達信公司 (TXT) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron second quarter earnings call.

(Operator Instructions)

I would now like to turn the call over to your host, Doug Wilburne, Vice President of Investor Relations.

Please go ahead.

Thanks, Roseann and good morning everyone.

Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today.

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

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

Our earnings call presentation can be found in the Investor Relations section of our website.

Textron's revenues in the quarter were $3.5 billion, up $670 million from last year's second quarter.

The Beechcraft acquisition completed at the end of the first quarter contributed $425 million to the increase.

Income from continuing operations was $0.51 per share, compared to $0.40 in the second quarter of 2013.

Last year's second quarter EPS was reduced by $0.07 per share and severance costs recorded at Cessna while this year's results reflected a four quarter -- full quarter's impact of the Beechcraft acquisition.

The Beechcraft impact included an $0.08 EPS reduction from fair value step-up adjustments of acquired inventories sold during the quarter and $0.05 in restructuring charges which were recorded on a separate line for acquisition and restructuring costs.

Manufacturing cash flow before pension contributions was $271 million, compared to a $362 million use of cash in last year's second quarter.

Pension contributions during the second quarter were $27 million.

And with that I'll turn it over to Scott.

Thanks, Doug and good morning everybody.

Revenues were up 23.5% reflecting solid organic growth and contributions from acquisitions.

At Bell we delivered 10 V-22s and 8 H-1s compared to 9 V-22s and 6 H-1s in last year's second quarter.

On the commercial side we delivered 46 aircraft, up from 44 a year ago.

On the development front, during the quarter we received certification for the wheeled landing gear version of the 429 model in Thailand and Argentina.

Following first quarter approvals in Canada and Brazil which expands the appeal of the platform to a broader customer base.

We also delivered our first 412EPI model at the end of June to the New South Wales Police Department in Australia.

Our 505 Jet Ranger X development program remains on track for first flight this year as Turbomeca demonstrated maximum continuous power during the first engine test.

We also continue to make good progress on the 525 Relentless as we completed the first all composite main rotor blade, received our first GE engine and began gear box testing.

Overall assembly of the first aircraft is also progressing and within the next month we will be ready to join the three main cabin sections with initial flight targeted for late this year.

On the military side, we signed the Lot 11 contract for 24 additional H-1 aircraft worth about $450 million with expected deliveries beginning late next year.

We also continue to make progress toward potential foreign military sales for the V-22.

Negotiations are ongoing for the six initial units for Israel and we are working with a number of foreign governments that should result in additional FMS orders.

Moving next to Textron Systems, revenues were down as we expected, but program performance and a favorable mix of contract revenues resulted in a segment margin of 12.1%.

We continue to make progress on the Shadow TCBL upgrade development program, successfully completing the final operational test and evaluation during the quarter.

We also saw continued performance stability in our Aerosonde fee-for-service platform and we recently received a new task order to continue operating under the Navy ISR program.

During the quarter we also won a $190 million contract for approximately 360 sensor-fused weapons to be delivered to Korea beginning in the third quarter of next year.

Most recently we completed an acquisition for our new TRU Simulation training business with the purchase of ProFlight, an innovative provider of pilot training, specializing in Cessna CJ series and Cessna Conquest turbo props located in Carlsbad, California.

This acquisition of a FAA Part 142 approved training operation was an important next step as we build our business aviation pilot training capabilities.

In addition we were just selected by Boeing to develop and supply the full flight simulator training suite for the new 737 MAX program.

This is a significant strategic win for TRU as we expand the air transport portion of this business.

Shifting to industrial, we saw good growth across all our businesses reflecting our continued emphasis on innovation, new product introductions and bolt-on acquisitions.

For example, in May we announced the acquisition of TUG Technologies, a leading manufacturer of ground support equipment in the aviation industry, significantly augmenting our line of specialized vehicles.

In addition to the obvious sourcing and manufacturing synergies with our existing E-Z-GO, Cushman and [Bentwell] operations, we will be able to leverage sales of TUG products around the world based on our global distribution channels.

Moving to Textron aviation, in the quarter we delivered 36 business jets and 34 King Airs.

In last year's second quarter we delivered 20 jets and Beechcraft delivered 24 King Airs.

Trends of jet demand factors such as aircraft cycles, corporate profitability and availability of used aircraft all continue to move in the right direction.

Despite the fact that we remain in a spot market, new products are supporting demand in this segment of the industry.

On the new product front, FAA certification of the Citation 10 Plus was obtained late in the quarter which allowed us to deliver the first three units.

We also completed EASA certification of the new Caravan EX, the M-2, and the Sovereign Plus in the quarter.

Our Latitude program continues to progress towards an expected 2015 entry into service.

We now have two Latitude aircraft in test flight, reaching over 100 test flights, and expect a third to be available for certification activities later this month.

Moving to the defense side of Textron aviation we had two new orders for our T-6 military turbo prop trainers during the quarter, one for the Mexican Air Force for 12 units and one from the US Navy for 29 units which represents the last lot under the existing JPATS program.

Overall the T-6 and the weaponized AT-6 are generating significant international interest and we're pursuing a number of promising opportunities.

Our Scorpion program also continues to progress as it recently completed a 4,700-mile trip from Wichita, Kansas to the United Kingdom to participate in the Royal International Air Tattoo and the Farnborough air shows.

Interest in the Scorpion at both shows has been very encouraging and we're in discussions with a number of customers for potential initial orders.

Scorpion is also scheduled to participate in a US government emergency preparedness exercise later this year sponsored by the Pentagon's Northern Command where it will demonstrate its surveillance capabilities.

To wrap up, we believe we had a very solid second quarter with strong revenue growth and improved overall margins and cash flow performance demonstrating that our strategy of investing in new products and distribution is paying off and we're seeing significant contributions for our M&A investments.

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

Thank you, Scott and good morning everyone.

Segment profit in the quarter was $304 million, up $91 million from the second quarter of 2013, on a $670 million increase in revenues.

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

At Textron aviation, revenues were up $623 million from this period last year, reflecting $425 million of acquired Beechcraft revenue and higher new jet volumes.

The segment had a profit of $28 million, compared to a loss of $50 million at the Cessna segment a year ago.

This reflected a $28 million charge taken in the segment last year for severance costs, higher new jet volume, and the impact of the Beechcraft acquisition, including a $33 million acquisition inventory step-up impact.

Backlog in the segment ended the quarter at $1.4 billion, down $100 million from the end of the first quarter.

Moving to Bell, revenues were up $94 million, reflecting higher commercial and military aircraft deliveries as well as a $41 million revenue benefit related to settlement with the US DoD related to the systems development and demonstration phase of the Company's former armed reconnaissance helicopter program which was terminated in October of 2008.

Segment profit increased $6 million from the second quarter of 2013, reflecting a $16 million profit impact from the ARH settlement.

At Textron Systems, revenues were down $140 million reflecting lower overall volumes.

Segment profit was flat despite lower volumes reflecting favorable performance across all product lines, and favorable mix of contract revenues during the quarter.

Industrial revenues increased $93 million, reflecting higher overall volumes and the impact of acquisitions.

Segment profit increased $15 million, due the higher volumes and improved performance.

Finance segment revenues decreased $4 million primarily due to gains on finance receivable dispositions during the second quarter of 2013.

Segment profit decreased $8 million, primarily due to prior year impacts of loan loss reversals and gains associated with the finance receivable dispositions, partially offset by lower administrative expenses.

Non-accrual accounts ended the quarter at $88 million, down $10 million from the end of the first quarter, while 60 day delinquencies were $96 million, down $29 million in the quarter.

Moving below the segment profit line, corporate expenses were $38 million, interest expense was $36 million, up from $30 million a year ago, reflecting debt costs related to the Beechcraft acquisition financing, partially offset by the retirement of our convertible debt in May of last year.

We recorded $20 million of restructuring costs in the quarter, on the acquisition of restructuring line, and we still expect full year costs of about $45 million.

Our tax rate was 31% and we're still estimating a full year tax rate of 31.5%.

That concludes our prepared remarks.

Roseann, we can open the line for questions.

John Godyn from Morgan Stanley.

The Bell margins at least versus our estimates came in quite strong this quarter.

The last that I remember, management had suggested that Bell margins might come in a bit next year.

Is that still the right framework or are we seeing any kind of core operating improvements that might actually improve the margin outlook as we look out?

John, obviously we're not at a point where we're going to give any kind of explicit guidance on 2015 margins.

Obviously, there was some benefit in the quarter of the settlement on ARH, was about $16 million, which we would not expect to recur.

On the other hand, we are working our way through as you know some of the higher costs as a result of last year's issues.

So I think the margin rate in the quarter is about where we would have expected it to be in terms of operational performance.

We all know we'll see lower volumes on V-22s and lower margin rates on V-22s as we go into 2015.

So we still have some work ahead of us but we continue to put a lot of focus on cost control and attacking cost base to try to help us get there in 2015.

Got it.

As we think about the long-term outlook for biz jet, of course you've seen great contribution from some of the new product lines.

When we think about some of the legacy product lines, though, do we feel like we're seeing enough here that it's fair to say that biz jet trends have sort of stabilized and are on their way to a rebound as we look out longer term.

If you could just kind of update us on your thought process there, that would be helpful.

I think, John, stable is probably the word we would use right now.

I think the market is okay for the legacy products.

We're doing all right.

Obviously most of our growth this year, which we forecasted and are realizing is a result of new products.

So when you look at full year of Sovereign Pluses and M-2s and now starting to get Citation 10 Plus sales, most of what we're seeing, all of what we're seeing frankly, in terms of upside in the market in revenue versus what we saw last year is really driven by new product programs.

Of course, we expect to have a contribution in 2015 as a result of the fact that we'll have Latitude as well.

So the underlying market, stable is probably the right word.

We certainly hope to see it recover as time goes on.

As I said earlier, we're seeing fewer aircraft available for sale in the used market.

All indicators are fairly positive but it's been stubborn in the terms of the rate of recovery.

So we're still largely banking on new products coming into the market to drive most of the growth.

That's helpful.

Just last question on the outlook for capital returns.

Operations have been quite good.

It seems like biz jet is stable.

Integration on Beechcraft is going well.

Of course, you have some debt here to pay down over time but I'm just curious what management's thought process is on capital returns to investors going forward.

I think on the capital returns, as you said, we took some debt on obviously associated with the Beech acquisition and that's kind of at the top of our priority list in terms of getting that paid down, to get back to where we think the balance sheet should be.

We will continue to do stock buyback to avoid the dilution of our employee plans, and as we've said before, we would on a sort of as appropriate basis continue to do some stock buyback beyond that if it makes sense.

So in addition to that, of course we've had a number of small acquisitions and I you would expect we will continue to see some number of small bolt-on deals.

So it's not a lot of capital but I would say that's in total how we view our use of cash in the balance sheet.

Very helpful.

Thanks.

Joe Nadol from JPMorgan.

It's actually Chris Sands on for Joe.

Scott, wanted to ask you about the outlook for the 412.

The first half run rate suggests that deliveries could be down quite a bit year-over-year which is in contrast to your expectation for growth overall in commercial.

Could you just give us any insight into the demand trends there?

So Chris, we were certainly very light on 412s in the first quarter.

The second quarter, 412s were about comparable versus 2013 and about where we expected them to be.

So we still do have sort of a heavier back half in terms of 412 deliveries.

We don't usually go down to guide on a unit by unit basis.

But they'll be relatively comparative numbers versus 2013 is how I would think about the 412 deliveries.

For the overall year or just in the second half?

For the overall year.

We are a little bit lighter because of the first -- the first quarter was lighter.

The second quarter was comparable.

And I would expect as a result the back half will be a little heavier on 412s than last year.

So the total year will be pretty similar.

Great.

And then in systems you commented on the strong program performance kind of across the portfolio.

Can you quantify the overall level of EACs that added to margin in the quarter?

Well, we give you guys the total EAC number for the Company.

I wouldn't break it down into the division by division, but we did have EACs in the quarter and I think we've seen pretty strong performance.

Our precision munitions business is doing a nice job on productivity.

We're seeing it pretty much everywhere across the different businesses.

The only thing that I think we referred to is we did have very good mix, i.e.

in this quarter we were very strong on our precision munition business which tend to be a positive mix for us.

We did not see a lot, we did get through the final test and evaluation on TCDL but have not started shipping any of those units yet.

Obviously we're sort of in the transition on the vehicle side where we were very light in the quarter because we're transitioning from the old A&A programs and will now start to ramp deliveries for the Canadian programs.

So those will all be a lot more third and fourth quarter loaded.

Right.

Overall your expectation for revenue and margin in the segment for the year hasn't changed?

That's right.

It has not.

Which means you're going to see more revenue and a lower margin rate as we go into the back half of the year.

Right.

All right.

Thanks, guys.

Sure.

Sheila from Jefferies.

Please state your last name.

It's [Sheila Kaili] from Jefferies.

Could you elaborate a little bit more on the conversion opportunities that you're seeing with Hawker customers?

Has the sales force approached the owners?

Any qualitative commentary would be great in terms of are they offering more attractive trade-in options?

Is it the service offering?

How are you luring them in?

I would say it is kind of a couple step deal.

The first step is as we talked about building that relationship, so certainly reaching out to the Hawker customers on the service front, folks that are already operating these aircraft.

There's been a lot of work going on to just make sure we have spare parts flowing and getting that channel filled again and making sure that we're taking care of the customers that we already -- that already own the aircraft.

Clearly we've started discussion with a number of those customers around what they're going to do in the future and making sure that when they want to flip over to a new aircraft or upgrade it's going to be under our line.

We have frankly a dedicated group of people that are working that pretty hard and interacting with those customers.

Keep in mind it's only been a few months that we've been doing this.

Anyone that's going to entertain a new aircraft or upgrading an aircraft is usually a process that takes a little while.

I don't think I would say at this point hey, here's X examples of Hawker customers that have decided to move their next aircraft into a Citation jet but we fully expect that will happen over time.

So but again, for the job one and the first thing we put a lot of emphasis on is making sure that the level of service and support is back to where they expect it and I think we're making some progress there.

Okay.

And in terms of Cessna pricing of course or Textron aviation pricing in Q2, could you comment on that?

Did you sustain the momentum in Q1?

And then also for overall Textron aviation EBIT, how should we think about costs for the remainder of the year and how that progresses?

I think on the pricing front, things have been pretty stable, probably up just a little bit on most of the models.

In terms of our cost position, the run rate I think we're about where we need to be.

We had the teams work pretty aggressively even before the integration period, making sure we were ready to take the appropriate cost actions and for the most part those have been taken.

And we're I think more or less where we need to be at this stage of the game in terms of our cost run rate.

Got it.

Thanks a lot.

Sure.

Julian Mitchell from Credit Suisse.

I just wanted to ask about the mix effect within Textron aviation.

You talked about the mix effect in systems as we look at the second half.

On the Q1 call you talked about 10s and Sovereigns coming in, should push up the Cessna mix on margins as we go through the year.

Do you still expect improvements in the second half versus Q2 or do you think Q2 is a pretty representative quarter in terms of mix at Cessna.

I think Q2 is pretty representative.

For sure, Julian, if you compare it on a year-over-year basis we do have more sales obviously of the 10 Plus, the Sovereign Plus in the mix.

So I think we're -- should be fairly stable in terms of the mix of the relative sizes of aircraft through the balance of the year.

Thanks.

And then on R&D, I think that was down about $14 million year on year in Q1 for Textron overall.

Is that a similar progression in Q2?

That's a good question, Julian.

I haven't looked at the number that was reported.

I don't think that would turn out to be the case because we're consolidating Beech now and that would be additive.

It becomes a --

It's just a timing issue.

Got it.

And then just on Bell, I guess your sort of first half clean margin is sort of 11, 11.5 if you strip out the AHR, ARH gain.

That's implying I guess for the full year you have a decent margin step-up in the back half sequentially, even though things like V-22 deliveries are flat.

Is that just kind of timing on cost savings at Bell coming through in the back half or is it sort of the mix from --

There's a bit of cost.

There's a bit of cost and there's a bit of positive mix in terms of the mix of commercial helicopters as well.

So we would expect to see more 412 activity in the second half of the year.

Right.

Thank you.

Jeff Sprague from Vertical Research.

Just a couple clean-up items if I could.

First, just on Bell, has the capitalized costs that are in inventory from the labor disruptions and everything worked their way through, is there any residual impact of that left in the back half?

Yes, there is, Jeff.

I think we've expected throughout the full year to see about 100 basis points drag as a result of that working its way through.

That load would be the same in the second half as the first half.

There's no tail-off even from a run rate basis?

It really starts to tail as we go into the beginning of 2015.

And then I was wondering just on turning the Beech inventory and getting kind of the PPA step-up behind us, where are we at on that perhaps, Frank, and how do we think about that in the back half of the year?

We've gotten through 45, roughly, of the 65 that we had talked about.

So there's about 20 to go and that will obviously hit the back half as that product gets sold.

It's probably a little bit heavier in the third quarter than the fourth quarter.

But it depends on deliveries.

And then also just wasn't clear on Beech.

Are you implying that Beech net of the step-up and restructuring and everything that's OP breakeven or can you give us a little color on just the underlying OP performance at Beech?

It's hard for us, Jeff, because we've consolidated all these things together.

So you really -- we're not tracking, given all the SG&A, all the engineering, manufacturing, everything is sort of put together so while we can still give some visibility on the revenue front, the operations are totally integrated.

We really don't have the ability to tease out the differences between those.

I guess the only guidance I could give you, gross margin on products is pretty equivalent.

So I don't think, you can forget the accounting of the step-up at the margin rates of the various product lines and their contribution are pretty comparable.

Right.

And I guess finally just directionally on Bell R&D, does that still have an -- or does that have an upward bias here with 505 and 525 also as you're looking at the overall Bell top line coming down, obviously with V-22 next year?

Are you able to compensate with the R&D investment?

There is some pressure on that, Jeff.

505 and 525 which will both go into flight test programs late in the year, so obviously through 2015 there will be a very active program and flight test for both of those.

And of course we have the V-280 program which is also ramping up.

There is certainly pressure in terms of R&D, new product programs associated with Bell, given that level of activity.

Okay.

Great.

Thank you guys.

Appreciate it.

Sure.

Jason Gursky from Citi.

It's actually [John Ervive] on for Jason.

I have a question about your M&A activity recently especially with the simulation business.

I'm just wondering if you could talk about what the growth rate outlook is for that business and how large you think it can get at this point.

I know you've talked about some numbers before but if you could update us there, that would be helpful.

John, I don't know that we give any specific numbers in the growth rate.

I think obviously the reason that we went into the space was because we think at a macro level it's an industry that's its going to be growing probably at least mid to high single digits.

There are different segments of the market, obviously.

Our intent is to participate on the air transport side as a simulator provider and I think you've seen that we've had sales in that business, largely be in sort of the Boeing and Airbus commercial transport market.

This win with Boeing to be the provider for the 737 max is obviously a very big deal for us and so obviously as the 73 max comes into production and they start shipping those around the world, we think we'll get some significant growth associated with that program.

On the training side, it's obviously oriented towards our platforms, i.e.

Cessnas and Citations, King Airs and Bell.

So we would expect that business to grow as we introduce new products and start to do more and more training with our new customers that come online for those platforms.

So I don't think we're going to give a specific number.

It's certainly reasonable to expect that it should be in the high single digit kind of growth based on what's going on in the marketplace.

And clearly we would like to think that we can gain some share and that would help accelerate that to be a double-digit kind of a growth business for us.

Great, thanks.

And I was wondering if you could update us on the cadence of business jet deliveries this year.

It seems like things are going to be a bit smoother.

I was just wondering what your strategy has been in making that happen versus especially how it's been the past couple of years.

Well, look, we would love for it to be level loaded.

Any time you're running a manufacturing operation and having a more consistent level load, that's how we like to manufacture and so having a working capital tie out to revenue is great.

And this year has certainly been much better than last year in that respect.

And part of that is the market and, again, a lot of it is driven by the fact that these are new products.

So the demand has been steadier for those in the marketplace.

We're not competing with our used aircraft so things tend not to get all the way into trying to do deals at the end of a quarter.

I think the order flow, while it's not as strong as we'd like to see it ultimately, the order flow has been certainly a lot more level loaded through each quarter in the year.

Great.

Thanks very much.

Sure.

Cai von Rumohr from Cowen.

Good quarter.

Can you give us a split on the backlog between Beech and Cessna?

No, I don't think we're going to break that out, Cai.

Obviously you've got Cessna, you've got the Beechcraft King Airs, you've got the military business, it's all going to be in that one backlog number.

Okay.

I mean, the margin, given the size of the inventory step-up, looked considerably better than I would have guessed for the level of volume you achieved.

Is that kind of -- is that sustainable?

Is there anything abnormal where used aircraft was at a plus, looked pretty good for the level of volume you achieved.

I think we're pretty happy with it Cai.

I think that the restructuring activity associated with the synergies and combining the two businesses is on track with where we expected it to be.

Frankly, we're also seeing some good productivity as we bring the teams together.

It's not just the synergies of reductions of headcounts but I think the operational efficiencies throughout the factories were also good in the quarter and that contributed to help give us a pretty strong margin rate.

Where are you in terms of your expectation of synergies for the year?

Are they bigger?

The same?

I think the synergies are pretty well on track.

Again, I think to the extent there's upside to it, Cai, it's the fact that we're just seeing better productivity in operation on top of the synergies.

Got it.

And maybe, Frank, you could give us an update on pension.

With the expectation of a transition next year to new mortality tables, discount rate is down.

Can you provide any color in terms of what we should expect from pension next year?

You know, Cai, we're still looking at it.

We won't have those numbers until we kind of formulate them at the end of the year and move into next year.

We've had a pretty significant change in our workforce that we're running through as well.

Certainly interest rates where they are would put some pressure on things and the mortality rate will put some pressure on things.

Don't expect it to be a headwind.

It's just a question of kind of what type of tailwind might it be and it's probably going to be lower than we might have thought when we sat here a year ago.

But we're still working through those and can't give you explicit guidance on that until we actually run the numbers and give the guidance.

Terrific.

The last one, TCDL, are we likely to have any shipments there in the third quarter?

You know, Cai, I hope so.

The biggest milestone that we needed to achieve was getting through the final operational test evaluation and we did that in the quarter.

There are still a few things just in terms of final configurations and working through to do the official submittal of the ECP to the customer, so those conversations and that review process is ongoing.

So I would certainly hope that we will see some initial sales in the third quarter.

And then the balance of our plan in the fourth quarter but I would say worst case even if it's delayed somewhat, I'd still feel pretty confident that we'll get what we expect for the total year in the back half of the year.

Thank you very much.

George Shapiro from Shapiro Research.

Good numbers.

I want to try Cai's question a little differently.

Could you just sit there and provide of the $100 million decline in backlog how much of it roughly might have been due to Cessna and how much to Beech without breaking out the military part of Beech, just applies to each.

No, George, I honestly don't -- I don't even know the answer to it because we haven't been splitting the number up that way.

So I don't think we're going to provide that in terms of guidance or status because it will just be the segment backlog number as we would normally report.

I don't think there's anything that I even know to say that there had been a material difference between how much of the backlog burnoff came out of the Citation jet business versus the King Air business.

Okay.

And then one other on Beech.

In the first quarter you said dilution for the year would be about $0.08 a share.

Is that number still the same or are you just not going to even provide it given that you've combined everything?

The latter, George.

At this point it's a combined operation.

We reiterated our guidance that we gave the last time around so we're really not tracking that separately now.

It's a combined business and we're moving forward on that basis.

The issue George is we honestly don't even look at it that way.

The engineering teams, the manufacturing teams, the sales, marketing, all these teams are now fully integrated.

So for us to even try to do that would be sort of arbitrary allocations of those functions to product lines to try to come up with such a number.

So again, it's not how we operate the business and as a result we really can't report it that way.

Okay.

And just one in general, Scott.

We've obviously seen business jet cycles improve, and as you mentioned, everything is going in the right direction.

Can you just kind of size up the lower end of the market versus kind of the middle end of the market as you see it today?

So I think the lower end of the market has been sort of stable.

We've seen good demand and deliveries on our M2 which is a new product.

I think things have been pretty steady for things like our CJ3s and XLSs.

We're seeing a little more strength at the higher end of the market with the Sovereign Pluses and the 10s.

Again, I think that's more driven by the fact that these are new products that are getting out into the market as opposed to necessarily any real difference in generically speaking market demand between, say, a light versus a mid or super mid-sized aircraft.

Okay and then just one quick one for Frank.

What was the growth in the after market business at aviation?

Again, it's tough to look at the comparabilities because we now have the Beech in the mix.

We continue to believe and it's trending at a mid kind of single digit, higher single digit type growth rate on after market.

So business continues to perform well there.

Okay.

Thanks very much.

Pete Skibitski from Drexel Hamilton.

Nice quarter.

Thank you.

Just on the strong aviation margin this quarter, the underlying rate of like 5.2%, were you guys tempted to kind of raise margin guidance for the full year from that 2.5% to 3.5% or do you have any performance concerns in the back half of the year or is it just strictly the spot market nature of the business right now?

It's very much the latter, Pete.

I think that we're pleased with how the integration's gone, the synergies are coming along as we expected.

We feel good about plant performance, the operational side of things.

And while we like that it's been a more stable market and more balanced, there's still a lot of work to do in terms of sales activity in the second half of the year.

Okay.

Got it.

And then just a couple quick --

For the record, Pete.

For the record, I'd just have to say I think that's our first temptation question in my experience doing IR.

Thanks for breaking that feeling.

(laughter) Not a problem.

Want to ask something, a couple program questions.

It looked like you guys were negotiating with Iraq on a sale of AT6s, it looked like it could be a nice deal for you.

Is that -- what are you thinking about the timing on that, given what's going on over there.

It's a very good question.

There has been discussions of an AT6 deal with Iraq.

Frankly, there are several other things across our various businesses that have been in discussion with Iraq and of course we've sold things into Iraq before.

So I'll tell you Pete, it's very hard to predict where any of those programs are going right now.

There's clearly a desire for the products.

The Iraqis continue to express a desire to acquire them.

But that government's awfully busy with a lot of other things right now.

So the level of instability makes any transaction difficult.

Understood.

Okay.

And last one on Scorpion, it wasn't very long ago that Scorpion seemed like it was going to be very kind of far out.

But it seems like a lot of momentum is building and I'm just wondering what your view is.

I mean, should we start thinking about factoring in some Scorpion revenue at this point for 2015?

Are we that far along at this point?

I wouldn't get too far ahead of yourself just yet.

So look, we are encouraged.

There's been an awful lot of customer interest.

Having the aircraft kind of make its debut publicly over here and to be seen by an awful lot of foreign militaries which is sort of our principal customer target at this stage of the game has been encouraging.

As you know, when a military looks at acquiring an aircraft, there are budgetary cycles, there's a lot of work to do to translate something where somebody says hey, that's very interesting, that would fit well, and taking it from that discussion to an order and then a ramp-up of production is going to take some time.

So I feel pretty good about where we are.

I think the product is performing flawlessly.

The guys have done just a super job.

It's flying very well.

Everybody's thrilled with it.

Customers are very impressed with it.

It's going to take time.

We've really just started to market the product.

It's going to take a budgetary cycle or two to take interest and to turn it into orders.

Thanks, guys.

Sure.

Myles Walton from --

Deutsche Bank.

Thank you.

That's okay, I could hear you.

Good morning and good quarter.

I think in response to a question on the trajectory of Bell R&D you talked about some of the upward pressures from new programs and the Valor.

I'm curious, can you do the same kind of commentary around Cessna in particular with the Latitude probably winding down a bit on spend and the Longitude spend in particular, how that cadence should look?

As we went into this year, we expected R&D to be down slightly at Cessna in terms of the jet business, just again, comparing the old Cessna to that sort of piece within the current business, just because we had so much flight test activity last year that really drove -- certification activity that drove quite a bit of the R&D cost.

At this stage of the game, our principal aircraft that really is in certification is Latitude.

So you have one instead of three and that does save us somewhat on the certification cost.

So I think that's the expectation I would have this year and I expect it to be the same next year.

I think we'll probably hold reasonably flat on a consolidated basis.

If I look at what's going on in the jet business, there was money obviously being spent at Beechcraft associated with upgrades and keeping the King Air line and the T6 and AT6 lines active and I think we'll see that.

So I guess my view going from 2014 to 2015 would be that it's probably neutral in terms of R&D as a percent of sales if you will.

Is your view on the Longitude and the expansionary nature of the Cessna jet portfolio still the same in terms of timing for that kind of entry into service and expansion of the offering?

Look, we're always looking at the line but I think that the trend towards investing in some of the larger aircraft will absolutely continue.

So our guys continue to work on the Longitude program.

There's a number of things we're doing.

I think you'll see we continue to be committed to growing the sort of larger end of our fleet of jets.

Okay.

Got it.

Thanks.

Sure.

(Operator Instructions)

Robert Stallard from Royal Bank of Canada.

On the first question, I was wondering if you could comment on used aircraft activity in Textron aviation and what sort of trend you saw there in the second quarter.

Used activity continues to be good.

We moved a number of aircraft in the quarter.

I'd say the used market in general has been pretty solid.

In terms of valuations I wouldn't say we've seen a significant pick-up although some of the reports have seen a little bit of strengthening in some of the price in some of the lighter end.

And I think in general that's what we're seeing.

So it's stable, and most importantly, the market's active, aircraft do turn over, which is good.

The second aviation question, this might be tough but you mentioned stability a couple of times in the business jet market of late.

But is it reasonable to start expecting some stability in the backlog as well?

Well, obviously the two are going to be correlated, Rob.

There's still selling that goes on in the quarter for the quarter and so you can see increased levels like we've seen in this quarter of selling that doesn't have a positive impact in the backlog.

But that's a result of still having a bit of a spot market.

There's still more selling than we'd like to see obviously for a quarter, in a quarter.

We have some models now that as we've said before have pushed out to where availability's out there the next quarter but there are still aircraft that are available for sale in the third quarter.

So I think as long as we have that environment, that will kind of make it hard to see a lot of growth in backlog.

We've been fighting our way through that now for five years.

And then just a final one.

Industrial margin was very solid in the quarter.

How do you expect this to trend for the rest of the year?

Well, the second quarter is always our strongest just because of the cyclical nature of the different businesses and how they contribute.

But I think what we've seen in the recent past and we expect to continue to see is that if you look on a year-over-year basis we're going to continue to see some expansion in those margins.

Part of that's driven by volume.

Part of it's driven by new products and some better pricing.

So I think across the board we feel pretty good about where those businesses are.

So second quarter is usually a peak margin rate for the year but I certainly expect on a year-over-year basis we'll continue to see margin expansion each quarter.

Thanks much.

Sure.

Johnson Wright from Nomura.

Scott, just one quick follow-up on sales activity in the second half.

I think on the Sovereign in particular I think you said at the 1Q results that the Sovereign was booked about one quarter out.

Is that still the case there and how confident are you filling any empty slots for that particular aircraft in advance of the -- particularly as you get close to the Latitude launch date?

We still see -- there are still some slots on Sovereign Pluses that are available in the year.

We've got I would say a pretty robust set of customer leads and through this year we've been in that mode and those deals have been closing.

The Sovereign Plus has been performing really well.

It's had great receptivity from customers.

Again, it's in this market environment, which has been sort of stable, the demand for the Sovereign Plus has been pretty good.

So lots of customer interest, lots of demo flights and lots of deals that have been closing.

I think we feel pretty good about it.

The Sovereign Plus versus the Latitude, certainly the Latitude has a larger cross section to the cabin but it is a six seat aircraft as opposed to the Sovereign which is the double club and the Sovereign also gives you that coast to coast range.

So we still have customers that need that range of capability and need that payload capability and so I think the Sovereign Plus remains a very strong platform even with the Latitude into the marketplace.

Okay, great.

Just to confirm one thing I think I heard.

EPG you were talking about some data points suggesting that the used market pricing had taken another turn down.

But it sounds like from your comments today that the actual pricing in the used market is relatively stable.

Is that right?

Yes, it really does wander around by models.

I think the last set of books was the first time that people have talked about some positive price on some of the CJ3s for instance and things like that.

You're always -- you still continue to see some price degradation in some of the aircraft.

Part of that is just the aircraft get older.

So you're always going to see a certain amount of price decline.

I would say net of overall what we're seeing in terms of our transactions and sort of the book reflecting the industry is that it's been pretty stable on our end of the products.

Okay.

Great.

Thanks.

Sure.

Cai von Rumohr from Cowen.

Just one question.

It looks like in the quarter you kind of beat expectations on the profit line in all of your businesses.

Sounds like tone of business is pretty good and you didn't raise your guidance.

Is that just being conservative or is there something we should more worried about in the second half?

Cai, I think that we are feeling good about operationally how things are going.

As I said earlier, I think when I look at the aviation business as well as Bell on the commercial side, there's still a lot of sales activity to go in both of those businesses.

That's kind of where we've been for some time with Cessna and I think with King Airs, and we feel good about the prospects and customer activity and order closure rates and things like that.

But there's still a lot of work to be done.

Similarly, on the Bell side, I think operating performance, the actions the team has been taking have been good.

But even at Bell, on the order side, we still have aircraft to sell and while that market has been pretty strong, we are seeing a little bit slower closure activity.

There's a lot of bid activity, but there's not a -- just from where we would like to be right now on the year, the number of deals that have closed to ensure those third and fourth quarter sales has been slower coming than we would have expected.

The year's always a bit back ended, right loaded, and it's going to be the same this year.

But I think operationally we feel very good about where things are.

I would be a little conservative on upside, just given the nature of how much selling activity still has to happen in the aviation and Bell segments to close out the year where we'd like to be.

Thank you.

Jason Gursky from Citi.

It's John Ervive again.

Thanks for taking the follow-up.

Scott, just on that point in terms of Bell closing activity being a bit slower than expected, wonder if you could add any color to that, why you think that might be the case.

You know, we don't know.

I think it's kind of a sense that we're getting across the whole industry.

If you look at the reported numbers and whatnot, there's again, still a fair bit of activity.

I think part of it is some uncertainties in some parts of the world.

Like I said we had some opportunities pending in places like Russia where there's been a lot of change in their economic outlook over the last six months.

And I think some of those kind of orders are kind of pending until people understand where that's going.

There's still a fair bit of uncertainty in Latin America.

It's just I think there's clearly demand out there but I think a lot of people are going through their process and getting their bid packages.

They see their needs but they're a little slow pulling the trigger right now, so --

Are you seeing any impact in terms of closure activity due to heightened competition with there being more players in particular segments in the helicopter market.

I think this is an industry-wide thing.

Everything that we're kind of hearing is there's nothing unique going on at Bell.

I think it's just the industries we serve and just kind of what's going on in those sectors that, again, deals are -- these are all competitive deals so the guys are putting out bid packages.

It would be a different story if we were losing deals.

I don't see any trend or significant difference in terms of a share issue.

They're competitive deals and the bids are submitted and people are sort of just delaying making the awards.

Great.

Thanks so much.

Sure.

George Shapiro from Shapiro Research.

Scott, I was wondering if you might comment on what percentage of deliveries at Cessna you still need to sell for the second half of the year and how that compares to where you were at this point last year.

Oh boy, George, I don't know.

Obviously we don't publish that number.

I don't think there's a huge dynamic.

I mean, like I said, the back end of this year compared to the back end of last year has a lot more new product in it, particularly the third quarter.

So I went back over the numbers I would harbor to say we're probably in a somewhat better position, just because we have a lot more new product here in the third quarter and as you recall, we didn't have the Sovereigns and the M2s until the fourth quarter last year.

So at least for the third quarter we're certainly in a better position than we were a year ago.

Could you comment at all on how many 10 deliveries you might expect or the ballpark for the year?

No, we wouldn't.

We did three, so in the second quarter as we just finished the certification, but we've kind of talked in general terms in the past, George.

I think the 10 is probably sort of a 6 to 10 aircraft a year kind of market the way we see it.

Okay.

Thanks again.

Sure.

I believe that completes calls in queue so thank you, ladies and gentlemen, for joining us.

Have a good day.

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