Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Textron's Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Doug Wilburne. Please go ahead.
Douglas R. Wilburne - VP, IR: Thanks you, Tawny, 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 our earnings release.
On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations' section of our website.
Moving now to second quarter results starting with Slide 3. Revenues in the quarter were $2.8 billion, down 6% from a year ago. Our income from continuing operations was $0.40 per share, which compares to $0.58 in the second quarter of 2012.
Moving to cash flow, second quarter Manufacturing cash flow before pension contributions was a $362 million use of cash. And second quarter pension contributions were $17 million.
With that, I'll turn the call over to Scott.
Scott C. Donnelly - Chairman, President and CEO: Thanks, Doug, and good morning, everybody. We saw solid revenue growth at Textron Systems and our Industrial businesses, as well as strong commercial orders of Bell. On the business jet front, demand continued to be soft. As we announced in April, we took cost reduction pricing actions appropriate for this market environment. Specifically, we re-lowered our light jet production line rates, reduced associated direct headcount, downsized our indirect workforce and reduced our jet discount allowance. As we expected, reduced discounting to entice customers into the market did result in lower sales volume as we delivered 20 jets compared to 49 a year ago. However, we achieved positive new jet pricing on both a sequential and year-over-year basis, which was our intent. We still believe the overall market demand will eventually recover as global economic – the global economies continues to expand.
With respect to the rollout of our new M2, Sovereign and TEN product lines, we are making good progress with certification testing. The aircraft are performing extremely well, although minor delays in avionics software certification has slightly delayed initial delivery dates. We would now expect M2 and Sovereign to begin shipping in the fourth quarter this year with the new Citation TEN early next year. This will reduce total expected 2013 shipments resulting in a new full year Cessna revenue outlook of just over $3 billion.
Looking longer term with new products, we're making good progress in our Latitude and Longitude platforms planned for service entry in 2015 and '17. In fact, the first Latitude fuselage in those sections were mated last week, and we're on track for flight test early next year. Market receptivity for this new model has been very good as we conducted a 19-city tour with our mock up during the quarter.
Finally, on Cessna, we're making excellent progress in implementing our Chinese strategy to build and market Cessna Aircraft (doing) country joint ventures. We completed the equipment and tooling installation for our new Chinese Caravan facility and expect deliveries to begin before year end. We're also installing equipment and tooling at our newly constructed business jet facility and expect deliveries of XLSs to begin next year.
Moving to our Finance segment; slowness in the business jet market resulted in only a few new loan originations during the quarter. However, the segment profit benefited from good credit performance and a number of small (asset) transactions in our non-captive business.
In our Industrial businesses, we saw good growth in each of our businesses, reflecting strong auto markets in North America and new product introductions and expansions of our global distribution channels. We also had good execution with an overall incremental margin conversion of 39%. We'll continue to invest in new products in our Industrial businesses as we believe that's the best way to win in the market and create high-value growth. For example, during the quarter, we did introduce our Redesigned TXT Golf Car, updating the model's curb appeal and proven performance, while delivering new features, as well as increased durability and simpler maintenance.
During the quarter, we also closed on the acquisition of Sherman & Reilly, a manufacturer of aerial and underground electrical power distribution and transmission products, which significantly expanded Greenlee's electrical utility product line.
Moving to Systems, revenues were up, reflecting growth in our unmanned air systems and precision munition product lines. We continue to see operational stability in our fee-for-service unmanned air vehicle systems contract. But as previously discussed, this is essentially a breakeven program at this time for us. Our other major UAS contract is the Shadow Tactical Data Common Link retrofit program. This program is still in the development phase, and now it appears the completion of the development program will not occur on time to allow shipments of the production units that were planned for this year. As a result, Systems' 2013 revenues will probably be about $200 million lower than we previously expected.
On the precision munitions front, we continue to ship product for the Saudi program under an undefinitized contract and expect a boost to Systems' backlog in the third quarter as we recently came to agreement on final pricing.
At TMLS, we're making good progress on our Canadian TAPV program, as we deliver our preproduction vehicles for initial performance testing. Across Textron Systems, we have a substantial amount of global sales activity underway for our products and continue to believe this business can maintain a flat to slightly growing top line over the next several years.
Finishing with Bell, we delivered nine V-22s and six H-1s in the quarter, flat with delivery in last year's second quarter. We signed a second V-22 multiyear contract to deliver 99 units beginning in late 2014, with options for 23 additional aircraft, with one already exercised. We're also in active discussions with several potential FMS customers. This should lead to additional V-22 volume in the second multiyear timeframe.
Last month, our Bell V-280 tiltrotor platform was selected to participate in the U.S. Army's Joint Multi-Role Technology Demonstrator program. We believe the V-280 offers the Army the highest level of performance (at test), as well as the best overall value in terms of capability, procurement costs and operating costs.
On the commercial side, we delivered 44 helicopters in the quarter versus 47 units in last year's second quarter. While deliveries were down, this was a result of commercial delivery timing and not a reflection of demand, as commercial order flow remained strong in the quarter.
On the last earnings call, we indicated the transition to a new ERP system had negatively impacted our productivity in aftermarket shipments. We've improved operations, such that we are now shipping spare parts at levels higher than before we implemented the new ERP system. But we have further work to do implementing these systems and we'll be focused on improving operating productivity and output to reduce spare parts backlog and return to internal production schedules.
On the new product front, we made a strategically important announcement at the Paris Air Show when we unveiled our new Short Light Single, which essentially replaces our legacy 206 JetRanger. With our recently upgraded 407 and 412 models, our new 429 and the planned 525, the new SLS will fill out our product line at the lower end. With over 4,400 JetRangers currently in service, there's meaningful existing upgrade market to support this demand. We're expediting development to bring this product to market as quickly as possible with the expected first flight late next year.
To wrap up, we expect slightly lower full year results at Cessna and Systems and slightly higher results at Finance and Industrial. We're maintaining our guidance for 2013 – guidance of $1.90 to $2.10 per share. We're also maintaining our projected 2013 cash flow from continuing operations of the Manufacturing Group before pension of about $400 million.
In summary, we remain focused on improving our operational execution and cost productivity and we remain committed to continue our investments in new products and sales capability to grow the business over the long-term.
With that, I'll turn the call over to Frank.
Frank T. Connor - EVP and CFO: Thank you, Scott and good morning everyone. Segment profit in the quarter was $213 million, down $97 million from the second quarter of 2012 and a $180 million decrease in revenues. Let’s look at how each of the segments contributed starting with Cessna.
Second quarter revenues at Cessna were down $203 million on a year-over-year basis, reflecting lower jet deliveries. The segment had a loss of $50 million, primarily due to lower volumes along with the impact of $28 million in pre-tax severance costs. We would expect that expense savings would offset most of the $28 million by the end of the year.
At Bell, revenues were down $31 million primarily due to lower commercial helicopter volume. Segment profit decreased $17 million, reflecting the lower volume and an unfavorable mix in our commercial business.
At Textron Systems, revenues were up $33 million, primarily due to higher volumes in our UAS and Weapons and Sensor product lines. Segment profit decreased $6 million, reflecting a larger mix of lower margin service contracts.
Industrial revenues increased $45 million, reflecting higher volumes across most of the businesses and increase from acquisitions. Segment profit increased $18 million primarily due to improved performance in the higher volumes.
Moving to Finance, revenue decreased $24 million from last year's second quarter, reflecting lower finance receivables. The segment had a profit of 15 million. Credit performance continued to improve during the quarter with non-accruals of $124 million and 60-day delinquencies of $65 million.
Moving to corporate items, starting with cash flow. Looking at our cash flow reconciliation, which is at the bottom of the Manufacturing Group cash flow schedule, which is attached to our earnings release, we've had a year-to-date use of cash from operating activities before pension contributions of $787 million.
As reflected on our June 29 balance sheet, also attached to our press release, you can see that a significant portion of this cash use was driven by an increase in working capital. This was driven primarily by operations at Bell and Cessna. At Bell, this was the result of inventory builds for higher second half military and commercial deliveries and the productivity issues that Scott discussed earlier.
At Cessna, the cash use reflected ramp-up of production for new M2, Sovereign and Citation TEN and lower than expected deliveries in the first half of the year. We expect these working capital increases to reverse during the second half of the year as we deliver the higher volumes at Bell and as we certify our new models and deliver higher volumes at Cessna.
Moving back to the P&L, corporate expenses were $20 million, flat with a year ago. Interest expense was $30 million, down $5 million from last year's second quarter, primarily due to the benefits from the payoff of our convertible notes on May 1. Our diluted average share count during the quarter was 283.8 million shares, which was 11.7 million shares lower than last year's second quarter, primarily reflecting the share repurchases in last year's fourth quarter and the convertible notes settlement.
Finally, our EPS guidance now reflects an annual effective tax rate of 28%, down from our previous guidance of 29%. This reflects lower domestic income at Cessna and Systems, which is subject to higher U.S.-based tax rates.
That concludes our prepared remarks. So, operator, we can open the line for questions.
Operator: Noah Poponak, Goldman Sachs.
Noah Poponak - Goldman Sachs: Scott or Frank, just to make sure I've got the production flow at Cessna about correct here. If I sly the TEN out and the Sovereign out as you just indicated versus my prior model, I show second half total deliveries down kind of 5% to 10% and full year '13 down something like 20% to 25% versus 12%. Does that sound about right?
Scott C. Donnelly - Chairman, President and CEO: That's probably about the right order of magnitude.
Noah Poponak - Goldman Sachs: Then, could you just go back to the avionics delays that you mentioned are driving that and maybe give us a little more detail on exactly what's going on there?
Scott C. Donnelly - Chairman, President and CEO: Look, we have in both the M2, which is Garmin 3000 cockpit and the TEN and the Sovereign which essentially have the same Garmin 5000 cockpit. We're trying to have one basic certified software build that really underlies all three of those platforms. The flight testing and the performance of the avionics equipment and whatnot, for the most part, has been quite good. The aircrafts are performing extremely well, making great progress in all their flight testing. But our supplier has struggled going through this first – our 25 cert and just getting everything all lined up and getting us a build of the software that will pass through all the final certification testings. We think we're there, frankly. I mean it hasn't really impeded the flight test program. The aircraft have been continuing to run. We do have the initial builds of – or the initial versions of the latest build that are in our own integration laboratories on the ground and look very good. Guys were very bullish that we think it has the things that needs to have in it for the final cert, and so it's a matter of just taking those now and getting them into the actual aircraft; and then frankly going through the formal process and getting each of the aircraft through. The only reason that the TEN is pushing into next year is just the timelines to get the M2 through the certification process, get the Sovereign through it. It's probably going to push the TEN into beginning of next year. So it's relatively mild, modest in terms of its schedule impact, Noah. We're originally hoping to get the first couple of sales of M2s and Sovereigns late in the third quarter, and then we had always planned the TENs in the fourth quarter. And I just think with some of the, rather let's say, relatively minor delays in getting this final software build, it's pushed them out a couple of months, but that's enough to push it, all the deliveries of the M2s and the Sovereigns into Q4 and just realistically speaking as we focus on getting those through the process. So it'll push the TENs into the first of next year.
Operator: Joe Nadol, JPMorgan.
Joseph Nadol - JPMorgan: Scott or Frank, just on the cash flow, heard what you said on the inventory build at both Bell and Cessna. I was wondering if you could give a little more detail on, I guess, what surprised you in the quarter or if it did at all. Are you back on track? I know you haven't caught up at Bell for the ERP implementation, but are you back on track with where you originally would've thought you would've been? And then on Cessna, how are you going to make back the inventory build by the end of the year if some of these deliveries are getting pushed into 2014?
Scott C. Donnelly - Chairman, President and CEO: Well, I think Cessna is more or less to be expected. We know we're ramping up M2s. We're ramping up Sovereigns. We expected, as you know, to take down the light jet production volume, but obviously, we're finishing up the aircrafts that were in the queue. So we certainly expected to see a significant inventory build at Cessna. We still believe that we will get the M2 and the Sovereign deliveries that we had in the plan for the year. It's just that they'll all be fourth quarter instead of over the end of the third and into the fourth quarter. So, the only ones that are really moving out in total are the TENs moving into next year. So for sure, there is some pressure there. On the other hand, we think there are opportunities, and we're certainly taking fewer trade-ins. So, as we continue to work down our balance of used aircraft inventory, which we did again in the quarter, we think that helps to make up for some of that cash shortfall in terms of having the Citation TENs delayed into the first quarter of next year. So the Cessna situation, I think, is pretty well understood. There is not a lot of surprises there, and we'll work our way through that. At Bell, I would say, certainly to our plan, we're behind where we would like to be in terms of cash. As I said, in terms of how we're doing in this ERP system, particularly with respect to a lot of our parts shipments, be it into the spares or into our final assembly factories, the improvement in that area is kind of back to plan. But it did not catch up where we were behind in the first quarter. So that's the work we still have to do. So, the system is running. We can demonstrate that we can now ship the parts at levels at or above where we were before we put the system in. But we haven't yet achieved the level where we were able to burn down that backlog. But we certainly have expectations that'll happen through the course of the year. That also results in getting things around progress billings and things like that where you don't have as much in progress that has been accomplished, and therefore, you're behind on some government billings. But again, as we get that system recovering, get it stable and work our way through the rest of the year, we think we will recover that.
Joseph Nadol - JPMorgan: So it's fair to say that we should see improvement certainly in Q3, particularly at Bell and then a lot of the improvement at Cessna comes in Q4 because that's when all the new deliveries take place?
Scott C. Donnelly - Chairman, President and CEO: Yeah, that's exactly right.
Joseph Nadol - JPMorgan: And then over Industrial, margins were quite good, the highest in, I think, a very, very long time. You'd attributed it to performance and to volume. How should we be thinking about the upside opportunity to what you've been putting up in the past? It's sort of the 8% level as we go forward, or are we going to revert back to that level?
Scott C. Donnelly - Chairman, President and CEO: Well, as you know, our Industrial businesses are each cyclical in their own nature. So, I think I wouldn't expect to see 9%, almost 10% margins in the last two quarters, but I certainly would expect to see margin expansion over what the margins have typically been in the third and the fourth quarter. So I think performance will stay strong. The strategy we have around there, both in terms of productivity and driving more sales and new products is working, and I think it'll continue to work. So, certainly, there is the seasonality, but I would expect to continue to see margin expansion in the Industrial businesses.
Joseph Nadol - JPMorgan: Then just one more, Scott, could you comment on demand, in particular for mid-sized aircraft? Have you filled those initial Sovereign slots for the new version of the aircraft and maybe just address XLS demand?
Scott C. Donnelly - Chairman, President and CEO: So, Sovereign demand, I mean, we are starting, obviously, to take orders for the new Sovereign. We just got the first production aircraft off the line only a few weeks ago. And that thing has been on a very, very steady and busy tour of flying around and doing demo flights. So, we really didn't have the sales tool in place until here just very recently, but the aircraft is out there, flying a lot of customers. And I'd say we have a pretty strong list of customers that are interested in new Sovereign. It's always been a very popular aircraft. People that have them love them. And it's a very nice refresh to the aircraft. So, as I said, we have started to take orders and put them in the backlog but we’ve only really been out there able to show people the aircraft, and demo flight here in the last few weeks. So, I would say it’s building some pretty reasonable momentum in terms of the customer prospect list. XLS demand has been pretty steady through the quarter and no real change. In terms of the light jet market, as I said, the market is still very soft. And if you're not out there doing progressive discounting and trying to go to customers that are not ready to move yet, you're not going to see a whole lot of volume. That’s exactly what we expected to see in the marketplace. So there is obviously some activity but it’s still pretty soft.
Operator: John Godyn, Morgan Stanley.
John Godyn - Morgan Stanley: In the release you described the Cessna production cuts as the right actions. I was just hoping you could elaborate on that a little bit. Of course, demand continues to be soft. So I was just curious, would continued softness in biz jet trends from here cause you to revisit production even further and potentially reduce it again, or by right actions, do you mean that the data that you see and the conversations that you're having suggest that you’ve really hit the right level given where demand is?
Scott C. Donnelly - Chairman, President and CEO: Well, obviously this is a very fluid situation. So I don’t think we would ever say, 'hey, we are done one way or the other'. So, in the case of the lights, we scale back what we thought our target for the year would be around sales of those aircraft. I would say at least looking into what we're anticipating for the third and fourth quarter, we think we are in the right place. On the other hand if you look at M2’s, the market, demand for that new product has stayed has stayed fairly strong. We’ve actually gone in and tried to figure out how to add some additional slots in the next year because we're in a situation right now where we see some transactions happening, and the M2 would be the right aircraft for the customer, but it's – we don't have available slots for them. So we've had some adjustments, obviously, that we took down this year around some of the light models, comfortable with where we're right now. That doesn't mean we would change it up or down based on what we see demand changing in the marketplace. But I think what we took those down to, our view right now is, that's probably the right number in terms of our current production role. Then, of course, we have the M2 where we're going to go try to find a way to insert some more available slots into 2014 because we think the demand is there.
John Godyn - Morgan Stanley: And I was hoping you'd talk a bit about what the sales force is telling you the customer response was to the production rates. Of course, you had some good comments on incremental pricing. Is that just sort of simple supply-demand rebalancing? Or is there any kind of new or renewed sense of urgency to transact that wasn't in the customer conversations before the cuts? Just any clarity or background there would be helpful.
Scott C. Donnelly - Chairman, President and CEO: Sure. No, I would categorize it as a supply-demand balancing. So the transactions that I felt that we were doing, that we wanted to get away from doing, we're trying to go in and do some additional discounting to get a customer who's ultimately going to upgrade their aircraft and trying to pull them forward to get them to upgrade now. So as we took that sort of aggressive discount out and didn't go try to pursue and try to get somebody to come into the market that didn't feel they were ready to come into the market, obviously, those transactions are going away. And our customers are fine with that. When you have customers that say, 'hey, I'm okay where I'm probably for another year or two', then that's fine. So they'll keep flying their current aircraft for another period of time.
Operator: Carter Copeland, Barclays Capital.
Carter Copeland - Barclays Capital: Just a quick question on the Cessna margin in the quarter. If you exclude the severance costs that you called out last quarter, you're still decently negative. I wondered if there were any other cost action items there. Or maybe you could comment on any impact from used aircraft in the quarter? Any color there would be helpful.
Scott C. Donnelly - Chairman, President and CEO: So obviously, the vast majority of it was associated with the severance costs which is the $27 million that we have in there. There were about $8 million of used aircraft residual write-downs. But other than that, it was just a very, very light delivery quarter. And so there's just not a lot of cost absorption on 20 jets.
Carter Copeland - Barclays Capital: Just as a clarification, when you say pricing improvement from the actions you took, is that sequential improvement versus last quarter or year-over-year?
Scott C. Donnelly - Chairman, President and CEO: Sequential and year-over-year actually.
Carter Copeland - Barclays Capital: And one final one. In Systems, you mentioned the definitization of the Saudi contract. Does that result in any material margin impact versus what you have under the undefinitized contract before?
Scott C. Donnelly - Chairman, President and CEO: No it doesn’t we ended with roughly the pricing that we expected in terms of how we've been booking the deal. So I think the only real consequential outcome to see that becoming a definitized contract is it will all go into backlog as opposed to just what was under the undefinitized contract.
Operator: Robert Stallard, Royal Bank of Canada.
Robert Stallard - Royal Bank of Canada: Scott, I have a follow-up on your comment. Earlier you mentioned about continued softness in light demand, of apparently, a pickup in demand for the (mid-cam). Do think there are some of the sort of structural change here in terms of the business jet market that is preferring these larger jets?
Robert Stallard - Royal Bank of Canada: The second question, I was wondering if you could comment on the demand environment in terms of geographical regions. If you're seeing any differences versus maybe what you said three months ago in U.S., Europe or Asia?
Scott C. Donnelly - Chairman, President and CEO: No, it's still very much U.S.-centric. There's a little bit of activity in Europe, very light activity, frankly, in Latin America, some in Asia, not very strong on the lights. A lot of demand in Asia on the Caravan. We're seeing a fairly strong demand for our turboprop business over there. But in terms of the jet markets, it's very North American-centric.
Operator: Pete Skibitski, Drexel Hamilton.
Peter Skibitski - Drexel Hamilton: Let me just ask, I guess, a couple of Bell questions just for something different. On the SLS, Scott, I mean, some of your competitors sell helicopters in that range, 100 to 200 helicopters a year. Is that the kind of opportunity that you're thinking for that model?
Scott C. Donnelly - Chairman, President and CEO: It is. I mean, I think our principal competitor in this market right now, Peter, really is the guys that have moved into the Robinson R66s. That's really the space that we're targeting. It's kind of that price point. I think we have – it'll be a little different performance for us, but it's in roughly in that price point; and it's probably a 200, 300 helicopter a year market.
Peter Skibitski - Drexel Hamilton: And then, any progress on the 429 weight approval from the FAA?
Scott C. Donnelly - Chairman, President and CEO: Not from the FAA. We continue to get more countries that are approving it based on the Canadian certification. So we see the market continue to grow internationally for it as it's approved. I think the situation with the FAA, Peter, is that, as you may have read, there's really an activity going on right now within the FAA to look at this whole issue of – is 7,000 pounds the right number to delineate between the current certification standards, whether it's 27 or 29. And this has happened in the past by the way, right, where, as technology changes and what's available in the market changes and technologies change in particular, is it appropriate to have a specific weight that delineates the difference? If so, is it the right weight? So, really what's happening right now is there is a broader review of this issue going on in the FAA, and I suspect that where we'll end up will really be reflective of where the FAA wants to go in the future in terms of how they're going to delineate between Part 27 and 29 service.
Peter Skibitski - Drexel Hamilton: Then just broadly, on the Bell commercial helicopter, I guess, cycle, you mentioned timing during – I think your opening remarks. You know a sense that the commercial helicopter cycle is slowing at all? You just think you had a timing issue in the quarter and overall the commercial helicopter up-cycle is sort of still intact, is that kind of your view?
Scott C. Donnelly - Chairman, President and CEO: It is. There's no change to our view. The quarter actually was quite strong in terms of order rate. So a lot of order activity. We were light a few helicopters versus a year ago, but that really just has to do with customer delivery timing and there's no change in our view of what's going on in the market nor our expectations in terms of our deliveries for 2013.
Operator: Cai Von Rumohr, Cowen and Company.
Cai Von Rumohr - Cowen and Company: So, Scott, you mentioned improvement in pricing at Cessna sequentially and year-over-year. And yet, if one looks at the used market, it looks like those prices continue to kind of soften. So do you feel you've kind of hit equilibrium here where basically the prices really have held and can get better from here? Or are you concerned that the weakness in the used market is going to catch up with you, and so you're going to have continuing pricing pressures in your business?
Scott C. Donnelly - Chairman, President and CEO: I think that part of what's going on with the new aircraft pricing was also driving the residual value on the used aircraft. So it's actually a little bit the other way. And I guess one thing I want to be clear about. I don't want to mislead anybody, all right. We got better pricing in the quarter both sequentially and year-over-year, but we're hardly taking aircraft back to list pricing. These are still attractive prices for customers versus historical levels, okay? So there is still discounting going on. It's not like this has snapped back to all of a sudden, people are going to be selling at list price. So I do think that pricing will continue to reflect sort of the tone of what's going on in the market. It was just our view that coming out, particularly out of the first quarter, and I looked at what's going on from a pricing standpoint, was getting to the point where it didn't make any sense do these deals, okay? So, I mean, we need to go back to a level of price that is still a fair, an attractive deal for our customers, but one which is also a reasonable deal for our company to be able to continue to invest in new products and, et cetera. So that correction, I think, was very important. And I'm glad that we made it, and I think it's appropriate that we make it. But these products are still very attractive in terms of how they're priced at this point even going back modestly above where they were in 2012. So used aircraft pricing, Cai, absolutely, I think is still going to be a challenge. But I think that there -- it's more of an impact to the ability for somebody to trade in and what their residual value is, as opposed to how it should necessarily pressure new aircraft pricing.
Cai Von Rumohr - Cowen and Company: Was there any change as you went through the quarter in terms of the tone of demand in any respect?
Scott C. Donnelly - Chairman, President and CEO: Not really.
Cai Von Rumohr - Cowen and Company: And then you'd mentioned the avionics delay, and obviously, you already were planning most of the delivery of Sovereigns and M2s in the fourth quarter. But obviously, I assume some of those have slipped into next year. Approximately how many of those new plane deliveries that you'd expected this year slipped into next year?
Scott C. Donnelly - Chairman, President and CEO: As I said, I really still expect that we will get the M2 and Sovereign deliveries that we were expecting. They'll just be in the fourth quarter instead of getting some done in the beginning or at the end of the third quarter. The only aircraft that I really view as moving into the next year as a result of these delays are the (indiscernible).
Operator: Jason Gursky, Citi.
Jason Gursky - Citi: Frank just a quick question for you. The corporate line in the income statement seems to bounce around from quarter-to-quarter. I was wondering if you could give us an update on the second half in your view, all else being equal at this point, stock price and all the other inputs that go there, what we should expect on the corporate line for the second half of the year.
Frank T. Connor - EVP and CFO: Yes, I mean, the corporate line kind of, generally, if you look at kind of how we guided it, runs about kind of $35 million to $38 million on average. And it bounces around, as you say, because of that kind of share price activity and what that does in terms of just the stock-based compensation expense. And so if you kind of think $38 million type area per quarter, that's a normalized type of level for that expense.
Jason Gursky - Citi: That's what's baked into your guidance then for the full year; is $38 million booked in the third and fourth quarters each?
Frank T. Connor - EVP and CFO: Yeah, that type area; $37 million to $38 million.
Jason Gursky - Citi: Then, Scott, just a quick question on Cessna and the margins there. Could you just give us a little bit of color around your expectations on incremental margins, assuming we get some year-on-year growth going again there, what we ought to expect from incremental margins on a go-forward basis? I think you've talked about a range in the past and I was wondering if you could give us an update there.
Scott C. Donnelly - Chairman, President and CEO: Yeah, we generally expect to see 20%, 25% incremental margin on volume growth at Cessna.
Jason Gursky - Citi: These most actions don't change that at all; the headcount reductions?
Scott C. Donnelly - Chairman, President and CEO: No, because it's largely trying to size based on what we anticipate volumes to be. I mean, those are the actions that we have to take if we're going to adjust the business accordingly in terms of what the revenues are going to look like.
Jason Gursky - Citi: Then last one, Scott, can you – in the past, I mean, you've given us a little bit of your expectations around the biz jet market in China. I was wondering, generally speaking, you talked a little bit about your production actions, but can you talk a little bit about the market itself and the development of the biz jet market in China and where we are today?
Scott C. Donnelly - Chairman, President and CEO: Well, we still have expectations that we're going to see growth in the Chinese market in terms of – well, I'm (not right) talking about our products, which are primarily aircraft that would be flown within China, not in and out of China, so it's a domestic aircraft. It is still today not an easy market from that standpoint because it's not easy to fly internal just in terms of the aerospace management. But we have every indication and certainly see activities going on that would lead us to believe that that's going to continue to liberalize. So, there's a lot more liberalization of lower altitude airspace that's happening. We see this in selling Caravans. We see it in selling helicopters. A lot of these aerospace is going to become more open. But it's certainly our expectations that they'll start to open up and make it easier to fly within the country at the higher altitudes, which is really obviously the land of the jets. So our focus here right now is making sure we have a good sales team in place and start to do the market development activities, so that as we continue to sell into that market, we make sure that we're present to see every opportunity. And obviously, the XLS manufacturing in Zhouhai, which we expect to kick in and start deliveries next year is specifically targeted at those opportunities.
Operator: Julian Mitchell, Credit Suisse.
Julian Mitchell - Credit Suisse: Yes, I had a question on the Bell margins. In the first half, they were down around 100 bps. Year-on-year you had sort of 40%, 45% decremental. If you are thinking about the second half, I mean, is there anything in terms of the phasing or the waiting of R&D for things like 525, the V-280 that maybe changed that dynamic or R&D is fairly well, smooth through the year?
Frank T. Connor - EVP and CFO: Fairly smooth, Julian. I mean, we're still on track for our original guidance between 13% and 14%.
Julian Mitchell - Credit Suisse: Then in Cessna, if we are thinking about – I understand the push outs and so on. I mean, excluding that, it sounds as if volume and pricing are tracking pretty much in line with the way you would've thought back in April and May. I just wanted to check if that's the case? More specifically, what's going on with Cessna aftermarket? I think that was up about 9% in Q1, just what sort of trend did you have just now?
Scott C. Donnelly - Chairman, President and CEO: It's up again in this quarter in both parts and services. So guys are still flying the aircraft, utilizing the aircraft and we are seeing, I'd say, reasonable growth on the service side of the business and in terms of the volume of jet production as I said I think the numbers we are looking at right now in terms of the performance this quarter and our expectations here through the second half of the year, we feel like our plans in terms of production that we laid in are probably about where they need to be. So, I'd say it's -- at this point, we still have the same expectations that we had when we talked to you after the first quarter call.
Julian Mitchell - Credit Suisse: Then lastly just if you could obviously rates are moving around and so on just a reminder on what the anticipated pension effect on earnings is for '13?
Frank T. Connor - EVP and CFO: It's for '13.
Julian Mitchell - Credit Suisse: Yeah. If you are willing to talk about '14, that would be great, but I just any view on either.
Scott C. Donnelly - Chairman, President and CEO: It is 130.
Frank T. Connor - EVP and CFO: For '14, the pension expense was 225-ish area, which was a meaningful headwind to our 2012 level.
Scott C. Donnelly - Chairman, President and CEO: For the expense.
Julian Mitchell - Credit Suisse: The expectation for the effect in '13?
Frank T. Connor - EVP and CFO: I'm sorry, so on '13, we had about $55 million of pension headwind and total pension expense was about kind of $225 million and in '14, we should no long -- we would expect, it depends on rates and lots of things between now and then, but we would expect that we will no longer see a headwind. We should see a bit of a tailwind and obviously that will depend on kind of discount rates and returns for the rest of the year and lots of other factors, but as we sit here today, we would not expect to continue to see a pension headwind as we move into '14.
Operator: Jeff Sprague, Vertical Research.
Jeffrey Sprague - Vertical Research Partners: Just cleaning up a few things. Used aircraft, that charge of $8 million or write-down of $8 million, is that on aircraft that are now no longer in-house? And can you give us some color on the size and dollars and/or units of your used aircraft inventory?
Scott C. Donnelly - Chairman, President and CEO: That $8 million is a charge against our current inventory based on the residual values. We obviously had some sales of aircraft in the quarter, Jeff. I don't think there was an appreciable gain or loss on sale of those guys. So they're marked to roughly the right spot. I think it was a very modest gain this quarter. But we don't talk about the specific numbers of aircraft on the used side. We didn't sell quite as many as we did year-over-year, but actually dollar volume of the sales was actually a bit higher than it was year-over-year.
Frank T. Connor - EVP and CFO: Our net inventory went down slightly, Jeff.
Scott C. Donnelly - Chairman, President and CEO: Right. Net inventory -- yes.
Jeffrey Sprague - Vertical Research Partners: Just kind of back to Cessna. So effectively what you are telling us right is M2 was sold two year plan now through 2014, we obviously don’t know precisely what your plan is. But I am hoping we can kind of get, kind of bigger than a bread box type of thought process here. If I think about M2 obviously clearly is going to hurt M1 I think you'd agree with that I don’t know if you do. If I think about M1 plus M2, are we looking at unit volumes equivalent or maybe even better than kind of the 40-ish a year that we were seeing in 2011 and 2012?
Scott C. Donnelly - Chairman, President and CEO: Well I think it’s a fair way to look at it, Jeff. I mean it’s sort of an equivalent number. Mustang deliveries have been at a relatively low rate just because, again, we see a relatively small number of people coming into that market. But certainly, when you look at the total for the entry jet market, there's now two ways to participate in that with us; Mustang or the M2. So, yeah, you got to think about kind of annualized roughly the same number of aircraft with, I think, at least in the early years, a significant mix shift towards the M2.
Jeffrey Sprague - Vertical Research Partners: Then kind of along the same lines, your confidence on clearing the list inventory in Cessna, obviously, comes around moving the Sovs and the TENs that you are building. Can you give us some color on how you are sold on those relative to your production plan on whatever horizon you are comfortable talking about it, whether it's through Q4 or into 2014?
Scott C. Donnelly - Chairman, President and CEO: Well, I guess, just from a color standpoint, I mean, the TENs are pretty sold. That's been out there for a while. We've been able to market and sell that aircraft on the Sovereign. We still have a number of aircraft to go sell. But as I said earlier, we really have only had the first demonstrator aircraft to take out and start doing demos and flight tours here over the past month. So, as I said, we have started to take orders, we have started to close deals, but we still have more aircraft to sell here for the 2013 plan. But we think we have a pretty reasonable level of interest in the customer community and a lot of people that are talking to us, a lot of people are doing demo flights. But that process is still fairly early.
Jeffrey Sprague - Vertical Research Partners: Right. And then finally from me, just Bell commercial, can you give us kind of just the rough percentage delta what you think full year volumes look like versus 2012?
Scott C. Donnelly - Chairman, President and CEO: I think we guided we would be up significantly and I think that's how it's playing out.
Jeffrey Sprague - Vertical Research Partners: So notwithstanding a little hiccup in Q2, the back half looks very strong?
Scott C. Donnelly - Chairman, President and CEO: Yeah, I mean, the Q2 is just – we line up with customer delivery dates. So unfortunately in Q2 there were a number of aircraft, particularly larger aircraft, that are heavily, more heavily weighted towards the third and fourth quarter.
Jeffrey Sprague - Vertical Research Partners: I'm sorry, just finally, one more. So just thinking about all this, actually the incrementals in Cessna with the charge and the used aircraft and everything aren't awful actually. For as much as production is down, I would say, it's kind of admirable, although it's a tough market for you. But should we think of Cessna, I mean, Cessna should be breakeven or better in Q3, is that a reasonable expectation?
Scott C. Donnelly - Chairman, President and CEO: You know, again, Jeff, it's so sensitive to the volumes of aircraft and without having any of the M2s or Sovereigns in Q3, I think that's going to make that a challenge. I mean, obviously, that's what we're trying to do. I think – look, the bottom line here is that the team out there I think is doing a heck of job in a pretty tough environment. They have driven a lot of cost productivity and I think that's part of what you are seeing. I mean, we are not just saying, well, it's a bad market, so everything's going to a disaster. We can't possibly be happy but anything that has a red number associated with it. But the guys are simultaneously trying to drive as much productivity and go through the challenges of reducing and eliminating an awful lot of jobs to respond to what's going on in the market. At the same time they're trying to invest a ton of money in developing a bunch of new products that will help us both this year, next year and into the future. So it's a tough balancing act. But I think those guys are doing a heck of a job, trying to do everything they can to manage cost and make sure that we do as well as we can in a tough market. And obviously, I think, position us so that when this thing does play itself through on this cycle, things will come out very well.
Operator: George Shapiro, Shapiro Research.
George Shapiro - Shapiro Research LLC: Just to follow-up on a couple of numbers, Scott. You kind of said aftermarket sales of Cessna were up, were they up in the 5% to 10% area like they were in the last quarter?
Frank T. Connor - EVP and CFO: They were up 16%, but keep in mind that we had some M&A over the past year in the service center, so on an organic basis, it was high single digit.
George Shapiro - Shapiro Research LLC: The used plane sales that were in the quarter?
Scott C. Donnelly - Chairman, President and CEO: I'm sorry George, what about used aircraft in the quarter?
George Shapiro - Shapiro Research LLC: Can you just give us what the sales volume was?
Scott C. Donnelly - Chairman, President and CEO: I don't think we get in the specific numbers, George. As I said, we were down a couple in terms of units, but on a year-over-year basis, we were actually up in terms of the sales volume, so they were more expensive than larger aircraft.
George Shapiro - Shapiro Research LLC: Then Scott, the CJ4 was particularly weak this quarter. I mean, you kind of been running double digits and it dropped to 4. Is there any reason for it or is it just coming to the light weakness and then would you expect that to rebound some in the third quarter?
Scott C. Donnelly - Chairman, President and CEO: Well, I think, George, it's probably is a reflection a bit of this notion that people that already have CJs aren't going to do an upgrade at this time and we see a lot of people that are going to the CJ4s that might be current CJ2 or 3 operators right now. So, I think that's probably a little bit a good example of it. If you don't see a whole lot of upgrade activity going on, you are probably not going to see as many people moving into the 4s.
George Shapiro - Shapiro Research LLC: So what drive -- in third quarter deliveries, I mean, what's able to drive it significantly higher or maybe it's only a little bit higher than the 20 that we saw in the second quarter?
Scott C. Donnelly - Chairman, President and CEO: I'd have to say, George, it's probably just sort of the normal cyclicality of people buying aircraft. In all places we look at what's going on in the customer community and the number of deals, the number of prospects on every aircraft type. So, I mean, we are not particularly guiding a specific number of aircraft in the third quarter, but I would – looking at right now, we certainly expect it to be higher than the 20 that we saw in the second quarter.
George Shapiro - Shapiro Research LLC: Then just more general one, Scott, you have mentioned after the first quarter you weren't going to cut price and we clearly saw that in lower orders this quarter although better quality orders. The fact that you didn't succumb to that temptation at the end of the quarter, does that change people's minds sufficiently that we go into quarter here that they recognize that they are going to have to pay a better price if they want an airplane. I mean, can you talk about that mentality that's out there?
Scott C. Donnelly - Chairman, President and CEO: Well, George, it's a very good question and it's part of the theory, the case that we have, but we don't know the answer of that yet, right. I mean, without a doubt, some calls happened at the end of the quarter saying, hey, are you ready to make a deeper discount, get a deal done and the answer to that question is, no. And so, for sure, there's some deals that probably could have happened this quarter that didn't because we're not prepared to go with those price levels. As I said earlier with Cai, we're not going back to list pricing, all right. But these are still attractive prices and we're certainly hopeful that those customers who want to upgrade have a reason they want to upgrade to a new aircraft will consider coming in and pay in a reasonable price. But we are not going to go do that kind of aggressive discounting at the last moment to try to get a deal across the goal line. So, whether that's actually happens in practice versus just theory remains to be seen, but certainly, there were some people that were looking for bigger discounts to try to make a deal happen; and again, that goes back to price levels that don't make sense for us. So, I think, I'd hope we are at a point now where the number that we can put on the table for that customer is a very fair and reasonable number and it's a number that they'll be comfortable with, and ultimately will trade in or buy the aircraft.
Operator: Myles Walton, Deutsche Bank.
Myles Walton - Deutsche Bank: I guess the first one is sort of, high level assessment EBIT margin guidance for the year, is the full year anticipated to be still better than breakeven now?
Scott C. Donnelly - Chairman, President and CEO: That's certainly our objective. Again, so it's very volume-sensitive, but certainly our plan would be to get it above the breakeven line on the year.
Myles Walton - Deutsche Bank: Then, Bell aftermarket in the first quarter had the ERP issues and was down, what was it like in the second quarter and can you give us some perspective on the military aftermarket in particular?
Scott C. Donnelly - Chairman, President and CEO: If you look at the total aftermarket, we were on what our original plan was for the quarter, okay. So, the system – we've figured out how to operate with the new system, in some cases, with the system, around the system sort of going through the usual things you go through on one of these big system implementations. But anyway, the operation is certainly back and while it's – we have our share challenges, we are able to deliver what we need to deliver. The only unfortunate part is we did not eat into the miss that we had in the first quarter.
Myles Walton - Deutsche Bank: So, what was the aftermarket sales in the quarter in terms of directionally, up down how much?
Scott C. Donnelly - Chairman, President and CEO: On a year-over-year basis, it was…
Frank T. Connor - EVP and CFO: It was up about single digits.
Scott C. Donnelly - Chairman, President and CEO: It was up, but up modestly on a year-over-year basis.
Myles Walton - Deutsche Bank: Then last one, just confirming, so on the R&D expectation for the full year, I think it is expected to be somewhere in the kind of $500 million, low $500 million range. That hasn't moved as a result of kind of the development timelines. Is that still the right place holder?
Scott C. Donnelly - Chairman, President and CEO: Yeah, these issues on certification really don't have much of an impact on the R&D front at this stage of the game. Most of the R&D is invested. It's simply a timing ongoing through the final certification. If you look at Cessna, a lot of the R&D now has moved into the Latitude program. And as Doug said earlier, the Bell – Bell's on track and relatively (level) load in terms of its R&D investments, (driven) by the 525 and now the SLS and V-280.
Myles Walton - Deutsche Bank: Only one other one, another manufacturer had similar issues with delays in avionics; caused the avionics suppliers to forward advances to the manufacturer. Is that something you're pursuing as a result of the delay in certification?
Scott C. Donnelly - Chairman, President and CEO: No, it's not. Look, I think our supplier has been very genuine in their efforts to get this thing done. I think that there were some deals made with other customers because, frankly, they said, look, we've got more on our plate than we can handle, and we're going to go focus on getting this deal done for Cessna, because we were kind of first in the queue. And so I think we are the guy, I believe, that's getting the top priority and getting the energy put into it. And look, in the grand scheme of things, I don't like to have a certification date slip out, but this is a relatively mild, modest slip. And I do believe these guys are dedicating the resource and everything they can to keep it on track. So, no, at this point, we're not in a position to try to go look for any kind of damages. I think they're in good faith doing everything they can to get us going.
Operator: Ron Epstein, Bank of America.
Kristine Liwag - Bank of America: This is (Kristine Liwag) calling in for Ron this morning. I guess my question comes from about Systems margins. So margins were down about 200 basis points this quarter even though revenue was up 8.5%. I was just wondering if you can walk through maybe the factors that drove the margin contraction in this quarter.
Scott C. Donnelly - Chairman, President and CEO: Well, I think the most significant element is that these fee-for-service contracts were basically booking at 0 profit, right? So we had taken a charge last year and basically did a total program or task order estimate to complete that took it from a loss contract and basically booked forward on a breakeven basis. And so obviously, there is dilution to our overall margin rates associated with that. So I think, if you looked at the margins in our other businesses, they're standing where we would expect them to be in the double-digit, above double-digit kind of margin rates, where we're seeing dilution from our UAS business principally.
Frank T. Connor - EVP and CFO: Yes, the other place we saw a little bit of margin impact there from volume-mix standpoint is in our armored security vehicle, where we're doing more reset volume relative to production volume than we had in some previous quarters. And so we saw some additional ASV volume that was reset volume with lower mix rather than production.
Kristine Liwag - Bank of America: And last week, I heard from Defense Secretary Hagel that sequestration could cut investment account by 15% to 20% in fiscal year '14, so starting October 1. This cut is larger than what we've heard before. So are you seeing any sort of customer behavior changes? Or do you see further downside risk to your defense outlook for the rest of the year, particularly in the second half?
Scott C. Donnelly - Chairman, President and CEO: I'm sorry, for the rest of this year?
Kristine Liwag - Bank of America: Yes. Because right -- fiscal year '14 would start on October 1.
Scott C. Donnelly - Chairman, President and CEO: Yes. No, I don't think we would expect that. And for us, I guess, it's principally driven by the fact that we have a multiyear deal around V-22. So we know what those unit volumes look like. Our other big deals with Cessna or at Bell, rather, are around H-1 and the unit volumes on the production side of that have been stable. Obviously, our Armored Security Vehicle businesses or precision munition businesses are virtually all international businesses at this point. So they really have no exposure. The area that we're probably the most sensitive with respect to sequestration issues is around our unmanned air vehicle business and some of our intelligence software and geospatial analysis and intel businesses, which are funded more on a year-to-year basis. So when they change budgeting, those things can be affected year-to-year. We're suddenly seeing some pressure on those businesses, but it's not something that I would say is material. And we certainly don't have any reason to believe there'll be any material change to this calendar year with respect to the sequestration, further sequestration discussions.
Operator: Steve Levenson, Stifel, Nicolaus.
Stephen Levenson - Stifel, Nicolaus & Company, Inc.: Can you give us an update on the timetable for the 525, please?
Scott C. Donnelly - Chairman, President and CEO: Sure. 525 is progressing very nicely. We'll be flying that aircraft next year, which was our original plan in 2014. We're obviously in work with the FAA around certification dates. We have not announced the certification date yet for that aircraft. But I think it's still our expectation that we'll be flying it next year. We'll likely certify – we haven't given a hard date to customers yet, but probably sometime out in 2015.
Stephen Levenson - Stifel, Nicolaus & Company, Inc.: And last, what stage are you on partnering on the V-280, or is it a little premature for that still?
Scott C. Donnelly - Chairman, President and CEO: We have a number of partners that are part of the V-280 program. And to be honest, I don't know how much we publicly announce. So I got to be careful here that I don't announce something we haven't announced. But we have several partners. It's a very – it's not a structure like we had with Boeing on the V-22, right, where it's a Bell-Boeing function. But we have a number of very strong partners that will have portions of the V-280 product. And those discussions are, frankly, pretty mature at this point, but we just haven't publicly announced them yet.
Douglas R. Wilburne - VP, IR: All right, thank you, ladies and – okay, go ahead – thank you very much, ladies and gentlemen. Go ahead, Tawny.
Operator: Thank you. Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.