up-side to what we would have guided, Jason, has to do with our successful liquidation in the Golf Mortgage portfolio and the fact we've have been able to liquidate those notes at better than where we marked them when we took the mark last year.

So obviously, those come through as a gain.

Now, eventually, obviously, that is going to stop.

We've had two good quarters of those liquidations.

I think we'll continue to see good liquidations of that through the balance of the year.

But obviously, as we start to think about 2013, we have a better sense of how those are liquidating now, so when we get around to guiding you toward 2013, we'll consider that.

But that is going to end, right?

Those receivables are dropping fairly quickly, which is good news, but as you look at them going from starting the year with 381, we're already down to 244.

These things are going to run through the book -- I hope will continue to run through the book pretty quickly.

I would hope that we will continue to see some positive numbers come out of that as we liquidate them at better than their mark, but that will end.

And as far as the timing on the ending, do you have a sense of that?

Is it in calendar '13, or we see that this year?

Well, our -- it's hard to tell, right?

But our pace right now has been in the $60 million, $70 million over the last couple of quarters.

So even if we continue that kind of run rate, then you're going to be -- the portfolio will be half what it was as we get to the end of the year, which means it will --

We'll still --

Number in '13.

We expect, obviously, liquidation activities in 2013.

As Scott says, it's going to depend on pace of liquidations for the second half of this year and where those liquidations take place relative to where we have at least the Golf portion marked, and then we have other liquidations coming out of other pieces of portfolio that will continue.

I guess what we're saying, Jason, is you can't assume that level on a go-forward basis.

That's not something we can bake into the TFC model on a go-forward basis because it is really driven by particular asset class and how that's liquidating, and as you know, that will come to a completion as we finish that liquidation.

Great.

Just two quick follow ups then.

On the Cessna cancellations, can you give us a sense of how much that might have contributed to operating profit in the quarter?

And then, Scott, can you just give us an update on V-22 international sales?

On the former, Jason, the cancellation foreclosure number is de minimis.

It's $1 million or something.

It was not an impact on the quarter in terms of the margin rates, really.

In terms of V-22, on foreign military sales opportunities, we just came out of Farnborough.

I would say we had a great show.

The Marine Corps had four V-22s.

Over at the show, they were providing demonstration rides for a lot of foreign military customers.

It was a packed few days.

They were terrific in terms of supporting us.

We had a lot of folks flying the aircraft, a lot of fabulous feedback.

I would say we are in serious discussions with several different countries around the V-22 sales opportunity, and we remain pretty bullish that several of those deals are going to close.

We obviously would love to see one happen this year.

I think there is a possibility for that to happen.

And remember, we're really trying to look at production slot availability out in that 2015 time frame as you start the second multi year.

So I would say right now there is not a complete signed contract on any with those, but there are several that I think are real opportunities, and they're going to start to happen.

Great.

Thank you.

Sure.

Our next question is from Noah Poponak with Goldman-Sachs.

Please go ahead.

Hi.

Good morning, everybody.

Hi, Noah.

I just want to go back to the full-year earnings outlook question from the first questioner.

And I just want to make sure I'm interpreting you correctly in that I think you are saying the reason for just keeping the range and not raising it despite the large beat, at least versus our expectations, is simply because of the broader, higher-level macro and not because of an expectation for specific segments to get worse in the back half because you earned a dollar in the first half, so you have to earn less in the second versus the first to get to the midpoint of your range, which in any normalized year historically has never happened.

So just wanted to make that clarification.

And if it is the businesses, which ones are the drivers?

No.

It is as I said.

We're -- if you looked at where Bell is today and where the industrial businesses, the systems business I talked a little bit about, I think I have a reasonable degree of confidence in forecasting what their performance will look like for the balance of the year.

But at Cessna, we are in the same mode that we've been in for a few year here where we're taking orders and selling in a three-to six-month window for the most part.

And I still worry about the back half of the year in terms of what the market is going to look like, and that's just driven by, I believe, a lot of uncertainty in economies.

I think there is a lot of concern about heading toward November, a lot of small, mid-sized guys, who are our customers, are very concerned about the balance of the yea, and where things are going in terms of election and politics.

You got debt ceilings, you've got sequestrations, you've got massive changes to tax policy, so I remain concerned that we'll have too many people sitting on the side line as opposed to guys that are willing to make significant capital investments and hiring people and things like that.

So I think it's prudent at this point, given the uncertain nature of the economic and political situation, particularly in the US, that we be a little cautious about the second half of the year.

Okay.

Understood.

And then as a follow-up to the Cessna order topic, orders weren't through the roof, but they were certainly -- they kind of held in there relative to how bad the macro was in the quarter.

Can you talk about whether or not part of that is share gain, and you have new management and new product strategy, and the degree to which you think you're taking share back from competitors that maybe had some inroads versus you?

And then as a second question, when you mention gross book-to-bill being above 1, I think that's been the case for a few quarters.

So what's the timing at which you think the cancellations finally end such that even without core gross or the improvement you'd automatically have book-to-bill above 1?

You know, Noah, I've been trying to stay out of the guessing game on the order book.

But let me just say I think we feel good about what gross orders were the second quarter.

I think that it feels like we're taking some share.

I haven't seen the NBAA numbers yet.

Embraer just put their numbers out, but I haven't seen numbers from any of these other businesses.

We'll obviously -- we'll see that here in the pretty near future.

But I would say that I think our sales teams are doing a great job in terms of coverage.

Certainly, a lot of the new products that we've announced has generated a lot of interest in our brand, and our product continues to be very well received in the marketplace.

So I think we'll continue to do well, and I would guess that we have seen some share pickup in the quarter, and I would expect that to continue.

So it's not like I feel bad about where we are in terms of where we are in terms.

Our order rate has been pretty good.

I think the guys are doing a nice job out there.

It is just caution in the macro environment that would cause us to feel strong enough at this point to take our overall guidance number up.

Okay.

Thanks a lot.

Our next question comes from the line of Jeff Sprague with Vertical Research.

Please go ahead.

Thank you.

Good morning, everyone.

Just a couple questions, just back to R&D, obviously you do have a lot going on and R&D has to go up.

I think in some of your prior conversations, though, the thought was, yes, R&D goes up, but it doesn't outpace sales growth once we get beyond this year.

Is that view changing?

No, I don't think so.

No, I think the comment, Jeff, was just that it's more back-end loaded than front-half loaded this year, but the longer-term look at R&D is still the same.

Right.

And Scott, can you just share some thoughts on sequestration?

You've taken the view that it won't happen.

Unfortunately, you're taking that view because you're a logical businessman, right?

And we're operating in a world where maybe things aren't so logical.

So whether you think it's going to happen or not, what does Textron do if it does happen?

How do you posture?

Can you do things in advance?

Do you even know what sequestration would mean for your businesses at this point?

Jeff, it is really something at this point you can't plan for because the fundamental flaw in my view of sequestration is it's just bad policy.

If people decide that there needs to be a further reduction in the defense budget, and obviously the defense community doesn't like that idea, but even if you are going to take it down, the issue is you surely would never do it in the fashion it is laid out in the sequestration law where you do a -- spread it across everything, every program, every spending item, everything gets hit by a common percent.

First of all, it would be a disaster for the government because that means every contract, every work order, everything out there gets impacted, which is going to result in a massive deluge of contract changes, request equitable adjustments, it'd just -- it would cost the government more money than they would ever save.

There is actually contracts.

You can't just go out there and arbitrarily change contracts without having ramifications.

Just from a pure administrative standpoint, you would never do that.

The other course is, if you're going to take more money out -- and I'm not betting against, by the way, that they're going to take more money out.

I think that there still could be when they work their way through, I would be very surprised with the lame duck session, but when you get into a new Congress and they actually start to figure out what they got to cut and what they're going to do about the deficit, there could still be further allocation of cuts to defense.

But I think you have to let that go work the way it normally does.

Just like the first $0.5 billion of defense is already taken where you go to the Pentagon, you go to Congress, say okay, we're going to take out this much money, and there's actually a thoughtful, rational way about what programs get hit, what programs don't get hit, and you proceed down that path.

So I think I wouldn't be very surprised if sequestration gets invoked because of inaction in our political process.

That wouldn't surprise me a whole lot at this stage of the game.

But I think once that hits, there will be some emergency sessions, and people will actually say, okay, if we're going to cut money, here is how we have to do it.

Ant the problem with planning for that is you don't know what programs they're going to go to try to take money out.

So I don't think it's going to be an across-the-board deal.

I think that's an administrative -- it's bad policy.

Administratively it's bad.

It's bad for defense.

But knowing where the cuts ultimately will come at this point would be absolute guess work, and I just don't think we can -- we're wasting our time to even try to do a plan for that.

Great.

Thank you.

Sure.

Good luck.

Thanks.

And our next question is from the line of Carter Copeland with Barclays.

Please go ahead.

Hi, good morning, guys.

Good morning.

Just a quick question on big-picture on Cessna, Scott.

I wondered if you might compare and contrast the demand environment to the summer slowdown periods we've seen in the past couple of years and whether it's any different than what we saw last year, better or worse?

And then a point of clarification with respect to the order book and the NetJets order and whether there is any portion of that that's included in the backlog.

Thanks.

In terms of macro view of Cessna, we certainly are not where we were two summers ago where when the Euro crisis first hit and froze the market.

We have not seen that level of reaction.

Frankly, even with what's going on in Europe right now, we still continue to see order flow in Europe.

Obviously, it's in -- mostly around countries that are still economically doing better than some others.

So we haven't seen that falling off a cliff where everybody just stops.

So in that regard, it's more like it was last summer, right?

We went through it, and we muddled along.

We continued to get orders.

And I think there is still demand out there, obviously, for the product.

There are still people who want to do upgrades, and they want to put new aircraft, and that's the flow that we're seeing.

And so our belief is that's why we think we're going to continue to have a solid year.

But there is still the macro overhang of it.

So at a macro level, it's certainly not like it was two summers ago when the market just absolutely stopped.

It is much more like last year, and I would hope it will continue like that.

That's what we seem to see in the demand right now.

In terms of the NetJets order, no, none of the NetJets order is into our backlog.

The process of how we're proceeding is that we will put aircraft into the backlog as we identify a specific serial number to be delivered to NetJets to fulfill their customer demand.

And obviously, with this aircraft coming to market in 2015 and just really getting into the marketing and the selling process on the NetJets side, I wouldn't expect to see those aircraft going into the backlog for some time, because again, we won't put them into the backlog until we see and assign specific serial numbers, and we'll do that on aircraft-by-aircraft basis.

We will not put that entire order in the backlog at any point in time.

It will come in on aircraft-by-aircraft basis.

Great.

Thank you for the clarification.

And one other just brief follow-up.

You mentioned the aftermarket performance at Cessna.

I wonder if you might comment on what you're seeing on that front at Bell?

Bell aftermarket performance was good, as well.

Still good growth there.

Is it similar to the mid single digit at Cessna?

Is that fair?

Yes.

Okay, great.

Thank you, gentlemen, and good quarter.

Our next question comes from the line of David Strauss with UBS.

Please go ahead.

Morning.

Morning, David.

Scott, last quarter you talked about the pricing environment being tough being a headwind last quarter.

Could you address pricing year-over-year and sequentially at Cessna?

I would say still a difficult pricing environment.

As I indicated on the call in the last quarter, we saw tougher pricing on a year-over-year basis than we would like to have seen as we're battling our way through things.

In terms of sequential, we actually saw some modest improvements.

We actually put a couple of list price increases out there in the market and pulled back on some of the allowances, and I think our sales team has done a nice job of closing a lot of orders and getting a little bit of price back.

In terms of the Cessna, you knew in your conservatism, obviously, with all the macro issues, but could you maybe talk about where you are in terms of being sold on the rest of the year relative to whatever delivery number you have baked into the revenue guidance and how that would compare to the last couple of years when you were midway through the year?

No, we're not talking about unsold positions at this point, David, but, as I've said, I think the reality of the market where we are and have been now for some time is that it's safe to assume that a lot of the aircraft are going from an order sales process that's in the three-to six-month time frame typically.

Okay.

Last one, Frank, on the pension side, will you guys benefit at all from the recent change in the pension legislation smoothing the discount rate from a funny standpoint?

I think you were looking at pretty meaningful contributions on a go forward basis.

No, it won't have a impact.

From a minimum required pension contribution, it helps us to the tune of $30 million-ish or so, so it's not a big number.

And we have been making contributions just because of our funded status at levels, as you know, well above our minimum contribution levels, and we had anticipated continuing to do that for a bit longer.

So it doesn't have really any impact on how we think about that.

Thanks a lot.

And our next question is from Cai von Rumohr with Cowen & Company.

Please go ahead.

Yes, thank you very much.

Scott, could you give us some color on the demand at Cessna both by product, by geography, and the pace going through the quarter?

Did it slow down as I would assume in the last part of the quarter, early July?

You know, Cai, we didn't see much of a slowdown.

I would say in terms of geography, both our orders and our deliveries at this stage of the game are sitting in 60/40, 60% domestic, 40% international market.

And I would say it was pretty steady through the quarter.

And by product, we have been hearing that maybe the mids and super mids are firming a little bit.

You seeing any areas stronger or weaker?

It's relatively balanced.

The XLS Plus had a very good quarter.

We continue to see strong position in the CJ4's.

There were some CJ2's, 3s, Mustangs were about flat.

So it's pretty well across the portfolio.

Okay.

And then help me understand your comment, the guidance is the same, and yet your corporate expense is way down.

And unless you're assuming your stock price surges, it looks like that is going to come in a fair bit lower than you expected, and you indicated expecting some more favorable adjustments on liquidations, so it looks like TFC is going to do better than expected even if it about breaks even for the year.

So is this really conservatism, or help us understand why that guidance didn't change.

Well, I think that if you're -- if you would accuse me of conservatism, Cai, I would say that it probably is conservative on our view of how we will do on Cessna for the balance of the year.

Got it.

Got it.

You're right that there's obviously some of the upside we've seen at TFC associated with the Golf Mortgage liquidations.

When you look at our overall guidance, that will tend to push us towards the high side of the guidance based on that number being a number that is stronger than guidance.

And I would say that is going to be true, but I still think we're going to be a little conservative here on the total year Cessna number.

Understood.

Now, you mentioned R&D is going to move up in the second half, up sequentially from where we were in the second quarter, and was the second quarter maybe not up much from the first and not up much year-to-year, so it's really the R&D profile has something to do with the numbers for the full year?

Well, we've never talked about quarterly R&D because it does fluctuate, Cai, depending on different things that are going on with different programs.

But it will -- and we always expected it to be a bit back-end loaded relative to the first half of the year.

Thank you very much.

Your next question is from Julian Mitchell with Credit Suisse.

Please go ahead.

Hi.

Thanks.

Yes, so firstly, just on Bell commercial, you have been fairly positive on that for six or nine months, and it certainly seems to be coming through in your numbers.

Could you talk a little bit about your expectations for volume delivery growth in Bell commercial over the next 12 months?

And also, what's happening on the pricing side there, given that you've had this inflection on volume?

Well, I think on the volume side at Bell, the year is playing out very much as we expected and guided, so we are going to see for the total year significant growth in terms of Bell deliveries, and I think you're seeing that in the second quarter as we had pretty strong deliveries on the commercial side.

I expect that will continue through the balance of the year.

I think we'll see particularly strong mix on the 429s and our 407s.

As I said, I think both products are doing very well in the marketplace.

And pricing has been good.

The market -- the demand is strong around the world, and so as you would expect, there has been some pricing power as well.

Okay.

Thanks.

And then just yet another question on Cessna, unfortunately.

But I just wondered how you're thinking about the business jet takeoff and landing data to the traffic data and how that affects your outlook for the second half.

So I guess the US, you had good growth for three years, and that's largely expired.

The US traffic seems to -- in Europe traffic seems to be down a little bit.

So how does that -- when you're thinking about second half or the next 12 months, the core assumption around traffic growth versus market share gains that you can get from price, how do you think about those two drivers for Cessna volumes?

We don't look at that a whole lot in terms of volume driver, Julian.

We certainly look at average deal utilizations, and there is some tie-in in terms of looking at the service business and are people using our aircraft or not using our aircraft.

And that's been pretty steady in the last know, year or so.

It went down a lot, obviously from the '07, '08 kind of numbers, but the number that we see right now in terms of the ADUs for the quarter are very consistent with what we saw last year, so people are using their aircraft, and as a result, they're coming into the service centers and they're having maintenance worked done and upgrade work done.

And so I think that that piece of utilization is something that we'd look at more around what does it drive in the service business as opposed to new aircraft sales.

On new aircraft sales side, we tend to look more on the metrics around what's available in the used market and what percentage of the fleet that's out there is available for sale, and those numbers continue to go the right direction.

We were down -- we believe our fleet now was down somewhere just above 12%, and in particular, if you look at the models that are still in production models and what's available for sale in the market of those model types, for most of our models, that is now down in the mid single digits.

Okay.

Great.

And finally, just on the industrial business, very good core growth, 11%, much better than a lot of other industrial companies this quarter.

What's the update there on the investment program and how you're thinking about the cost base?

Are you investing substantially to make sure that that growth continues, or is it largely a one off course and you think the growth will normalized from here?

A lot of the growth is driven -- if you look at our golf and turf markets, those were pretty hard hit.

Those have started to rebound a little bit.

So I think we saw good performance in the E-Z-GO business across not just golf but also the commercial and consumer markets.

We had a reasonably strong quarter with Jacobsen.

You see more people going back and having to replace mowing equipment.

The industrial tools business did well.

We had some FX challenges there, but volumes and profitability continue to be recovering in the industrial tool world.

And Caltex hung in there.

As we've said, we've seen some softness in Europe, which is probably our biggest market for that business, but that was offset by continued strength in the North American market.

And I would say probably growth is not as strong as it has been in Asia, but it is still growing in Asia in terms of the automotive market.

Great.

Thank you.

Our next question is from the line of Myles Walton with Deutsche Bank.

Please go ahead.

Thanks.

Good morning.

Good quarter.

Scott, I think you're probably going into the 2013 strat planning sessions and looking at Cessna and coupling that with the commentary about the second half economics, geopolitical uncertainty.

Are you still looking for higher production on Cessna into 2013 that you preliminarily pass along to the supply chain come September?

Well, you're right, we are in that process.

In fact, we've just completed doing that with all of the businesses, so we are developing a view, I would say, at this point in time, but I would say we are not at the point where I would start to talk about issuing 2013 guidance on the businesses.

The near-term activity, if you de-couple it to that second half event risk situation, would that still make you comfortable that you are in what you've talked about before, consistent recovery?

Maybe it's slower than previous cycles but still a recovery nonetheless?

Yes, absolutely.

I would say at a macro level, I wouldn't change the tone of our view that we will expect a steady, slow recovery in the market.

The issue, of course, is that that can have some peaks and valleys along the way, and so we always have to keep an eye out for that.

But there's certainly -- in terms of talking to customers and looking at the activity that is going on in the market, looking at demand and where it is, we don't have any reason to feel differently than that this light to mid-sized jet market will continue to make a slow, steady recovery.

And obviously, part of what we factor in is with a lot of products that we're putting out in the marketplace, we would expect -- certainly expect to see some share growth over that period as well.

So I don't think anything versus what we told you in the past is different in terms of the macro mid to long-term business.

Okay.

And then a clarification on delinquencies.

I know it wasn't a big pick up sequentially, but I think it's the first one that we've seen in the last couple of years if not longer, and I think you said it was aircraft customers.

I'm curious when is the trend going the wrong way and if that's indicative of either higher-risk customers coming into the portfolio or customers who have been in there a while starting to show weakness.

You're right, the 60-day delinquency trend was driven by a couple of sizeable aircraft accounts.

I never like to see a data point that goes in the wrong direction, but it did go into wrong direction, but I don't think that is going to be a trend.

These are customers that we know or we understand.

There is a couple of specific issues that are going on, but I don't think they're -- I don't find it personally alarming at this point.

I think it is something we'll be able to get under our control and get the delinquency heading back in the right direction.

Are these aren't necessarily customers -- or are these customers that entered the picture in the lat 24 months or customers who have been in there longer?

No, no, no.

For the most part, these are guys that have been on the book for quite some time.

Okay.

Great.

Thanks again.

Our next question is from Steve Levenson with Stifel Nicolaus.

Please go ahead.

Thanks.

Good morning, everybody.

I think all the good questions have been asked.

I just wonder if you have any commentary on the developments around Hawker Beechcraft, the price discussion and if you think the door is absolutely closed to any sort of participation by Textron.

Well, the HB process is certainly not closed to anyone at this stage in the game.

They're -- they basically have entered into a negotiation process with a -- what is effectively a stalking horse in the normal bankruptcy process.

So I don't think it is certainly technically not closed to anyone.

On the other hand, I would say the number that's out there is a number that's a pretty high number.

So we obviously, as everyone will, watch it as it goes through in a pretty public process and see how it plays out.

I guess you might like to get that valuation for Cessna.

Well, I -- we think we should.

With you there.

Okay.

Thanks very much.

Sure.

Our next question is from the line of Ron Epstein with BoA.

Please go ahead.

Hi.

Good morning.

It's [Elizabeth] in for Ron this morning.

Just a follow-up on the last question.

What implications do you think there could be for Cessna from the recent deal to sell Hawker to the Chinese with your Chinese partnership?

Well again, this is a process that I think that is still fairly early on.

We'll see how things work out.

If, in fact, the Chinese do buy Hawker, then it means Hawker is still on the market.

And we have been competing with these guys for a very long time, and we'll continue to do that.

Frankly, I think if you look at the investments that we're making in things like the Latitude and the Longitude, the things we're doing with our service network, for the reasons that we've been very successful versus Hawker Beechcraft in the last couple of years are the reasons we would continue to be successful against those products in that capability in the marketplace regardless of who happens to be the equity behind them.

So--

But what about your deal to build a new airplane with the Chinese?

Well, we're still continuing our discussions with AVIC.

I think the Chinese market is going to be a big market.

And there is going to be a lot of competition in China.

Obviously, the things that we have been trying to do with AVIC is to give us a capability in the country that we think will be attractive to customers, to help make us competitive in China, but I don't think by any means do we think we'll ever the only guy over selling in China.

Everybody sells in China today, and I think everybody will sell in China tomorrow.

We continue our discussions with AVIC to see if that's not something that gives us a competitive advantage in that marketplace.

And so from that perspective I don't see that as a change.

Okay.

Thank you.

Sure.

And we have a follow-up question from George Shapiro with Shapiro Research.

Please go ahead.

Yes, just a couple of probably more nitty things.

But was there any LIFO benefit at Cessna in this quarter like you had in last year's second quarter?

No.

Okay.

And there was a slight sequential decline in the margin at Bell even though revenues were higher, and maybe it's too small to worry about, but it went from 14.6 to 14.4.

Any reason for it?

Because commercial was better.

Well, commercial, obviously, the commercial mix is usually somewhat dilutive in our margin.

We did have -- when I talk commercial, I'm talking about OE, so when you see more unit volumes, things like 429s and 407s, in terms of the original equipment sale, those tend to have some dilution.

But you're right, when you get into tenths of percents, I wish I was that good, George.

That's what I figured.

Okay.

Thanks anyway.

All of our businesses, as we've seen, have a fair amount of quarterly volatility to them.

There's lots of ins and outs.

Okay.

Thanks again.

And we do have another follow-up from Carter Copeland with Barclays.

Please go ahead.

Yes, just one quick one back to the Hawker Beechcraft process.

Obviously, the defense piece of that portfolio, the trainer business, is still out there.

I wondered if you might comment on whether that's something you would still be interested in, or any comment would be welcome.

Carter, I think we have the same general view.

These are assets in which we have an interest.

But again, it would have to be at a value that we felt was appropriate.

In general, I would say this situation with HB, we always expressed an interest.

I think some of assets of the company are interesting and would be a good fit in our Company and that we could do the right thing for their existing customers and our customers.

It would all work.

But at the same time, whether it is the overall HB situation or the defense piece, these are things that I think, given the investments we are making, given the position of where Cessna is today, I feel great about what our team is doing.

So we don't have to do something here.

If it is the right value and it will be accretive for our business, then absolutely we're interested.

But if it's not something that is a good financial deal and it's not a good investment for our shareholders, then we'll pass on these things.

Is it your perception that that piece will have a sufficient number of interested parties?

It's a good question.

I don't know.

You can imagine a couple of people that would be interested in it, but I think we'll have to wait to see how that plays out.

Great.

Thanks, Scott.

Sure.

We'll go to the line of Noah Poponak with Goldman-Sachs for a follow-up.

Please go ahead.

I just had one follow-up on Systems.

You've obviously put up a number of nice wins there that start to flow through beyond 2012, and right now we're seeing the business show negative growth, and in the beyond-2012 period, you probably still have a number of headwinds.

I know you don't want to talk specifics beyond 2012 yet, so I wonder if you could just say, with everything you've won and everything you know about the legacy business, do you think Systems is up or down in 2013?

Well, again, I think it would be premature to get into 2013 guidance at this stage of the game.

The only thing I could really talk to is around 2012, and we are behind a little bit where we would like to be on the revenue side of things for '12, but I think with some of the wins we have and some of the other dynamics in the business, we still think we'll probably get back to about flattish for the year.

And can you comment on just directionally positive or negative next year, or too early to do that?

I think it is too early to do that.

A lot of these programs we talked about on Ship-to-Shore is a relatively small impact to this year.

It's a little bit bigger impact to next year, but again, primarily driven around research and development.

TAPV is a fabulous program win, but that really is production volumes that are later on.

We're already where we need to be in terms of maintaining productions as we go through next year.

So, the TCDL win, obviously, is something that will help a little bit next year.

So I don't think you're going to see a big swing one way or the other in 2013.

Got it.

Okay.

Thank you.

All right.

Tricia, I think we have one more follow-up, and then we'll wrap up.

Yes, we do.

We'll go to the line of Jason Gursky with Citi.

Please go ahead.

Thanks for taking the call.

Just on -- one last question here on Systems, and I apologize if you already answered this question, but I didn't quite hear the details.

On the outlook for the rest of the year, to get back to roughly flat, can you just give us a little bit of detail, Scott, on what needs to happen in the back half of this year?

What programs specifically do you think are going to see an acceleration in the revenue outlook for the back half of the year?

Well, we had a couple of programs that drove some of the -- caused us to be under where we are today, primarily driven around some FMS transactions where it was a matter of getting through definitization of contracts and getting things signed, which I believe have happened now.

So I think we will be able to firm up more in the back half of the year.

I guess I'd rather not go into a specific contract-by-contract basis.

There is a lot of contracts going on, right?

We have talked about some of the larger and more strategic wins, but when you look at things that are going on, options that are being exercised in our armored security vehicle business, upgrades that are going on in the UAV business, some FMS sales in our precision munitions business, these are all sort of full of business, if you will, but many of those things have been just difficult to get through the whole process and get definitized contracts done.

So the things that we knew we were going to have, there was no question about was the program going to happen or be funded or not.

It was just a matter of getting under contract, getting definitized, and getting everything lined up so that we can get about with doing the production and test and sell-off.

Okay.

The slowdown in that is what caused the first half to be a little softer.

But I think we'll recover that in the back half.

Okay.

And then your comment on pricing at Cessna and some of the price increases, is that fairly broad based at this point, or is that kind of model specific?

It was pretty broad based.

The price increases were on a couple of specific models, but incrementally, on a quarter-over-quarter basis, we saw some pricing improvements in virtually all models.

I think there's only one model I can think of where the pricing was sort of flattish versus before.

But on a quarter-over-quarter, virtually all the models were up a little bit in price.

Okay.

Great.

Thank you very much, guys.

Okay.

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