達信公司 (TXT) 2012 Q4 法說會逐字稿

Ladies and gentlemen we'd like to thank you for standing by.

Welcome to the Textron fourth quarter earnings teleconference 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 call will be recorded.

I would now like to turn the conference over to your host and your facilitator, as well as your Vice President of Investor Relations, Mr. Doug Wilburne.

Please go ahead sir.

Thank you Steven, and good morning everyone.

Before we begin I would 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 fourth quarter results starting with slide number 3. Revenues in the quarter were $3.4 billion, up 3.3% from a year ago.

Income from continuing operations was $0.50 per share compared to a loss of $0.06 in last year's fourth quarter which included net charges of $0.55 per share.

This year's EPS included a previously disclosed $0.06 after tax charge at Cessna related to an unfavorable business arbitration award.

Also this year's fourth quarter per share results are based on an average share count of 291.6 million shares which reflected the repurchase of 11.1 million shares made over the course of the quarter under our 2007 Board authorization.

Moving to cash flow, fourth quarter manufacturing cash flow before pension contributions was $625 million bringing our full year manufacturing cash flow before pension contributions to $793 million.

Full year pension contributions were $405 million, which reflected an additional contribution of $224 million made during the fourth quarter.

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

Thanks Doug.

Good morning everybody.

Despite weakness in our automotive and business markets we grew maneuvering revenues in the quarter as a result of strong military and commercial at Bell along with increased deliveries at Textron Systems, E-Z-GO and Jacobson.

Operationally, results were excellent at Bell, in line with our expectations elsewhere.

Obviously, we had a couple disappointments in the quarter with respect to the arbitration charge at Cessna, and another issue that emerged, our fee-for-service UAS program at Systems.

While we've made good progress with the training and interior operational deficiencies we discussed on our third quarter call we have experienced some aircraft engine performance issues in the fourth quarter which resulted in a pretax charge of $19 million.

We believe we've identified the underlying causes that are affecting engine performance and have committed the resources necessary to address these issues.

Looking forward with these charges we've taken we now assume both of these programs in ISR services will generate zero profit through 2013.

Positive news at Systems in the quarter was that we had better overall delivery performance resulting in record quarterly revenues and significant deliveries of Shadow retrofit units and Sensor Fuzed Weapons.

Therefore, as we look to 2013 we see a return to top line growth and a significant improvement in margins led by growth in UAS revenues primarily from delivery of TCDL systems.

Shifting to Industrial, as expected we saw volumes soften in the fourth quarter at Caltex as a result of both European and Chinese automotive markets.

Greenlee was essentially flat while E-Z-GO and Jacobsen both saw good growth reflecting new product introductions and ongoing efforts to expand our distribution channels to customers.

For the year we posted a 10 basis point improvement in margins at Industrial on 4% revenue growth.

Looking to 2013, with continuing uncertainty in European markets we're taking a conservative view and expect a slight increase in revenue and margins.

Moving to our Finance segment, the fourth quarter capped a four year effort to liquidate our non-captive Finance business.

During the quarter we reduced our total finance receivables by another $65 million, bringing our 2012 liquidations to $820 million, and our four year total to $8.7 billion.

That leaves only $370 million in non-captive receivables which we will continue to reduce opportunistically.

This is the last call in which we will plan to highlight receivable liquidations as the size of our non-captive portfolio is now essentially immaterial.

Moving now to Cessna.

With the US presidential election and fiscal uncertainty intensifying during the quarter we saw an usually slow business jet demand resulting in 53 jet deliveries down from last year's 67.

In total for the year we delivered 181 jets versus 183 last year, again reflecting that economic and political volatility that developed during the second half of the year.

Looking towards 2013 we're planning on deliveries to be modestly higher than 2012 although we do expect a backend loaded profile.

This is essentially the result of our new model rollout plan this year with new Sovereign first delivering in the third quarter and the M2 and New 10 in the fourth quarter.

We also believe we'll see degree of uncertainty in the jet market as Washington works through its fiscal challenges but we believe demand will solidify as those uncertainties are reduced.

On the aftermarket front we acquired two European service centers, one in Zurich, Switzerland, and one in Dusseldorf, Germany, bringing our global owned service center footprint to 15 facilities.

We also signed two joint venture agreements in the quarter with our Chinese partners for final assembly and sales activity in China for the Caravan and the XLS Plus.

As we continue to believe that China represents a significant growth market for our Cessna product family.

Longer term, we're still expecting overall jet growth to develop as global economies gain momentum, emerging markets develop further, and our new products roll into the market.

Wrapping up our operations review with Bell.

Execution across programs continue to be outstanding and was reflected in strong margins in the quarter.

We delivered 9 V-22s and 6 H-1s and 65 commercial helicopters versus 7 V-22s 6 H-1s and 62 commercial helicopters in last year's fourth quarter.

For the full year we delivered 39 V-22s and 24 H-1s, compared to 34 and 25 last year.

During the quarter we received an undefinitized V-22 contract for lot 17 and long lead funding for lot 18 which we're hopeful will lead to the signing of a second year multi-year procurement contract once the DOD receives authorization to approve new multi-year contracts.

We also continue to actively pursue FMS opportunities for both the V-22 and the H-1.

On the commercial front for the full year we delivered 188 helicopters, up 50% from last year's 125 units, reflecting our investment in new products and increased focus on the commercial helicopter market.

For example, we just received an order for 5 429 helicopters from the Turkish Forestry Department which follows on the Turkish order placed in December 2001 for 15 429s for their national police force.

The 429 also continues to receive regulatory approvals for the additional 500 pounds of lift capability bringing total certification to 14 countries including Canada, Brazil, China and most recently, Chile.

The new 407GX is also selling very well with a recent order for 20 units from Air Methods.

Demand is also solid for our 412VP with contracts recently signed with the Colombian Navy and oil production transport countries in Mexico and Egypt.

Looking to 2013, based on our commercial backlog and an active order pipeline we expect a solid increase in commercial deliveries once again.

In summary despite continuing volatility in the global economic environment I think we had a solid year.

At our business units, Textron Systems had a number of important program wins including the Canadian TAPV contract, two UAS service contracts, and the navy ship to shore development program.

At Industrial last year's 4% top line growth reflected our continuing investment in new products and distribution.

Cessna improved margins, expanded its service footprint with new service centers, initiated a China growth strategy, announced the new Citation Sovereign and expanded their product line family with the new long range Citation Longitude.

Bell achieved record full year performance, announced the new 525 Relentless super medium helicopter, won the number one customer service rating for the 18th year in a row, and opened a new joint service facility with Cessna in Singapore.

At the Textron level we continue to strengthen our balance sheet as we liquidated most of the remaining portion of our non-captive portfolio while generating nearly $800 million in cash from our manufacturing operations.

Consequently we reduced our consolidated net debt by $974 million to $2.6 billion even after making discretionary contributions into our pension plan.

We also returned $272 million to investors through repurchase of shares during the fourth quarter.

Yesterday, our Board approved a new 25 million share repurchase authorization under which we intend to purchase shares to offset the impact of dilution from stock based compensation and benefit plans as well as for opportunistic capital management purposes.

To wrap up with our 2013 guidance we're projecting an overall revenue increase of about 6%.

And EPS from continuing operation in the range of $2.10 to $2.30.

Manufacturing cash flow before pension contributions is expected to be $500 million to $550 million reflecting a significant increase in expected cash income taxes.

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

Thank you Scott and good morning everyone.

Manufacturing revenue was up $85 million in the quarter, generating an increase in manufacturing segment profit of $11 million.

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

At Cessna revenues were $901 million in the fourth quarter, a decrease of $110 million on a year over year basis reflecting a 21% decline in new jet deliveries which more than offset a 12% increase in aftermarket revenues.

We posted an operating profit of $23 million down $37 million from the fourth quarter of 2011 reflecting the $27.4 million pretax arbitration charge and lower deliveries.

At Bell revenues were up $139 million primarily due to higher volumes.

Segment profit increased $10 million on the higher volume and mix.

At Textron Systems revenues increased $58 million primarily due to higher UAS and SFW volumes partially offset by lower ASP deliveries.

Segment profit increased $44 million reflecting charges of $60 million in last year's fourth quarter and the higher volumes this year which were partially offset by this year's $19 million charge.

Industrial revenues were essentially flat while segment profits decreased $6 million due to cost inflation in excess of price increases.

Moving to the finance segment, credit quality continued to improve with 60 day delinquency of $90 million, $24 million lower than at the end of last quarter.

Accrual accounts were $143 million, down slightly from $145 million at the end of the third quarter.

The Finance segment reported a profit of $2 million which reflects earnings in the captive business and a break even results in the non-captive portfolio.

Moving to corporate items, corporate expenses were $43 million, up from the $39 million last year, primarily due to the impact that higher share price had on compensation expense.

Interest expense was $38 million, up $11 million from a year ago primarily as a result of $7 million in interest income booked in last year's fourth quarter associated with the collection on an asset sale.

Our tax rate of 27% benefited from the impact of foreign taxes.

The 2012 results do not include the benefit of the recently extended R&D tax credit as that will be recorded in the first quarter of 2013.

Turning now to our 2013 guidance, beginning with pension expense and looking at slide 9. We're reducing our discount rate assumption which results in an increase of just over $50 million in 2013 pension costs.

Turning to slide 10 we're planning an increase to net increase R&D expense or spending to approximately $515 million or 4% of sales.

We also plan to increase our CapEx this year to about $550 million compared to $480 million last year.

These investments support our new product development and cost improvement strategies.

Now flipping to slide 11, here is a summary of 2013 segment guidance.

We're expecting about 9% revenue growth at Cessna reflecting growth in jets and aftermarket with segment margins in the 4% range.

At Bell we expect overall revenues to grow approximately 5% reflecting a modest increase in our military revenues and good growth on the commercial side of the business.

We're expecting margin head winds at Bell this year primarily due to lower military margins as well as slightly higher spending on R&D and S&A resulting in a margin range outlook of 13% to 14%.

At Systems we're looking for top line growth of about 9% led by growth in the UAS revenues with segment margins in the range of 9% to 10%.

As Scott mentioned, we're expecting revenues and margins to be up slightly at Industrial, reflecting continued softness in Europe offset by growth in other regions.

At Finance we expect the captive business will generate profit in the range of $10 million to $15 million in 2013 while our non-captive portfolio is expected to approximately break even.

Moving below the segment line and looking at slide 12 we're projecting about $160 million of corporate expense which primarily reflects the impact of an assumed higher share price.

Our interest expense estimate at about $115 million is down primarily as a result of scheduled debt retirements, most notably our convertible notes which mature in May.

We're expecting a decrease in our tax rate to about 29% primarily reflecting the impact of the US R&D tax credit extension.

We're estimating the credit will provide a total benefit of approximately $22 million in 2013.

Looking at slide 13, we're assuming an average 2013 share count of about 281 million shares, which reflects the share buy backs we made during the fourth quarter, the expected retirement of our convertible bonds and associated collar on May 1st and share repurchases in 2013 sufficient to offset dilution from share based compensation and benefit programs.

With respect to our EPS guidance take a look at slide 14 which explains the $0.23 change from our 2012 results of $1.97 to the $2.20 midpoint of our 2013 guidance range.

First, there is a headwind of $0.12 due to lower earnings at finance.

The increase in pension costs is $0.11 per share.

R&D and depreciation represents a headwind of $0.05.

Lower interest expense provides a pickup of $0.06.

And projected tax rate provides a benefit of $0.07.

And the lower share count adds about $0.10.

Therefore we expect our underlying manufacturing business to generate an approximate $0.28 increase in EPS.

That concludes our prepared remarks.

Steven, we can open the line for questions.

(Operator Instructions)

Pete Skibitski, Drexel Hamilton.

Good morning guys.

A few questions I guess on Cessna.

Scott, are you thinking that for the first half of next year maybe deliveries could be down year-over-year just because of what you mentioned, the lateness of the new model deliveries?

I do.

Peter if you think about the year's being up slightly, and obviously last year the first half of the year was probably stronger than normal.

The second half of the year was weaker than normal.

I would expect more or less the inverse of that this year in part driven by the fact that all those the new models are second half loaded.

Got you, okay.

Can you give us a sense, I know trade-ins are becoming such a bigger part of the business.

Can you give us a sense of the revenue of trade-ins in 2012 and maybe how you see that going forward?

I don't know if I'll do the exact number, but yes, trade-in sales were up on the, particularly on the quarter, and I think generally they will continue to be up.

We have seen a fair bit of trade-in activity Peter.

A lot of that is driven by people that are placing orders and buying aircraft on relatively short cycle and they do need to monetize their existing aircraft for those folks that have aircraft.

So we have been taking a higher ratio in terms of number of trades than we normally would.

The good news is the after market used aircraft market is doing okay.

It's moving pretty well.

Most aircraft that we're taking in we're turning them over in sort of that one to six month time frame and I would expect to continue to see that.

There will be higher turn of used aircraft going through our book, but I think that again, the market is doing fine and we are able to turn those aircraft around.

Okay.

Very good.

In terms of your guidance, next year at Cessna, you talked about modest unit delivery increases but it looks like about a 10% revenue increase.

Is that just continued aftermarket strength as well as maybe a little bit of a mix shift to the higher price point models?

It is.

I think you're going to see sort of low double-digit on the aftermarket side and slight gains in both the new aircraft as well as probably an increase, sort of reasonably strong increase in the used aircraft market.

Got you.

Thanks very much guys.

Sure.

Joe Nadol, JPMorgan.

Thanks, good morning.

The first question is on the cash flow outlook.

Scott you noted that the higher cash taxes are taking a big bite.

Could you just give a little bit more context as to is this the year we get to become a full taxpayer on a cash basis and any other items that are, that we should think about in terms of the bridge from 2012 to 2013 cash flow?

That's really the primary driver so you're right.

I mean, I think that we certainly feel we'll be paying our fair share this year in cash taxes, and that's really been just timing associated with other things over the last few years.

We have not paid as much cash tax.

That certainly catches up with us this year.

We were talking about used aircraft, I do think that we will see some positive cash flow as we work some of the used aircraft balances down.

But other than that it should be a relatively straight conversion into cash.

Obviously, as Frank said, we will have some higher CapEx spending this year, and again, that's primarily driven by a number of new product programs that are going on, particularly at Bell and Cessna, and as a result of some facilities capital that we're spending with Bell as we consolidate what was multiple facilities in the Fort Worth area into principally one location.

Okay.

You noted that your new models, your three new models or one new model with two updates are important to your forecast this year.

Can you speak to how they're tracking, particularly the M-2?

I was thinking that might be delivered in Q3.

It sounds like Q4.

So is that flipping or is everything on track there?

First of all the programs are growing extremely well.

Flight test activity is underway with all the aircraft.

We have not run into any issues so we're pleased with the performance and how they're doing.

Of course you do have to go through the FAA certification process.

That seems to be tracking reasonably well at this point.

The M-2 is one that we'd like to get some third quarter deliveries but I think the way the certification date is going to fall that's going to be difficult to do.

I think that most if not all will be in the fourth quarter.

Again, it's, the program and the product has been well received, and is not having any impact in terms of our expectations for the number of units that will ship in the 2013.

Okay.

And then just finally, could you just expound a little bit upon the Systems and the UAS issue and I guess specifically is this a continuation of what we saw last quarter or are these discreet and new issues that popped up?

That's a good question.

The issues we initially ran into on the services contract were with respect to our ability to get people trained to the appropriate level to be ready for the increase, basically just the ramp of the program in terms of people going in theater and operating the aircraft.

We put a very robust training process in place, and we have not seen any continuation of that.

In fact the off tempo has gone up significantly, both at -- and the UAS program as well as our ISR program, for both customers.

And the good news is, on the second program on the ISR services side, we didn't see any training related issues because we had learned from the initial launch on the MUAS program, the training programs have been effective and worked and as a result we seem to be in good shape even as we've added a significant number of resources ramping those programs up.

What's new unfortunately is that as we started to fly on the first services contract, we have run into what I believe is a number of different issues associated with the propulsion system on that aircraft, and so we were losing more aircraft than we had in our plan.

We have engaged our folks from Lycoming, obviously who are experts.

We've been doing a lot of testing and evaluation.

We believe we understand the critical issues that were resulting in the early failures of these propulsion systems.

We have been able to implement a number of fixes already.

The good news is that we are seeing improved performance in the field in terms of the MUAS program.

We are not seeing those problems on our -- with our second customer, again, as a result of things that we have learned on the first program.

But at this stage of the game, we don't have enough hours really logged on the second program, so when we think about estimating our cost to complete, we really have to look at the total of the combined programs, so obviously we're disappointed.

We did not anticipate having these kind of problems associated with the engines.

We've taken a significant charge as a result of that, but I do think we're seeing progress in terms of our ability to understand exactly what were those problems and put fixes in place that appear to be having an impact in the field.

Thank you.

Julian Mitchell, Credit Suisse.

Hi, thanks, yes, just on your Cessna sort of outlook, if I look at the guidance, I mean the incremental margins in Cessna have been running at around about 19% to sort of 20% in the last two years.

I guess your guidance implies it stays around that level in 2013.

I just wondered if you felt there may be some more volume leverage given you're in the fairly early part of the recovery, and whether that incremental margin is conservative or is it the fact that you think that earnings will be extremely weak in the first half and that's why the incremental margins for the year as a whole are only going to be maybe 18%, 19% on your guidance.

I think what you're probably seeing is there is an increase next year in used aircraft as part of that revenue, and sort of by design the way we typically bring those aircraft in and how we book them those are typically sales at zero margin.

So that obviously has a dilutive impact on the overall margin rate.

That's principally what guides that number to sort of net out around that 20%, 19% kind of range.

Okay.

Thanks.

And what sort of pricing trend in Cessna does the guidance embed?

Flat.

Okay.

Great and then lastly just on the Systems business, if we think about the guide for '13, you're implying a sort of 30% or so incremental margin.

How much of that is just coming from normalization following the charges in '12 and how much are you assuming sort of underlying business gets a little bit better on margins.

I think the way to think about the business is we had guided last year that '12 margins would have been in sort of that 9.5% to 10.5% kind of a range.

If you take out these charges unfortunately with our Services contract, that's really where we were, and I think if you look at next year, the reason we guide more in that 9% to 10% range is because we have the revenue associated with those programs basically at zero margins.

So I think that the margin performance on the balance of the business are -- is where we expected it to be and would have been consistent with this year's guidance.

The reason you see a slight detriment to that in terms of our '13 guide is because you do have the revenue associated with those Services contracts in they are at zero.

Great.

Thank you.

Sure.

Noah Poponak, Goldman Sachs.

Hi, good morning everybody.

Scott, the Cessna backlog is down again sequentially.

I know you guys have discussed how Cessna has shifted from a backlog business to a shorter cycle business, but presumably this backlog can't go to zero, and it become just an intra-quarter sales business, so how much lower can backlog go before you have to lower production.

And you sort of alluded to it in your prepared remarks, but what's embedded in your 2013 production in terms of how you think orders will compare to production throughout the year?

Well, I mean, look, Noah, we would certainly like to see some backlog start to build obviously as we introduce and get closer to the launches of things like Latitude and Longitude we would expect to see some build in that area.

We announced the new Sovereign relatively late in the year obviously and not in a great environment in terms of what was going on in the economy, but I would expect to see us start to build some book of the new Sovereigns.

But the bottom line is I don't think people should be terribly surprised.

I mean the fourth quarter, frankly, the second half of the year was not particularly strong in the business jet market.

That being said there's no reason to believe that's not going to normalize and we're going to get back to where we felt in the beginning part of 2012.

With respect to production rates, again, we look at this on a very regular basis, and anticipate what the order flow is going to look like based on what's going on with customer activity, and that is what is setting our production schedules as opposed to looking at backlog.

This is a classic example.

If you're looking at 2013, we're guiding to what we believe will be a moderate increase in the number of jets.

Obviously, that's based on what we see going on in the market, what our anticipation is in terms of order flow.

It takes into consideration, Noah, as we said production rates, how many aircraft went from '12 to '13.

As you know we've been trying to make sure that we're forecasting this very accurately.

There's no question that we would have expected higher sales in both the third and fourth quarter than what we actually saw and we've adjusted our production rates in 2013 accordingly.

We still believe if you look at the market, you see what's going on with customer activity, where we believe the cycle is that we still think it's appropriate to build towards a modest increase in deliveries in 2013.

Okay.

So that's helpful.

And can I interpret that to mean we should expect Cessna backlog to continue to decline in the first half and then potentially start to build in the second half given everything you just said?

Noah, that's -- I, we're guessing at this, obviously.

Right.

So yes, I think as we get closer to making deliveries and having the availability of the new Sovereigns that I would expect to see some order book bill for that product.

Obviously we have a limited number of Sovereigns to sell here in the next few months because we've stopped production of the Sovereigns, right.

There's only a few aircraft that are left frankly, so as we start to talk to customers about Sovereigns they're all going to be moving into aircraft that are not going to be available for delivery until third quarter.

Okay.

And if I can ask one more.

If I'm looking at your slide 11, the segment revenue and margin outlook, if you had to identify the one number on here that has the most upside potential and the one number on here you're the most concerned with to the downside, what would those be?

Well, yes, I'm always most concerned about Cessna just because of the sensitivity around what's going on in the market.

We don't have a whole lot of control over what the market's doing.

And as you noted, the backlog it's not something where you can just ride the backlog.

It does depend on orders and conversion to sales.

So that's I would say probably the highest risk item.

Look, as you guys know we have over the last few years tended to over perform at Bell.

I'm sure people will think that there's an over-performance opportunity at Bell.

I think we can probably push Bell towards the top of the range.

We are going to have -- we're stopping the ramp here right, so the ramp on the V-22s and the H-1s is kind of coming to its conclusion so I don't see a lot of leverage on increased volume.

And we are seeing continued growth on the commercial side of the business, and how that mix plays out will largely impact I think what opportunity we would have to outperform on the Bell side.

Great.

Thanks very much.

Mr. Jeff Sprague, Vertical Research.

Thank you.

Good morning gentlemen.

I was wondering if we could just delve a little further into Cessna margins in the quarter.

Was there any particular unusual items with used aircraft gains or other adjustments, or was that a pretty good representation of what was going on just operationally in the business?

I think it's pretty representative of what was going on operationally in the business.

There was a little bit higher sales in terms of used aircraft on a year-over-year basis, but not a huge number, and obviously the thing that really impacted us the most Jeff was arbitration settlement at $27 million.

Right, yes.

So you put that back in there, I think what the team has done in a, frankly, as I said, obviously as I said we had lower revenue, lower new jet deliveries than we would have expected, and I think what you're seeing is the team's doing a nice job on costs.

They're doing a nice job on efficiencies within the business, and we moved some volume through there.

I think the guys are ready to make it a much more profitable business.

That's certainly my point.

I mean revenues are down $200 million and you have a high mix of Mustangs and basically you held margins flat year-over-year, plus or minus a few basis points.

Is there something to read into the Mustang strength?

If you look at the historical relationship between business jets and profits it has broken down or the -- certainly the lead lag has extended relative to prior cycles.

Is there something going on to read into Mustangs being actually reasonably decent and maybe strong here in terms of just the lower end of the market actually firming up?

Jeff it's difficult to say.

I mean, I really -- to be honest with you as we go from quarter to quarter, it seems we see moments in time where the lower end of the market, be it Mustangs or CJs seems like there's more inquiry and more demand and then we have quarters where it seems to be more on the Sovereign and the XLS side.

I think the market is still a little bit skittish.

I don't know that I would look at one or the other.

It really does seem to swing as we go through the year.

It's peculiar that we seem to see spikes in interest in different sizes, different classes of aircraft.

But I can't say that I've been able to figure out how to correlate that to anything.

And then just on kind of the whole production question, back to that, you finished the year strong on cash flow.

It does look like inventory did not decline as much sequentially as it typically does.

Is there a dozen or so white tails or maybe they're green tails.

Maybe they're in whip or something, but is there a little bit of backup in the system to think about as we move into the first quarter?

Yes, there is.

Without a doubt.

We would have expected more fourth quarter sales at Cessna and those aircraft, which you know, really are serving the green tail.

Obviously as we are working around customers we focus on completion center activity around the demand that is there, but there's no question there's more inventory tied up in that latter stages of whip and going into the completion center than we would have expected.

We always have had these discussions around the fact that we are building to a forecast, and that's what we're going to continue to do.

We've generally speaking been about where we expected.

There's no doubt we were light in terms of sales activity in the fourth quarter.

But again, it does take a bit of a hit on the inventory side.

But these are perfectly good aircraft, and obviously we're selling them as we speak.

It's more of an issue of looking forward and adjusting what we need to do in terms of 2013 production to accommodate the fact that we did have more whip that rolled from '12 into '13.

And just a quick one for Frank, if you have the number.

Where did you end up on your final pension funded status for the year?

Yes, we're at a deficit of about $1.3 billion, so the obligation is about $7 billion and the assets at $5.7 or so.

Okay.

Thank you.

Jason Gursky, Citi.

Yes, good morning.

Scott, you mentioned that the pricing assumption for this year at Cessna is flat.

Can you let us know where that represents an improvement relative to what you saw in all of 2012 and particularly the fourth quarter?

I'd say that price has been relatively flat.

We've seen some models better than others.

I would say in the fourth quarter we certainly had some opportunities to sell some aircraft that would have reflected some significant downward pricing.

People are trying to play that game, and I think our decision was we're going to walk away from some of that.

So part of the behavior here in terms of pricing I think does have to get out of trying to move aircraft and that's behavior we're trying to cease so there's no question there were a few aircraft that could have resulted in negative pricing in the quarter that we're just not going to do.

So I'd say generally speaking it has been flattish, and as we said earlier that's kind of how we're thinking about it in terms of how we guide into next year.

Jason the math on this is a little bit not straightforward because we've got the new Sovereign coming in and the M2 so how you kind of look at that versus last year becomes definitional.

We'll expect better pricing on those two relative to what's been happening generically otherwise.

Yes, I agree.

No, it is helpful to look at it on an apples-to-apples basis, I hear you.

And then Frank in your prepared remarks or maybe it was in response to a question you suggested that there were some cost inflation in the Industrial division that hurt margins on a year on year basis.

Do you have any numbers to back that up or that you could provide to us?

Then can you describe the types of things that you're doing to help offset any of those types of head winds?

Yes, I mean it was really year-over-year on a quarterly basis, and what we typically do see some kind of inflationary headwind relative to price, particularly at the Caltex business and we look to offset that with performance.

So that can kind of jump around quarter to quarter.

We also under our Caltex contracts recover some elements of cost inflation but there can be a lag to doing that.

So we do get some quarterly fluctuation in that, so we just had some fourth quarter fluctuation.

Generally between kind of performance and price we're able to offset the inflation and that's what you'd see if you looked at the full year results for Industrial.

Okay, that's helpful.

Net for the quarter was between $6 million and $7 million on that.

Yes, it was not a big number.

Okay.

Great thank you guys.

Robert Stallard, Royal Bank of Canada.

Good morning.

Scott, on the Cessna front you mentioned that you'd been getting things done on the used market.

I was wondering if you've been seeing any improvement over the last three months in the used pricing or the used fleet that's out there?

Yes, we have seen some better deals on pricing in the used market.

I think that that just in terms of publicly available data that's out there I think would corroborate that people are seeing a little bit of an uptick in the used aircraft market.

It's not an overwhelming.

Yes.

And what about the fleet for sale?

Has that changed at all?

It's continuing to marginally drop.

Not a huge change though.

It's around 12%.

We continue to see very good turnover.

As I said earlier most of the aircraft that we're bringing in in a one to six month cycle we're moving them back out.

So from our perspective obviously the rate of turn to move these things is what's most important because we are -- we're basically providing a service for our customer to monetize that aircraft, to allow them to get into new aircraft and then we want to move that aircraft on.

Right.

And then at Bell you mentioned about V-22 you've had some success in signing up further lots but it looks like the multi-year has slipped out.

If the sequester kicks in, does that impact the ability of the Marine Corps to sign up to this multi-year and at what point would you start to get concerned if it doesn't get signed.

The issue with the multi-year is that as long as we're operating under a CR they do not have authority to sign multi-year contracts.

There was actually an attempt to put that in and make an exemption so they could do multi-years, and that did not go through.

They have no authority to sign any multi-year contracts, be it our programs or other programs.

It really has to do with getting legislation passed that actually gives them a budget and gives them budget authority to do multi-year contracts.

In terms of your timing if we were still here in the middle of the year, would you start to have problems with long lead items?

No, what they've done is they've gone ahead and awarded an undefinitized contract for lot 17 which would be the first lot of the next multi-year as well as the long lead material procurement for lot 18 which would be the second year of the multi-year.

So because they do have authority under the CR to award individual contracts on a year by year basis they are continuing to do that.

So what you're seeing with the award of lot 17 and the award of long lead material under lot 18 is on schedule and gives us the ability to deliver to what the multi-year plan would be but just because of their contracting authority they can only do it on a year by year basis.

Right.

And if the terms are not comparable to what you've got on your current multi-year?

Well, there was a price negotiation that was undertaken and has concluded with respect to the next multi-year.

Certainly the margins as part of that negotiation have been reduced as you would expect normally happens when you've driven a lot of productivity and you end up with another contract.

The issue of course is with a multi-year deal now it's incumbent upon us to try to figure out how to get those margins back to where they were.

Okay.

Thanks very much.

Sure.

George Shapiro, Shapiro Research.

Good morning.

Scott I wanted to, at Bell the guidance to 13% or 14% margins where you almost did 15% in '12 and you're one year closer to the end of the current multi-year with the V-22, you'd think you'd get a margin pickup.

Are you being conservative or is the mix between commercial going to be that much higher that you're figuring there's a lower margin?

And if you could just go through what was your commercial book to bill in '12 and kind of what are you looking for in '13?

Well, on the military side in terms of deliveries George it's going to be relatively flat on the V-22 and H-1 front and it is increasing.

Again we think we'll see another year of solid growth in terms of increases in the number of commercial deliveries.

Also as I said as we increase our R&D spending and we stop having the leverage on the military side of increasing those numbers, our costs are somewhat higher in terms of what's embedded into overhead rates and therefore that is putting some pressure even on the military margin rates.

On a year-over-year basis.

Okay.

And then one on Textron Systems, I mean where's the growth actually coming from?

I mean it looks like your guidance a little over 9% up year-over-year in a military business that most people would be down 5% on, on average.

And the margins there seemed a little aggressive to me given that the growth is probably coming from the TAPV, some of the zero low to zero margin programs.

I'm just wondering where you're getting the profit guidance there?

Well, we expect to see increased deliveries in a number of areas in our UAV business, in our -- I would expect to see some increased revenue in our Sensor Fuzed Weapon business.

The TAPV and ship to shore, which are of course in the early stages and the development phases, do not contribute a lot of revenue in terms of deliveries in 2013, so it's really the core parts of the SFW and the UAV business that we expect to see driving revenue growth.

And then thanks, and then just one on Cessna.

Did you see any difference in the bookings after the election versus prior to the election or in January?

Have you seen any difference where they did not change the depreciation rule so there wasn't any adverse impact on general aviation.

You know, George unfortunately we were hoping to a see a bit of an uptick after the election got behind us.

I would say that didn't happen and from our perspective and certainly talking to our customers, all the stuff that was going on with the so-called fiscal cliff, most people chose to sort of wait that out.

And so they did.

So the normal, I mean, frankly the number of customers that we had sort of in the discussion phase, all looked very normal.

The amount of activity going on was all very normal but the mess that happened as we went through December, November to December just led people to say they'd stand back.

We have seen deliveries, we have seen orders obviously here as we've gone into the beginning of the year.

I'd say we probably have had more order activity than we're used to seeing right at the beginning of January but I would say that's probably a result of people waiting out to see what was going to happen.

Remember they didn't come to a conclusion and decide at least, what little they were going to do on the fiscal cliff until beginning of January, so that clearly was a problem.

Okay.

But the fact that the tax laws were effectively not changed for general aviation, did that provide a little bit of a trigger here you think in terms of your comment that you're seeing a little better order activity here in early part of January?

You know, George I always think the bonus depreciation is sort of beneficial but on the fringe.

It's not going to cause somebody to buy an aircraft or to upgrade their aircraft.

You've always been looking at a five-year depreciation schedule here.

So whether you're doing 20% a year over a five-year period or whether you get half in year one, it's not a huge issue.

So if people have room in tax, we've seen that drive their behavior.

As you know, we always tend to see a stronger fourth quarter because people have always wanted to get that first year depreciation in the current tax year.

That's always driven some cyclicality into this business.

The difference between 50%, 20%, yes, beneficial but I still believe sort of on the margins, people don't buy an aircraft because of tax depreciation in terms of a bonus.

Thanks a lot, Scott.

Sure.

Carter Copeland, Barclays.

Good morning gentlemen A couple of quick clarifications and then a question.

Just briefly on the Cessna margin for next year, obviously, if we add back the arbitration charge from the quarter, you'll be for this year close to the low end of where the guidance is for next year.

And as you sort of go through the head winds and tail winds for next year it would seem that used aircraft will be a headwind, R&D's potentially a headwind, mix is potentially a headwind, but volume is your tail wind.

Are there any other tail winds there other than just improved performance out of the team that you're looking to see the margins come in a little bit better?

I think you've capped it pretty well.

Mix is relatively neutral.

We continue -- I think if we look at our forecast for the year, the mix won't help or hurt a whole lot.

Obviously some new models coming in is beneficial to us, particularly with the Sovereign block point in the latter half of the year.

So the head winds are increased used which does not carry much volume or margin with it.

A little bit of R&D headwind but primarily this is going to be how does the team do operationally.

I think our momentum going into the year is good.

The activities that Scott and the team have been driving in terms of operational efficiencies are working and we get some additional volume obviously that will be good leverage.

And presumably aftermarket is a bit of a mixed benefit as well so.

Yes, it is and I think we'll see again solid growth in the aftermarket.

Great.

Thanks.

With respect to Bell and the margin in Q4, was there anything to note in terms of cumulative catch-up that benefited the margin to speak of?

There's always some cume catch in terms of the program, you see accounting in the quarter.

I think in terms of year-over-year we had a pretty tough comp.

We had a very good mix of commercial aircraft in the fourth quarter a year ago.

We probably did not have as good a mix in terms of the types of commercial aircraft that shipped in the fourth quarter of this year, but overall over the span of the year obviously it was a very good year on the commercial side, and I think we'll see that momentum continue into '13.

Okay.

Great.

And lastly on the repurchases and the outlook for that for next year or for 2013, I wondered if you might share some detail on the decision, repurchases versus dividends and why you chose what you chose in terms of opportunistic capital appointment on repurchases instead of maybe upping the dividend.

There's a couple things going on, obviously one which we've mentioned is we feel like it's appropriate to be offsetting the dilution associated with the employee compensation and benefit plans, the 401(k) matching, and things of that nature.

So that accounts for us somewhere in the neighborhood of a few million shares a year, and so that's one thing that we want to make sure that we offset.

In terms of some of our activity this year, we know we have the convertible coming up here in May, and we want to try to be offsetting some of the dilution associated with the retirement of that instrument.

And in terms of going forward again, we'll continue as a minimum on the anti-dilutive offsets and based on our perspective in terms of the Company and where stock is, what do we think is in the best interests of the shareholder.

And I think at this stage of the game, our conclusion was allocating some of that cash to retiring some of the shares is probably the most share enhancing strategy in terms of capital deployment right now.

Great.

Thank you.

Cai von Rumohr, Cowen and Company.

Yes, thank you very much.

Last year on the fourth quarter call you projected R&D in 2012 at $590 million.

You've just reported net R&D of $504.

So what's the difference between R&D and net R&D?

And on a net basis, what did the R&D do in 2012 and where was it up if it was up?

So Cai, so the R&D was up.

It was up principally driven in Bell.

At Cessna, we were not up as much as we probably originally thought.

That's driven primarily by the fact that if we looked at our programs and the fact that we were taking Sovereigns basically out of production to bring in the new one, and a number of other changes we made particularly around deciding to do the Longitude program, and therefore not a couple of those things that were more shorter term upgrade programs.

We were able to shift a lot of our engineering resource from what would normally be sustaining minor change things into our primary new product programs.

So we're able to staff a lot of those major programs without having to increase a lot of our R&D dollars.

We would expect the same to continue to next year, so we'll see modest increases in R&D and again, principally driven by increases at Bell and some increases at Cessna as we ramp up those programs.

In terms of this net R&D, we're trying to show what is the true headwind, if you will, from an EPS perspective as opposed to not sort of all engineering as opposed to necessarily the R&D tax credit type, things that benefit or specifically fit the R&D definition.

So it's reflective of all of our engineering because basically what happened, Cai, is a lot of our engineering that really is associated with not historically R&D, but a lot of our sustaining engineering and instead move those funds and resources into our new product programs.

Okay, but when you say --

Just to be clear, on the net versus what we called R&D before, they're the same.

We just put the word net in there to clarify that it does not include those items that are reimbursed by third parties like the government.

Okay.

But so you reported $504 million the year before you reported $484.

You were going to be up $100 million.

You were only up $20; is that correct?

That's right.

And that's principally driven as I said by the fact that we've been able to take a lot of our other engineering resource which was not engaged in R&D programs, it was doing sustaining support of our production programs and move a lot of that resource into the R&D area.

Okay.

Great.

And then as you look at the mix in 2013, you said it would be neutral, but should we assume that Mustangs might be flat to down in the mix?

I would assume that M2s will be up plus in the mix, that Sovereigns and the 10's would be up or is that incorrect because they go towards the end of the year, is that likely not to benefit 2013 that much?

Well I think if you look at it Cai, so absolutely our view would be that Mustangs will be down.

M2s obviously will -- are new, so I think if you look at volumes of what was Mustang and that's sort of the lighter end of the market will be made up this year of instead of just Mustangs it will be a combination of Mustangs and M2s.

There's a slight mix shift up there.

When you're talking about $3.2 million aircraft versus $4.5 million aircraft, so in the grand scheme of things it doesn't change the mix shift very much from the perspective of the overall mix of the business.

We will have the Sovereign deliveries, but I think if you look at combined Sovereign and 10 sales last year versus this year, they're relatively equivalent and then you look at the balance of the portfolio through the CJs and the XLSs, again, it's going to be roughly a similar kind of number.

So that's why I say, I don't think you're going to see a huge mix shift in terms of the overall average dollar weighting if you will per aircraft in 2013.

That's very good, but you did mention the Sovereign and the 10 happen in the second half, so is the fact that the volume is relatively flat a function of when the deliveries begin and that therefore the market allowing 2014 should be an up year or is it just that demand is essentially flat.

Well, we see demand as being relatively flat.

Obviously we'd like to think that 2014 will be an up year, but that's a guidance question for another 364 days from now.

But yes, I mean it really is principally driven by demand at this stage of the game Cai.

Okay.

Thanks a lot.

Sure.

Myles Walton, Deutsche Bank.

Thanks.

Good morning.

Just a follow up question on Cessna.

Given the back end loaded of deliveries in 2013, I mean the usual question is will it be profitable in the first quarter.

I guess the question here is will it be profitable in the first half given 3Q, 4Q mix?

And then, CJ4s, are they a pressure point as they come off kind of being a new product, and how much of a pressure point, if at all?

Well, I think that we would certainly expect that the profitability in the first half of the year and the CJ 4 I don't expect, in fact I think if we look at year-over-year volumes, look like they're flat on CJ4s.

So, it's only an aircraft that's been in the market for a few years.

It's still doing very well from a competitive standpoint.

The performance is outstanding and customers are very happy with it.

It continues to be probably the most from a volume standpoint, probably about the most popular aircraft we have in our portfolio right now.

Great.

And one follow up, on aftermarket at Cessna what was the growth in the quarter and what's the expectation implied for '13?

The Cessna aftermarket was 12% in the quarter, and it's kind of 10%-ish for next year.

Okay.

Great.

Thanks again.

Brian Jacoby, Goldman Sachs.

Good morning, thanks for taking my question.

Just a quick one on the upcoming debt maturities at both the parent company and the Femco, what's your plans there?

Looks like you could handle it with cash but obviously the markets are pretty attractive from a debt funding perspective.

Yes, the way we think about the balance sheet is that we will handle those with cash and kind of with that debt pay down we will have a total debt level that is a level that we think is the right type of level for the business given its current size.

So the intent would be to pay that down and not refinance it.

Okay.

Great.

That's it for me.

Thanks.

Steve Levenson, Stifel.

Thanks, good morning everybody.

You've answered pretty much all the questions we had.

But in terms of the percentage of the fleet per sale can you say about how much is current models and what you don't think is an issue?

I'm sorry.

I haven't looked at that data just recently.

Things have been fairly stable in terms of available for sale.

I think as Doug said, the whole fleet's around 12% kind of a number.

As we looked at that data through the course of the year the models that are still in production, relatively recent aircraft has really been more in the low to mid-single-digit in terms of percent for sale.

Okay.

Thank you.

And with the changes at Hawker Beechcraft are you seeing any change in the market picking up any business or are those used jets causing an issue?

I guess we'll have to wait to see all the gamma numbers here but I guess my sense is in terms of new aircraft clearly we feel we've been picking up some share over the course of the year.

Part of that obviously is Hawker going out of the market.

I think it was a pretty tough year when you have a competitor that's exiting a business line.

I don't think there's a lot of aircraft left.

I would expect that not to be much of an issue on a go forward basis.

Great.

Thank you very much.

Operator, I know that we've got three calls in queue, but two of those are on follow-ups.

Let's make this next call our final call and I'll call the two gentlemen and follow up after the call.

Ronald Epstein, Bank of America, Merrill Lynch.

This is actually Kristine Liwag calling in for Ron Epstein.

Our question is, how many white tails or green tails do you have at Cessna?

We don't do the green tail or white tail number, specifically, just in terms of direction.

As I said, we clearly would have expected some additional sales in Q4 that we did not see given everything going on.

As I've said in the past we're trying to build to a forecast and estimate it as well as we can.

The only downside risk if you're off on that number is you take a little bit of an inventory risk and that's exactly what we did and what happened, and those aircraft will obviously sell off here in the very near future.

Great.

Thank you.

Sure.

Okay.

Ladies and gentlemen that concludes our call.

Thank you very much.

Ladies and gentlemen, on behalf of today's panel I'd like to thank you for your participation in today's conference call.

Thank you for using AT&T.

Have a wonderful day.

You may now disconnect.