達信公司 (TXT) 2013 Q4 法說會逐字稿

Ladies and gentlemen, good morning.

Thank you for standing by and welcome to the Textron 2013 fourth quarter earnings conference call.

(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 Investor Relations, Mr. Doug Wilburne.

Please go ahead.

Thank you, Tom, and good morning everyone.

On the call today we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer.

For everybody's reference, our earnings call presentation can be found in the Investor Relations section of our website.

During the course of our call, we will be discussing future estimates and expectations including our 2014 outlook.

These forward-looking statements are subject to various risk factors which are detailed in our SEC filings and also in today's Press Release.

We would also like to point out our 2014 guidance will not include the impact of our planned acquisition of Beechcraft.

We will update our 2014 guidance to account for the impact of the acquisition after we have closed the transaction.

Moving now to fourth quarter results, starting with slide 3 in our earnings presentation.

Revenues in the quarter were $3.5 billion, up 4.3% from a year ago.

Income from continuing operations was $0.60 per share compared to $0.50 in last year's fourth quarter.

This was a few cents higher than we were expecting at the end of December when we indicated that we would likely be below the bottom end of our guidance range as a result of better operating results in our manufacturing businesses.

Moving to cash flow, fourth-quarter manufacturing cash flow before pension contributions was $774 million, bringing our full-year manufacturing cash flow before pension contributions to $256 million.

Full-year pension contributions were $194 million, which reflected a $21 million contribution during the fourth quarter.

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

Thanks, Doug.

Good morning, everybody.

Overall we had a good fourth quarter to close out the year, with revenue growth at Cessna, Bell and Industrial and strong cash generation across all of our businesses.

Moving to our Textron systems segment, revenues were down in the quarter as expected, primarily due to lower UAS and precision weapon shipments in the quarter compared to a year ago.

Operationally, systems had a good quarter with 9.8% margins.

We also continued to make progress on the Ship-to-Shore Connector and Canadian Tactical Armoured Patrol Vehicle programs while continuing to make on-time deliveries on our existing Afghanistan National Army vehicle contract.

In our UAS business, we saw improvement in the operating reliability of our Aerosonde fee-for-service aircraft, reflecting installation of Lycoming built engines into the fleet.

Also within the UAS business, we made good progress on the Shadow TCDL development program which we believe puts us on track to begin delivering production units in the second half of this year.

Finally, we closed on the acquisitions of OPINICUS and Mechtronix in December, and we are now in the process of combining them with our existing military simulation business at AAI to establish the new Textron simulation and training systems business.

Jim Takats, the former CEO of OPINICUS, is the president of the new unit and with his team is busy with integration activities and business planning.

As we look to 2014 for systems, we see significant top line expansion, lead by growth in the UAS revenues primarily from delivery of TCDL systems and the impact of the simulation and training business which should lead to improvement in full-year margins.

Shifting to Industrial, revenues were up 9.5% in the quarter, reflecting higher volumes in each of our businesses as well as the acquisitions of Sherman & Reilly and HD Electric at Greenlee.

For the year, we posted a 60 basis point improvement in margins on 3.9% revenue growth.

Looking to 2014, we're expecting continued margin expansion resulting from solid top line growth driven by strong auto markets and our continued investments in new products, sales and distribution capability.

Moving now to Bell, platform activity and execution across our programs improved, and that was reflected in our sequential margin recovery in the quarter.

We delivered 13 V22s, 6 H1s and 75 commercial helicopters versus 9 V23s, 6 H1s and 65 commercial helicopters in last year's fourth quarter.

During the quarter, a lot of the V22 program was approved, which contributed to an increase in overall Bell backlog.

On the FMS front last week, the Department of Defense notified Congress that it intends to sell six V22s to Israel with the aircraft expected to be fielded in 2016.

We continue to pursue a number of additional FMS opportunities for both the V22 and H1 aircraft and believe we will have incremental FMS deliveries for both of the platforms.

On the commercial front, we delivered 213 helicopters for the full year, up 13% from last year's 188 units, reflecting our investment in new products and increased focus on the commercial helicopter market.

Looking to 2014, we're expecting a flat top line at Bell, reflecting a decrease in military revenue offset by an increase on the commercial side of the business.

Margins are expected to be down slightly, reflecting the expected decrease in military margins and continued impact for the manufacturing and efficiencies we talked about last quarter.

Wrapping up, our operations review with Cessna, we received FAA certification for our new M2 and Sovereign in the last week of December, which allowed us to deliver 12 M2s and 8 Sovereigns, bringing total jet deliveries in the quarter to 62.

This compares to 53 units in last year's fourth quarter.

For the year, deliveries were down at 139 jets compared to 181 last year.

Looking towards 2014, while we're not counting on a significant change in overall market conditions, we do expect that full-year deliveries of the M2 and new Sovereign plus introduction of our new 10 will contribute to increase in overall deliveries, which should in turn lead to an improvement in profitability.

Longer term, we're still expecting overall jet growth to develop as global economies gain momentum and combined with additional new products that are introduced.

With our announced acquisition of Beechcraft, we believe we will be in an excellent position to capitalize on the rebound in the business jet and overall general aviation market.

To wrap up 2013 at Textron Systems, we continued to innovate on the product front, including our expanded Commando family of armored vehicles and development of the Next Generation of the Shadow M2.

We continue to increase our international customer base with a contract to supply Saudi Arabia with precision weapons.

We also made progress on a variety of product opportunities in international military markets which we expect to lead to a number of orders in 2014, and finally, we established a new business unit in the growing global aircraft simulation training market.

At Industrial, last year's 4% top line growth reflected our continued investment in expanded distribution of new products, such as the hybrid powered Bad Boy Ambush iS at E-Z-GO and the high-productivity AR722T diesel turf mower at Jacobsen.

And our acquisition of Sherman & Reilly and HD Electric demonstrate our commitment to leverage these businesses for growth and long-term shareholder value.

At Bell, we implemented a new enterprise resource planning system, and while the rollout wasn't without its issues, we believe the new system will contribute to significant improvements in our manufacturing operation over the next several years.

We also introduced our new short light single product and continued to expand our focus on commercial markets around the world.

On the military side, we announced an important new tiltroter product, the V-280 Valor, and proposed it as Bell's solution for the US DoD's future vertical program.

At Cessna, in addition to the M2 and Sovereign, we certified the Cessna TTx, the world's fastest certified fixed gear single engine aircraft, as well as the Grand Caravan EX.

Finally in December, we achieved first flight of our Scorpion ISR tactical strike aircraft less than two years from when we launched our design program.

In summary, 2013 was an important year with significant new product introductions, strategic acquisitions and investments in the future of our businesses.

To finish with our 2014 guidance, we're projecting an overall revenue increase of about 9% with EPS from continuing operations in the range of $2 to $2.20.

Manufacturing cash flow before pension contributions is also expected to increase significantly to a range of $600 million to $700 million.

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

Thank you, Scott, and good morning, everyone.

Manufacturing revenue was up $153 million in the quarter, generating an increase in manufacturing segment profit of $26 million.

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

Cessna revenues were $923 million in the fourth quarter, an increase of $22 million on a year over year basis, reflecting the increase in jet deliveries, partially offset by a decrease in revenues of Citation Air and lower Caravan deliveries.

We posted an operating profit of $33 million, up $10 million from the fourth quarter of 2012, primarily the result of improved performance reflecting an unfavorable arbitration award recorded in last year's fourth quarter.

At Bell, revenues were up $226 million, primarily due to higher volumes across the business.

Segment profit increased $1 million as the impact of higher volumes was largely offset by lower military margins and manufacturing inefficiencies related to prior period labor negotiations and the implementation of a new enterprise resource planning system.

At Textron Systems, revenue decreased $162 million, primarily due to lower volumes.

Segment profit increased $4 million as improved performance more than offset the impact of the lower volumes.

Industrial revenues were up $67 million, and segment profit increased $11 million, primarily due to higher volumes.

Moving to finance, segment profit was $2 million.

Credit quality remains stable with non-accrual accounts at $105 million, flat with the third quarter, and 60 day delinquencies were $80 million, $8 million lower than at the end of last quarter.

We ended the year with approximately $1.5 billion in receivables with only $185 million remaining in the non-captive portfolio.

Moving to corporate items, corporate expenses were $57 million, up $43 million from last year, reflecting the impact our higher share price had on compensation expense.

Interest expense was $27 million, down $11 million from a year ago, primarily reflecting the retirement of our convertible debt earlier in the year.

Our tax rate of 23.3% benefited from the impact of lower US income and a number of one-time foreign items.

Turning now to our 2014 guidance, beginning with pension expense and looking at slide 8. Based on bond rates prevailing at the end of 2013, we increased our 2014 US plan discount rate to 5%.

In combination with 14% returns on plan assets for 2013, the unfunded liability of our Defined Benefit Pension Plans dropped to $200 million from $1.3 billion a year ago.

On this basis, we're estimating 2014 pension costs of about $130 million.

This will provide about $45 million in pretax year over year benefits to the P&L, taking into account 2013's higher costs that were inventoried and carried over to 2014 and a portion of this year's lower cost that will be inventoried and carried over into 2015.

Turning to slide 9, R&D is expected to be approximately $490 million or about 3.7% of sales, down from $511 million in 2013.

We're estimating CapEx will be about $425 million, down slightly from last year's capital expenditure of $444 million.

Flipping to slide 10 which contains our segment guidance, at Cessna we're expecting about 19% revenue growth, reflecting growth in jets and after market with segment margins in the range of 2.5% to 3.5%.

At Bell, we're expecting overall revenues will be approximately flat, reflecting lower military revenues being offset by higher commercial revenues with expected margins in the range of 12% to 12.5%.

At Systems, we're looking for top line growth of about 20%, lead by higher UAS revenues, with segment margins in the range of 9.5% to 10%.

At Industrial, we're expecting 10% revenue growth with expansion of 2014 margins to be 8.25% to 8.75% range.

At finance, we're forecasting segment profit in the range of $5 million to $10 million in 2014 with minimal upside potential from non-captive asset dispositions now that those assets are de minimis.

Moving below the segment line and looking at slide 11, we're projecting about $150 million for corporate expense, down from 2013, primarily reflecting lower compensation expense related to change in share price.

Our interest expense estimate at about $117 million is down primarily as a result of last year's retirement of our convertible notes, and next year's tax rate is expected to be higher at about 31.5% primarily reflecting the discontinuance of the US R&D tax credit and a higher US income mix.

Looking now at slide 12, our 2014 EPS guidance reflects an increase of $0.35 at the mid point.

Let's discuss the major elements driving the increase.

Cash headwinds decreased EPS by $0.14, lower expected earnings at finance represented a $0.10 headwind, improved interest expense provides a pick up of $0.01, the absence of last year's restructuring charge at Cessna adds $0.07, and the benefit of lower pension expense is expected to add about $0.11 per share in 2014.

And finally, the contribution from our underlying manufacturing business is estimated to be $0.40 per share.

Tom, that concludes our prepared remarks, so we can open the line for questions.

Thank you.

(Operator Instructions)

Our first question today comes from the line of John Godyn representing Morgan Stanley.

Thank you guys for taking my question.

First of all, Scott, I was just hoping that now with the passage of some time, you could talk a little bit about maybe the internal response from the sales force as well as any customer response from the announced Beech acquisition.

Sure.

I think its been overwhelmingly positive.

We've had a ton of interactions with Beechcraft customers, and I think from their perspective, this provides an incredible amount of certainty with a Company that's gone through some pretty difficult times.

So I think all the feedback we received has been very, very positive.

I think the notion that the Customer Service and support will be stable through the life cycle of these products on both the King Air piece, which I think people are fairly comfortable with, but in large part the Hawker piece -- a lot of customers were concerned about where that would go -- has given them a great deal of comfort.

And the fact that it's now in an ownership structure of a Company that's long term committed to the business and general aviation market has been received very, very well.

Great, that's very helpful.

And I was hoping that in terms of the 2014 outlook, you could elaborate a little bit on the assumptions or expectations underlying Cessna.

In particular, the pricing environment that you see next year or this year, is it getting firmer?

Just trying to understand the $3.3 billion revenue number a little bit better; I think the uptick just within the context of the easy comp in 2013 struck us as a little bit low, so I was hoping that you could elaborate a bit on that.

Well, I think if you look at the 2014, the comparative, first of all I'd say the market is still challenging.

As I said, I don't think we're expecting any dramatic change in terms of the market dynamic out there, so pricing for us was roughly flat year over year.

so I'd say it has more or less stabilized in terms of where the pricing environment is.

Most of what we're anticipating in terms of growth is driven by new products.

So as you look into 2014, obviously we've seen very strong demand around the M2 product, the Sovereign did well, right at the end of the quarter obviously.

The certifications happened very late in the year, but we will now have a full year of not just the M2, but also the Sovereign.

We're expecting the 10 to certify in the early part of this year, so we expect a full year of sales in terms of the Citation 10.

So really the dynamic is new products matter a lot.

As we've talked about over the last couple years, one of our biggest competitors has been our installed base of relatively new used aircraft.

So as we come out with new products that are differentiated from what's available out there in the marketplace in terms of the used, the customer perception has been strong.

And that's really what's driving most of our revenue increase through 2014 is just a full year of those new products that have been well received in the marketplace.

Okay, and if I could just ask a quick one on systems.

The margin outlook for 2014 suggests margin expansion versus 2013.

I was just hoping you could elaborate on what's driving that, thanks a lot.

Sure, there's two parts driving it.

One is we are feeling better about where we stand on our fee-for-service contracts in UAS.

We certainly had another challenging year in 2013 really driven by this issue of engine reliability.

The indications we're getting from the field now that we have put our Lycoming built motors out there has been on a positive trend, so we're pretty confident we should experience better performance.

It's still a challenging program, and we are booking it at zero profit, but again, we don't expect to see the impact we've seen over the last couple years in terms of losses associated with that program.

And the other significant piece is all of that delivery of production TCDL units was really something we originally expected to be able to start delivering in 2013.

As a result of the development program, that really moved into 2014 and beyond.

So we've been building those units, we've been ready to ship those units, but the contingency of completing the development contract which is a cost plus low margin contract, we expect that to happen here in the first half of this year.

And so you will see a positive mix in terms of now instead of just development program with low development margins, you will actually see delivery of production units and better margins.

Very helpful, thanks.

Sure.

The next question comes from the line of Noah Poponak with Goldman Sachs.

Please go ahead.

Hi, good morning, everyone.

Good morning.

Scott, I wondered if you could maybe just elaborate on the comment you just made about not really expecting much of a change in underlying legacy light cabin business jet demand.

Why not, what are customers telling you on the ground today, what are the data points you're looking at that you still need to see change?

Maybe just a little bit more on how things feel and what it could take to finally turn things.

Well, this is a tough one obviously.

We've been guessing at this for quite a number of years now.

The key metrics that we look at obviously continue to be favorable.

A number of used aircraft available out in the market continues to go down in terms of both percent and absolute number of aircraft, so we find that encouraging.

The used market has been quite active again in 2013 in number of transactions.

Customer activity in a lot of the surveys people do out there say people are more bullish.

Certainly, in the US, although we continue to be concerned about what's going on in the economies in Latin America and Europe, which are our second and third largest markets classically for those light mid sized business jets.

So if I looked at our legacy products, which are things we had in production through the course of the year, we're basically assuming a flattish market in that area.

And again, the area that we see and are pretty confident about the increased revenue is the fact that we now have full years of some of the new products.

But if I look at things like M2, we know what that is.

We did grow our production a little bit about half way through the year because of increased demand for that product.

We feel pretty good about where we are on our Sovereigns, and obviously as the 10 certifies, we have a regional backlog around that product as well.

So I think that the safe assumption at this stage is to assume that the market dynamic overall is relatively flat to what it was in 2013 and then all the upside or improvements come from introduction to new products.

So should we -- when we're looking at total Cessna units, should we have 2014 production up something on a percentage basis, something similar to what you're telling us revenue will be compared to 2013?

And then think about 2015 as not really changing substantially from 2014, or can you really not, is it so short-term still that things could really change significantly still later in the year and it's too hard to say?

Well I think again, the assumptions that you make around 2014 and average aircraft pricing, you will have a mix obviously of M2s which are from a price point obviously towards the lower end of the product range, but you have the 10s and the Sovereigns towards the high end.

So I think your assumptions are not unreasonable in terms of what you think about in terms of unit volumes in 2014.

We're certainly nowhere near close enough to 2015 yet that I would try to make any assumptions around the market overall.

I guess the only commentary I'd make with respect to 2015 is that we certainly expect to have the latitude in the market for a full year of sales in 2015.

So again along the same lines as the way we're thinking about it today, all else being equal, these new products are the things that really drive growth, and we would certainly expect to see growth in 2015 driven by the introduction of the Latitude.

Okay, I appreciate the color.

I will jump back in the queue, thanks.

And our next question comes from the line of Pete Skibitski with Drexel Hamilton.

Good morning guys.

Just a few more questions.

Let me start with maybe the XLS.

Scott, when does this final assembly in China start for the XLS, and are you maybe not expecting that to be a meaningful -- provide a meaningful uptick to XLS deliveries, next year or I guess this year.

We do expect in 2014 we would make the first deliveries through the joint venture for the XLS, just as we did for the Caravan in 2013, but yes, they're relatively low unit numbers as we're just ramping up that process and working the first couple aircraft through it.

So we're still in the process of business licenses and starting to generate sales activity in China through that joint venture.

Okay, got it.

And then could you maybe give us a more detail on what Cessna after market growth finished up at in 2013 and what your assumption is in 2014, and similar question on pre-owned volumes.

So the after market was up again at Cessna in the after market.

It wasn't up quite as much as it was in the third quarter, but it was a pretty strong quarter in terms of after market growth.

The utilizations have held pretty steady, and so that business continues to do well in terms of used aircraft the dynamic, what we saw was still a very active market.

And we certainly saw more aircraft, a net reduction in our inventory of aircraft as we sold more than we took in, in trades.

2014, revenue from pre-owned, are you expecting that to be down or directionally give us a sense?

It's probably relatively flat.

It was up this year, year over year, but I'd say probably relatively flat next year.

Got it.

Thanks guys.

Sure.

Our next question is from Carter Copeland representing Barclays.

Good morning gentlemen.

Just a couple quick ones.

On the Bell margin outlook for 2014, I know the sequential improvement in the fourth quarter, but I was wondering why that was, what was behind the down year over year number, there if that was just the V22 in the fourth quarter or if that was any more ERP bleed over from 2013.

Any color there would be helpful.

Well certainly some of it was a bleed over from the earlier quarter in 2013, so as those inefficiencies that we had which we talked about in the largely impacting the second and third quarter, a fair amount of that stuff is cost that was inventoried which then will bleed out.

So it certainly sold as we recognize revenue on aircraft in the fourth quarter, and we will see that as we continue our way through 2014 as well.

And in terms of realtime operations, we have seen improvements in terms of some of that productivity, but we still have a long way to go with continuing to drive better margins.

Obviously the other dynamic that we have which had some impact in the quarter and will have continuing impact on a go forward basis is that we are now transitioning into lots of aircraft that have been negotiated at lower rates than we were achieving in our earlier multi-year contract as a result of accumulating productivity over a period of a number of years.

Correct, and I wondered if you could just clarify the UAS commentary earlier.

You said you weren't expecting to book -- are you not booking profits at all, you just aren't booking losses.

Is that the right clarification?

Well, on the fee-for-service, we book that at zero profit.

And your expectation for 2014 is that that will stay that way through the course of the year?

That's correct.

Our expectation is that we will stay that way, but we will not recognize any further losses on the program.

Okay, great.

Thanks, I will get back in the queue.

Our next question will be from the line of Jason Gursky with Citi.

Please go ahead.

Hi, good morning everyone.

Frank, I was wondering if you could just help us a little bit with the cadence of revenues throughout the year, both at Cessna and at Systems.

Just wondering if the seasonality at Cessna is perhaps going to be a little different than in the past, it might have been the new deliveries.

And then the system, the cadence at systems would be helpful given the revenue outlook there is up quite a bit, just giving a sense of when we're going to see an acceleration of revenues there.

Yes, I think you will see the same type of seasonality that you have seen at Cessna.

It will be in part impacted a little bit by the timing of the certification on the 10s which is either a late first quarter or second quarter event.

But you will see the same type of back end strength relative to front end at Cessna.

And at systems because we expect the TCDL deliveries to be second half oriented, you will see the same -- you will see seasonality there as well where the second half of the year will be substantially stronger than the first half of the year.

Okay, great, and then just two quick follow-ups.

The tax rate, how much is the R&D tax credit worth if that were to fold back in?

And then the second question is just the R&D trajectory for the enterprise overall beyond 2014, just general trends on up or down relative to 2014 would be helpful.

Jason, on the R&D credit I will get back to you on that offline.

We don't have that number right in front of us.

Yes, on the overall R&D, it will be program specific at the end of the day in terms of what we're looking at, but I think in and around these types of R&D levels with some probably modest growth is what you should expect.

Okay, great.

That's helpful.

Thank you guys.

And we will go to the line of Robert Stallard, Royal Bank of Canada.

Thanks, good morning.

Good morning, Rob.

Scott, kicking off on Cessna, given your comments on 2014 growth, I was wondering how much of this is actually in the backlog already.

Do you have any remaining slots forecast as of the moment, or are we pretty much sold out on the newer models, just legacy models are still for sale?

No, we have some slots.

The M2 as I said earlier, we actually added production capacity, so we created slots.

So we do have aircraft that are available for sale this year.

Sovereign, there are aircraft that are available.

We have some of the backlog and some that will still be sales that need to convert to orders.

Our orders to sales in 2014.

The 10s are pretty well sold at this point.

There's probably a couple that could be available in the latter part of the year, so the new product side has pretty reasonable backlog in terms of sales.

And then secondly, on Bell, you mentioned you sign up your contract there, and there are some FMS sales floating around.

Has this had any impact though on your currency for 2015, or is this likely to be a further out affair, like in 2016 and 2017?

2015 is fairly well set just in terms of -- if you look at lead time frankly, any aircraft deliveries in the V22s slated for 2015 will already have had to have been in production.

So I think the 2015 numbers that we've provided you guys will hold where they are.

That's probably also true at this stage of the game in 2016, so when you see something like the Israeli deal where they want to take deliveries in 2016, those are units that are actually coming out of the Marine Corps MV22 stream.

And so as the decisions get made in terms of the government about how they want to treat those aircraft, they are going to add additional, probably at this point would be something that would be a 2017 delivery in terms of any incremental volume opportunity.

Thanks very much.

Sure.

We have a question from Cai von Rumohr representing Cowen & Co.

Please go ahead.

So give us a little color on Cessna's profits looked a little bit light.

Was there anything in terms of R&D being higher or higher used aircraft losses in the fourth quarter, because the incremental margin looked like it's 16% relative to the third quarter.

The big piece of that, Cai, is with the certification of both the M2 and the Sovereign, we had a lot of cost around the certifications and frankly an awful lot of variance in our manufacturing side because of a lot of updates and configurations.

So we're building these aircraft, and as you went through certification, there was nothing huge, but there was a fair bit of rework that went on to get those into the certification standards.

So those are costs that we bore in the fourth quarter, and of course we also had the Citation 10 certification program going full speed as well.

So it was primarily driven around costs associated with those certifications as well as a fair bit of higher costs associated with the manufacturing efficiencies of having to upgrade and modify those aircraft as we went through the Cert process.

Got it, and then you've indicated that R&D would be $490 million this year down from $511 million.

Were these certification costs included in the R&D in 2013, and what trend should we expect at both Cessna and Bell in R&D in 2014?

Well, if you look at R&D, Cai, obviously we don't break this out business by business, but it's safe to say the majority of the reduction on a year over year basis is coming out of Cessna.

And that's because we did have a lot of R&D costs this year associated with the fact we're doing the M2 and Sovereign and the 10 certification programs simultaneously.

Obviously as we go into 2014, we still have to complete the certification on the 10, although the majority of that I would say is behind us at this stage of the game.

But we still have the spending associated with the Latitude program and completing the Latitude design and development and getting into the flight tests and certification program on that front.

So most of that R&D reduction at a corporate level really is coming out of Cessna, and it's just a function of we rarely have had a time, I'm not sure we've ever had a time, where we've had that many parallel certification programs that we've been undertaking.

And again, it wasn't just on the jet business, but also on the prop business.

So help me understand, you're talking about a 400 basis point improvement year over year at Cessna, and it looks like we've got 100 out of the severance charge, we've got close to 100 out of pension, we've got something out of R&D.

So it doesn't look like you're giving yourself any credit for the higher volume; am I missing something there?

Well, I think if you looked at the, the way we look at it, is the mid point of the guidance as you move into next year, the leverage in terms of the incremental margin to that revenue is going to be in the low to mid [20%s].

Okay, and then you'd mentioned that there's a $45 million positive swing, P&L swing in 2014 in pension expense versus what looks like a $96 million decline in pension cost.

Could you give us for 2013 and what you're looking for, for 2014, the actual pension expense that will flow through and be in the P&L?

I'm not sure we have that exact number.

On a year over year base us it's about $45 million, and of course, the cost as we outlined on our schedule there drops to $130 million.

So where I'm going with this is you're only picking up half of the decline in the cost this year, and Frank alluded to the fact of the inventory flow through.

Could we expect the other $50 million or so to flow through in 2015 if all the assumptions remain the same?

Yes, so Cai, the math behind it is that we tend to inventory about a third of the pension cost differential that then gets realized in the subsequent year.

And so we have the benefit of the step down in 2013 to 2014, and we will get two-thirds of that benefit flowing through in 2014, but we will continue to have one third of the headwind that with we had from 2012 to 2013 that was inventoried and therefore will be realized in 2014 P&L, so that's the net $45 million.

If you then roll into 2015, assuming that we don't have any further change in downward trend and discount rate or negative impacts or something, we will realize the remaining one third of this year's benefit.

And then we will not have -- we will have whatever the subsequent impact is for that following year.

So we're making up for the headwind of two years ago in part this year, and then in 2015, it should trend even better assuming things stay on track the way they have been.

Thank you very much.

And next we will go to the line of George Shapiro with Shapiro Research.

Yes, just following up on Cai's question, Scott, why shouldn't the incremental margins be closer to 30% at Cessna versus the low to mid 20%s?

It's low 20%s you were suggesting on the call.

Well, George, because they aren't.

I mean, as we go through the numbers and we look at where we are in the market, you take into consideration the mix of the new products, legacy products, where we are in terms of pricing in the marketplace, it's where we end up with the incrementals that are at that mid point down there.

I think it's around 23% if you take the mid point of the guidance.

So if we see some better volume, if we see any change in the market, I think there's upside to that, but we have to see some strengthening in that light to mid size market.

But as we came through 2013, just the dynamic that we saw which was much softer than we would have expected in 2013, the impacts in terms of just pure volume and pricing was quite challenging, and so we factor that into our expectations for 2014.

Okay, and then a follow-up on your comment there.

If you look to see orders, we saw a big improvement in the third quarter, another big improvement this quarter where the orders were really up like 30% plus from the third quarter and certainly the best orders since 2008.

So why wouldn't that suggest that the market's actually really beginning to pick up some steam here?

Well, we would like to think that or extrapolate and carryover into 2014, but again George, if I go back to the latter part of 2012, we certainly thought there was some momentum that we were going to see coming into 2013, and we didn't see that.

As a result, we ended up with production schedules and such that were a lot more difficult than we would have expected.

So I think we need to continue as we go into 2014 despite having seen what was certainly a good quarter in terms of order activity, that we're going to continue to view that the strength will be around the new products and that it will still be a challenging overall market, and therefore the legacy products will be under the same pressure that they were in 2013.

Okay, and then just one quick one on systems.

The revenue guidance you gave is a lot higher than what I would have expected.

I know in your commentary you went through some of the things.

Is there one or two programs that are substantially increasing at that point in time, and what's the mix between international and domestic that you would expect in the 2014 guidance?

Well, the biggest driver in the systems revenue growth in 2014, George, is around this TCDL program, so we should complete, it will be relatively back end loaded.

We will probably complete the development program which includes an Army test which will happen in the second quarter.

So you won't get sign off on the development side until probably late in the first half of the year, so that means all that production delivery will be in Q3 and Q4.

Most of those assets by the way are manufactured, so there's not an operational risk in terms of our ability to deliver on that; it's just a matter of getting through the development program.

So that will all be third and fourth quarter, but it is a significant increase in revenue over 2013.

And then there is about probably $90 million to $100 million in there of incremental revenue associated with the acquisitions of Mechtronix and OPINICUS in the simulation and training business.

And then Scott, what was the mix between international and domestic in 2014?

In systems?

Yes.

I don't think we expect a big change there because we've got the growth in the TCDL unit there, but we're still on track to get that near 50%, in 2015, George.

Yes, the TCDL, George, obviously is all US Army, so that will skew our number a little bit.

And that demand which would have been split over several years will all be domestic.

But if you look beyond that in terms of our orders and our new business activity, it is still biased towards the international marketplace, which as Doug said, should mean that as you get into 2015, you're looking at more like a 50/50.

Okay, thanks very much.

We will go to the line of Joe Nadol with JPMorgan.

Thanks, good morning.

Scott, just on the mid size aircraft, seems like you had a decent quarter in particular.

XLS really picked up, and I'm sure some of that's timing relative to Q3.

Also seems like the Sovereign had a little more traction.

Is that a fair statement that you just try not to get ahead of yourself but things are looking better there?

Well it was a good quarter in that respect, and obviously the introduction of the new Sovereign helped having the aircraft available for sale in the fourth quarter.

And now we will have that available for sale throughout 2014, and we do expect good performance on that platform.

The XLS did very well in Q4, and it was probably some timing associated around that.

But again, as we look at our forecast for 2014, we are assuming those legacy aircraft -- and the XLS certainly fits that category.

It's a great airplane and continues to do well in the marketplace, but we're expecting the dynamic for the total year of 2014 to be very similar to what we experienced in 2013, which was pretty soft until we got into that fourth quarter.

Okay, and then just one other.

On the cash flow, Frank, just looking into 2014, what are the key working capital assumptions to get to the $600 million to $700 million; in particular, what are you assuming happens with inventory at Bell and Cessna?

Yes, the working capital is about flat, so there's no real change in working capital.

We would expect we will continue to see some inventory improvement at Bell and Cessna earlier in the year.

So we're always going to be seasonal from a cash flow standpoint, but better seasonality certainly than we saw last year.

But given our expectations that those businesses will continue to show out year growth, we would expect then some reversal of that that you will see later part of the year as we build into 2015, particularly as we get ready for instance for the latitude launch and other new product launches.

So overall flat with some dynamic around seasonality during the year.

And what was the, can you quantify versus maybe your expectations a year ago, the inventory build in those two businesses during 2013, how much did that cost you?

Just in terms of Cessna deliveries not meeting your original expectations and then the issues you had at Bell.

I think from a straight working capital management standpoint, between the overbuild at Cessna, part of which obviously liquidated in the fourth quarter but not fully to where we would like to have been, we had a couple hundred million dollars of working capital different than where we would like to have been.

And I think what Frank is saying is as we go through 2014, we certainly expect that we will address that issue and that we will fix that working capital problem, but it is going to be pressure as we get into the latter part of next year particularly around Latitude.

We have done first engine runs on that aircraft, it should be flying here very soon, it will be in the flight test program and driving towards certifications early in 2015.

And obviously to get a full year sales in 2015 means we're going to go ahead and turn that production line on.

So we will be building on those aircraft, but we won't be able to sell those aircraft, deliver those aircraft until that certification happens.

And so that will happen probably in the very early part of 2015, but we will be carrying a full production line with no revenue.

So I think we have a plan on how we're going to address what I would view as the overall working capital miss in 2013, but we are going to be pressured around some of the inventory particularly around the Latitude at Cessna in 2014.

Okay, thank you.

Next we will go to the line of Julian Mitchell representing Credit Suisse.

Your line is open.

Hi, thank you.

I think it's clear you aren't going to change your incremental margin guidance on Cessna based on the last 15 questions, but I guess if you look at the -- I just want to focus on the impact of the ramp up of the new jets.

How does that affect the incrementals at Cessna for the year as a whole in 2014 and in particular in the first half?

Because I guess you have some better pricing, but then at the same time you've got costs associated with the ramp up, maybe fixed costs under absorption early on?

Julian, I think Cai and George's questions are good.

It's easy to, we can go through some of the beneficial things that should be flowing through the P&L and try to justify higher number.

And I guess the bottom line is while we expect and the new products like the M2 and the Sovereign and the 10 are going to deliver good gross margin in terms of the product lines, there are no issues associated with those recurring costs on the programs.

But as we have introduced and as you ramp these new product programs, we have had inefficiencies this year around the mods we made as we went through certification.

We would expect some of that will bleed off obviously as we go through the beginning of the New Year, but the real issue here is that despite those better volumes and fairly good confidence with respect to the new product programs, we think that the pricing environment, the challenges and legacy product given the dynamics in the marketplace are still going to be pretty tough.

So as we factor that in, that's where we end up with the guidance number that we're giving you guys.

We would love to see that be an even better number, and if we see some turn in the market, I think we can make that happen.

But we were burned by that going from 2012 into 2013, so I think we will be pretty conservative about our perspective of what the overall market is doing as we go from 2013 to 2014.

Sure and then within Cessna after market, it sounds like you think this will be pretty flattish demand year.

I guess if you look at activity, take off some landings and so and you've got some better news I guess particularly in markets like Europe versus 9 or 12 months ago, the US is pretty stable.

I just wondered why it is you think the market will be flattish.

Well I think the after market will be up a bit at Cessna, but the fleet does continue to grow a bit.

ADUs in the US have been quite stable at 0.68, 0.67 as we've gone through the year.

So as to what happens in the European market or the Latin American market, I think it's still a bit of a wild card.

But we are assuming mid single digit growth in the service business on a year over year basis.

Got it, thanks, and lastly just on systems.

You've got a pretty healthy profit increase dialed in for 2014.

Is that something we should see straight off from the beginning of the year, or do you think there will be lumpiness around that?

I think it will be more back end loaded, Julian.

And again primarily driven by the fact that the dynamic on the UAS business is transitioning from this development program which is a very low margin program to the delivery of the production programs, which are reasonable, normal production margins.

But all those deliveries will be in the third and fourth quarter of the year.

Great, thanks very much.

Sure.

Our next question is from the line of Jeff Sprague representing Vertical Research.

Thank you, good morning.

Just a couple quick follow-ups.

Scott, has there been any change in just the tenor of order activity around actually getting the certs?

Is that something that really mattered to a significant degree for the sales effort or not really?

Not really, Jeff, I don't think.

The dynamic, and people knew they were coming, we've been in very close communication with customers for quite some time in terms of the status of this thing, but the fact that it happened so late in the year probably cut a few aircraft out that we would have otherwise have expected to get delivered.

But that was just more around it became such a compressed schedule right there at the end that just try to physically make the transition happen.

Obviously we've got quite a few aircraft sold in a very short period of time.

Essentially, close the books on the 28th, so in that one week window, we were able to title and transfer 20 aircraft between M2s and Sovereigns.

But I think had it happened earlier in the quarter, clearly it was an opportunity that we would have sold a few more aircraft.

I would say in terms of on a go forward basis, Jeff, the biggest issue that will drive orders and backlog particularly as we look into 2015 is getting Latitude flying.

So that aircraft once you start being able to demo the aircraft, that will start to generate order momentum, and we saw that on the Sovereign and M2.

Once you have aircraft that are out flying and able to do some demonstration and get it to shows and get it around to customers, you do need to have that to start generating any order momentum.

And I was just wondering on Bell, anything to be aware of there, like the margin trajectory flows out over the year?

I'm just thinking the carryover inventory cost on the labor disruptions plus as we roll into the multi-year, is there any long lead time stuff that weighs on margins in 2014 as we start to move into 2015?

Well I think we will probably be a little more pressure in the early part of the year.

In part we're recognizing now some of the lower margin military programs, particularly in the H1s.

You will see some more V22 pressure as you move through the course of the year, but because more of our volume is going to be dependent on the commercial business, as you know, that commercial business does tend to from a seasonality standpoint tend to be loaded more towards the latter half of the year.

And particularly a lot of the larger helicopter programs which tend to be the larger generator of profit in terms of the overall mix will be more skewed towards the back of the year.

So it's going to be not a wild swing, but I would say would be more pressured in the earlier part of the year on a Bell margin than we would be in the third certainly fourth quarter.

Okay, but so as it relates to the multi-year, to the extent we're expecting a step down in 2015, we really feel that calendar 2015 and V22 margins, there's no early lead time stuff that starts to impact 2014?

No, because we do this when we recognize revenue.

Now we do have some aircraft that will be delivered in the fourth calendar year of 2014 which is under that FY15 government calendar, so there will be some multi-year too deliveries that will be in the fourth quarter of this year.

And then just finally on V22, so at this point, it's still unclear, but you would expect that the US government makes the marines whole on the six units that are going to the Israelis that ultimately are made whole somewhere later in the program?

Well, that is certainly the Marine Corps' expectation.

I would just caveat that with subject to all of the budget stuff going on, I think that remains to be definitized.

Okay, thanks for the color, Scott.

Sure.

We have a question from Myles Walton with Deutsche Bank.

Your line is open, sir.

Thanks.

I did have just a couple follow-ups.

One on Bell first.

The Kiowa, can you give us a sense of the total revenue you have there with respect to the refurb and after market services if the Army does choose to stand down their fleet of Kiowa?

Yes, if you look at the Kiowa program in total, it's typically a little under $100 million a year of revenue between refurbishments, new cabin builds, spare parts, and service.

And probably a little better than or better than the Bell average I'd imagine?

No, it's probably about normal if you look to total mix between new builds and spare parts.

Okay, and the other follow-up was you talked about the second half systems deliveries, and just wanted to confirm, is that expectation in the backlog today, or is it in the plans but we're waiting for it to land in the backlog?

I'm just curious in terms of the visibility.

I'm sorry, which program?

On the second half Systems.

Oh, yes, no I'm sorry.

Yes, we've had those programs, those contracts have been in house for quite some time, and as I said, the units have actually been manufactured.

So it's just we haven't done it because we can't transfer title until after we've completed the development piece which is a separate contract.

But we actually have two separate production contracts that we already have in house for the production units of TCDL.

Okay, perfect, thanks.

Sure.

Operator before we go to our final follow-up call, I just wanted to clarify on a question from Jason relative to the R&D tax credit that in 2013, we had about $11 million of a tax credit related to 2012 plus another $15 million related to 2013.

Obviously that is now taken out in terms of our 2014 tax rate.

So with that, we will take our final call, Operator.

Okay, our final question today will come from the line of Pete Skibitski with Drexel Hamilton.

Scott, just on the commercial helicopter outlook, I know you said it's up for 2014.

That's your expectation, but we had a blowout year this year, particularly on the 407 and 429 was very strong.

So I'm just wondering what is giving you the confidence that we will continue to see growth in 2014 on the Bell commercial side, if it's primarily oil and gas or if you see other end markets improving as well.

It's really been the growth, and our order book has really been across-the-board, so oil and gas has been strong, emergency medical service has been quite good, as you said, we've seen significant growth in the 407.

The 407 GX product has done extremely well in the marketplace, been very competitive, and I expect we will continue to see that.

The 429, volumes have been up, and we expect to see those up again.

Receptivity of the product, particularly with the extra 500 pounds which we've seen in approved in many markets around the world, we're still working on that with the FAA for the US market.

But most markets outside of the US and Europe have given the additional 500-pound gross weight increase, and that product is doing extremely well in a very broad range of markets.

So I think that the strength in terms of what's going on in the helicopter market has been good, and our share as a result of the new products has been growing.

Very good.

Very good.

Thanks very much.

Sure.

Okay, that concludes our call for today.

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