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Textron Inc. (NYSE:TXT)

Q2 2010 Earnings Call

July 21, 2010 8:00 a.m. ET

Executives

Doug Wilburne - VP of IR

Scott Donnelly - President and CEO

Frank Connor - CFO

Analysts

Cai von Rumohr - Cowen & Company

Noah Poponak - Goldman Sachs

Jeff Sprague - Vertical Research Partners

Steve Tusa - JPMorgan

George Shapiro - Access 342

Operator

Welcome to Textron's second quarter earnings call. (Operator Instructions) I would now like to turn the conference over to our host, Doug Wilburne, Vice President of Investor Relations.

Doug Wilburne

Thanks, Robert, and good morning everyone. Before we begin, I'd like to mention that 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 President and CEO; and Frank Connor, Textron's Chief Financial Officer. We are originating our call from London today, as Scott and Frank are here meeting with customers and industry participants in conjunction with the Farnborough Air Show.

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

Moving now to the second quarter results, which appear on slide three of the presentation, revenues in the quarter were $2.7 billion, up 3.7% from a year ago, which yielded GAAP earnings per share from continuing operations of $0.27. This compares to a $0.23 per share loss in last year's second quarter.

We incurred $0.02 per share on restructuring charges in the quarter. So our second quarter EPS from continuing operations before special charges was $0.29 per share compared to $0.08 a share a year ago. The manufacturing operations generated $170 million in free cash flow during the quarter.

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

Scott Donnelly

Thanks, Doug, and good morning everyone. We're pleased with the solid resumption of top-line growth in the quarter, reflecting expansion of our defense business and recovery in our early cycle markets.

While the pace of the recovery remains uncertain with the European sovereign debt concerns having negatively impacted business and consumer confidence during the quarter, we do believe the ability of our businesses to generate profits and cash in the cycle is apparent in our second quarter results.

So let's take a look at how that played out in our businesses, starting with Industrial where revenues were up about 30%. We continue to achieve good conversion on this revenue growth, as we posted a segment margin of 7.7%, which reflects the positive impact our cost reduction programs are having.

At the same time, we're also focused on new product development to drive growth. For example, during the quarter, we introduced EZ-GO's new low-speed road vehicle, the 2Five. 2Five is a zero-emission electric vehicle that meets regulatory standards for use on 35 miles an hour and under public roads.

We believe the EZ-GO brand will work well in this market and customer demand during the product's introduction launch has been positive. With the public attention on energy conservation, we believe this will be a good growth opportunity for us that leverages our current capabilities.

Moving to the Finance segment, we had another good quarter of liquidations. If you look at slide four in the presentation, you can see that we reduced managed receivables by $674 million, bringing our total reductions since the beginning of 2009 to $5.2 billion. Distribution finance was the largest share of reduction again with $203 million. Also, $120 million of liquidations were generated from our timeshare business, which is also a positive continued future success of our liquidation plan.

As we look at the rest of the year, we're increasing our total 2010 liquidation target from $1.8 billion to $2 billion, which will bring us to a two-year reduction of nearly $6 billion.

Looking at slide five, the cash conversion on finance asset liquidations came in at 87% for the quarter, bringing our year-to-date rate to 91%. We now expect our full year cash conversion rate will trend into the mid to high 80s.

In terms of credit performance, we saw a reduction in 60-day delinquencies from $515 million to $385 million and a reduction in non-accrual finance receivables from $1.03 billion to $876 million primarily due to the resolution of several accounts for restructuring and repositioning activities. Charge-offs were $57 million, up from $31 million in the first quarter as previously reserved losses were realized.

Moving to Cessna, results were in line with our expectations as we delivered 43 jets, 23 light to mid-sized and 20 Mustangs. As a result, Cessna returned to profitability and positive cash flow for the quarter. Business jet usage continued to expand. Our average daily utilization reached to 0.68 hours from about 0.66 hours in the first quarter. The FAA rolling three-month averages for takeoff and landings were up in both April and May. Our due date will probably be out shortly.

Correspondingly, Cessna aftermarket revenues were up nearly 20% in the quarter on a year-over-year basis. On the used front, the number of previously owned Cessna's available-for-sale remained flat with last quarter at 15.1% and used pricing remained relatively stable with the exception of some further weakness in older models high-usage aircraft.

On the order front, as expected, we had a number of cancellations, which included the cancellation of a large Mustang order from a European fleet operator. On the other hand, gross orders increased from the first quarter. And most of these orders were for light to mid-sized aircraft, so we actually had a positive order contribution backlog on a dollar basis.

While we're encouraged by demand trends in April and May, June did see a slowdown in market activity following European debt concerns, which we believe weakened business confidence around the world.

As we discussed on our April call, we've already been experiencing softness in the Mustang orders. As a result, we've reduced our 2010 Mustang order outlook to about 70 units and adjusted our production plan accordingly.

With respect to the light to mid-sized market, we're still evaluating how the pace of the economic recovery might impact demand for these models. We're hopeful that Congress will pass the bonus depreciation bill. We believe the continued positive earnings reports, the stabilization of the European credit market will contribute to an improved environment for business jet orders.

We will be watching the market closely over the next several months. We will fine-tune our delivery expectations, production plans for light to mid based on how the market develops. In any event, we continue to believe that business jet demand will recover as long as the global economy continues to expand. I still believe that 2010 will be the trough year for Citation deliveries.

As we move to Textron systems, revenues were up nearly 12% reflecting strong domestic and international demand for our products. For example, on the international front, we completed delivery of the $57 million Sensor Fuzed Weapon shipment to the United Arab Emirates in June. Margins were also strong again, as we had good performance on our legacy US Armored Security Vehicle and unmanned aircraft system contracts.

Backlog was up in the quarter, driven by new US ASV orders and Shadow systems from Sweden. We expect the backlog will grow again in the third quarter based on anticipated domestic shadow orders as well as the recently announced deal to supply shadow systems to Italy.

We also recently completed two small bolt-on acquisitions of systems which add nicely to our product and technical capabilities. The most recent, Crane Wireless Monitoring Solution based in Texas will complement our intelligence, surveillance and reconnaissance products to better meet our world needs of growing reliance on networked sensors as well as a host of future non-military security applications.

And last month, we added MillenWorks, which is an engineering company out of California that augments our advanced powertrain and suspension capabilities for combat and specialty vehicles.

Looking forward, we believe we are well-positioned despite likely DoD spending constraints to our products that are aligned with prevailing nature of asymmetrical threats and throughout the international demand as well.

Wrapping up with Bell, we had a good quarter both in terms of top-line growth and operational execution. On the military side, we delivered eight V-22s and three H-1s. The V-22 continues to perform well on theater, and we've begun discussions with the customer on next multi-year contract, which would cover production beginning in 2014.

On the H-1, we're on track with a production ramp to deliver 14 units during the second half of the year. We also signed a contract for 27 additional units which begin delivery late next year. And the DoD has recently completed its operational evaluation of the attack version of the H-1, and we expect the full rate production decision this fall. So the outlook for the H-1 program remains very positive at this point.

Moving to the commercial side of the business, we delivered 21 helicopters, up from 15 in the first quarter. On the marketing front, we had positive net orders in the quarter contributing to an increase in bulk backlog. We are also making good progress through our 429 program. Initial delivery unit was placed in a medevac service. It's performing superbly and receiving accolades from the operator.

Certification of specific configurations is moving forward, and we are continuing to book 429 orders into our backlog. We expect deliveries to resume this quarter with about 75 planned over through the balance of this year and through 2011.

So the overall outlook at Bell this year and beyond is very good, both our commercial and military businesses. As Doug mentioned earlier, we're in Farnborough where Bell and Systems both had terrific reception of their products. In particular, the U.S. Marine Corps has a UH-1 Yankee Heuy that's been in combat in Afghanistan. The crews that have been flying that aircraft are giving great feedback to prospective customers.

Systems has Shadow and Aerosonde systems on display, and we've had a lot of international interest I think which builds well on top of our recently announced wins in Sweden and Italy. Cessna, while this is not typically a business jet show, is also seeing significant interest in terms of air assets for little troop movement as well as ISR missions.

To summarize, we think second quarter results demonstrate the earnings power of the company, and we will continue to focus on cost productivity and new product development. The benefits of these efforts were evident in Industrial segment margin again this quarter. Our Systems business continues to execute very well, and we have a steady outlook for growth there, especially with international opportunities that are emerging.

Bell is successfully executing the multiyear ramp in military platforms, and we're seeing increased activity in the commercial sector which should lead to solid growth over the foreseeable future.

At Cessna, clearly the last two years have been difficult in the business jet market, and we continue to believe this cycle is going to follow its normal course. And at Finance, we're confident we can reach our new liquidation target of $2 billion. And the cash which we've been generating has allowed us to make substantial improvements in our capital structure.

With that, I'll turn it over to Frank to provide financial details in full.

Frank Connor

Thanks, Scott, and good morning, everyone. To pick up on Scott's comments on capital structure, as you can see on slide seven, in the quarter we reduced our net debt to $6.1 billion from $6.8 billion at the end of the first quarter and $7.4 billion at end of last year. We are now targeting to reduce our net debt to below $5.5 billion by the end of this year.

We also made a second $250 million repayment on the Textron bank line, bringing the total repayment to $500 million for the quarter.

You can now turn to slide eight, as we examine the major factors that drove $0.21 per share year-over-year increase in EPS before special items. Inflation came in as a 2% rate, which reduced earnings by $0.12 per share in the quarter, while positive pricing of 1.3% provided a $0.09 benefit. A higher share count, taxes and other miscellaneous items cost $0.07 per share. The combined impact of volume, mix and M&A cost $0.04 per share. Increased pension expense was $0.04. TFC's reduced losses benefited the quarter by $0.07. And our restructuring and execution focus netted a cost performance benefit of $0.32 per share.

Now let's look at the results for each of the segments, starting with Cessna. Cessna revenues decreased $236 million, reflecting delivery of 43 jets compared with 84 jets in the corresponding period last year. These decreases were partially offset by higher aftermarket and used aircraft volumes.

Segment profit decreased $45 million due to the lower volume and a reduction in deposit forfeiture income, partially offset by lower used aircraft write-downs, inventory reserves and selling and administrative expenses. Cessna backlog at the end of the second quarter was $3.7 billion, down $400 million from the end of the first quarter.

Bell revenues increased $153 million in the second quarter, reflecting higher V-22 and H-1 deliveries and higher spares and support volume, partially offset by lower commercial aircraft volume. Segment profit increased $36 million due to improved performance, higher military volume and commercial aircraft pricing in excess of inflation.

The improved performance reflects a $21 million operating profit contribution for the recognition of reimbursements for prior-period H-1 and V-22 program costs, plus the non-recurrence of 2009 termination cost related to certain cancelled commercial models. Bell backlog increased $200 million from the end of first quarter to $7.1 billion.

Moving to Textron Systems, revenues increased $57 million primarily due to higher UAS volume. Segment profit increased $15 million due to the impact of higher volume and improved performance. Systems backlog at the end of the second quarter was $1.6 billion, an increase of $200 million from the end of the first quarter.

At Industrial, revenues increased $153 million due to higher volumes, partially offset by an unfavorable foreign exchange impact. Segment profit increased $39 million due to higher volumes and improved cost performance partially offset by inflation. Looking to the rest of the year for Industrial, we expect growth to slow somewhat, reflecting normal summer and year-end holiday shutdowns in the automotive industry.

Moving to Finance, revenues decreased $30 million largely due to the non-recurrence of last year's gains on debt extinguishment and lower average finance receivables, partially offset by reduced portfolio losses. Finance segment loss improved $28 million, reflecting lower loan loss provisions, portfolio losses and selling and administrative expenses, partially offset by the non-recurrence of gains on debt extinguishment and the impact of lower average finance receivables.

Now moving to a few corporate items, corporate expenses were less than expected in the quarter, primarily on the compensation expense line resulting from a lower prevailing stock price. Our tax rate in the quarter was also lower, primarily related to a number of discrete items associated with our international operations which benefited the quarter by about $0.03. For the rest of the year, we anticipate that our tax rate will return to about 30%.

Now let's talk about special charges for the year looking at slide nine. First, we're increasing our restructuring cost estimate from $30 million to $45 million or about $0.10 on an after-tax per chare basis. Most of this increase is for additional restructuring at Cessna.

And a second change results from the continuing wind-down of our TFC Canadian operations where we anticipate taking a non-cash after-tax charge of about $78 million or about $0.26 per share. Now, this charge eliminates the balance of a cumulative currency translation account and will be triggered when the Canadian operations is considered to be substantially liquidated, which we expect to occur during the second half of the year.

It's important to note that the equity in TFC and Textron has already been reduced by this amount to previous other comprehensive income adjustments. So there is no further equity impact from this charge.

So let's now turn our attention to our 2010 outlook, and we're now looking at slide 10. As demonstrated in our second quarter results, we are more than making up for the weaker current performance of Cessna with stronger performance from the rest of our businesses.

On a net basis, we are increasing our 2010 outlook for EPS from continuing operations before special charges to $0.55 to $0.65 a share. We are maintaining our free cash flow from manufacturing operations outlook to $500 million to $550 million, although the probability is that we will likely trend towards the lower end of that range, given the lower expected delivery outlook at Cessna.

That concludes our prepared remarks for today. Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Cai von Rumohr from Cowen & Company.

Cai von Rumohr - Cowen & Company

Could you give us a little more granularity at Cessna, if we take out the used aircraft and the forfeiture gains what the results would have looked like, and some color on the pattern of R&D over the balance of the year at Cessna?

Scott Donnelly

We're sort of almost at a watch here in terms of forfeiture gains and used write-offs. And again, used write-offs were kind of pretty focused on a couple of the older high-time, high-cycle aircraft that we still have in inventory. So we're pretty close to [net watch].

In terms of your question on R&D, that cycle we will see increasing levels of R&D as we work our way through the balance of the year.

Cai von Rumohr - Cowen & Company

If we take out the Mustang, are the citation delivery estimates intact?

Scott Donnelly

At the point we have right now on the light-to-mid size, we're not formally adjusting one way or the other where we are on a thing. As I said in my prepared notes, the market I would say through the first half of the year has trended like we thought in terms of our expectation in orders.

We did have a little concern here in the latter part of the quarter as things kind of got rather around a little bit with the (inaudible) thing going on and what not. We saw some people sort of turn the back off. I don't think there are customers that are leaving necessarily, but people are taking a bit of a pause, if you will, to understand what's going on with the recovery.

Obviously, we don't know if that's a 30-day issue or a quarter or two. So that's one where we're just going to watch it. And obviously, if we see any kind of significant changes to our plan, we'll adjust production accordingly and obviously we'll have a lot better insight advice on future calls.

Cai von Rumohr - Cowen & Company

And the last one, you had lot of changes relative to what people were looking for. Can you us give us just some color on the trends we should expect to your major businesses for the full year?

Scott Donnelly

I would say that if you kind of walk through each of the segments, Industrial I would expect to stay relatively strong. Historically, you usually see some softening just because of the volume is usually softer in the second half of year than the first half of the year in the automotive industry. Obviously, with Kautex being a big part of that, we would expect to see probably a modest decline through the course of the year, again driven primarily just by auto doing its normal cycle.

I think that Bell and Systems are going to continue to perform strongly through the balance of the year. I don't think you're going to see 13% margin rates obviously. The REA helped in the quarter for Bell, and we had some pretty strong deliveries here on some international programs like the SFW in the UAE in the second quarter. But I would expect those businesses will still be strong performers through the whole balance of the year and going forward.

Cessna, despite someone certainly around the order front, it's certainly our expectation that we will see incremental improvements as we go through each quarter in terms of our margin rates. So I think that's a reasonable expectation.

And Finance, there is no change to our previous guidance. I think we'll end up seeing a loss consistent with what we've guided you through the total year.

Operator

And next we will go to the line of Noah Poponak from Goldman Sachs.

Noah Poponak - Goldman Sachs

Can you just give us the actual unit numbers in terms of what the gross orders were and what the cancellations were, by Mustang and by the rest of the business?

Scott Donnelly

You know, we haven't been putting those numbers out. Again, I think those are pretty commercially sensitive. For instance, on Mustang, we are giving you the numbers and the production rate, because we set up the production rate. So that's where we are and there is no issue with doing that. I would say, as I said, the bulk of the orders in the quarter were light to mid-sized, which I think is a positive sign.

Right now we think at least in this market environment that the mustang really probably is 70 to 75 units per year kind of a run rate. So that's what we would expect to see, you know orders and what not. That supports that, and you get in the light to mid-size. And we'll see how that plays out through the balance of the year. Positive so far but a little bit of uncertainty just driven by the fact, which you know little bit of a slowdown in business confidence year to quarter generally through the first half.

Noah Poponak - Goldman Sachs

Can you talk a little bit more about who is buying aircraft today, what type of customer it is?

Scott Donnelly

Well, mostly, you know as we see in the light to mid, you are talking about a fair number of Sovereign's and XLSs. I mean, these are small businesses. Order activity has been probably stronger in the US than anywhere. And one of the things that concerned us, you know, the half obviously is the European currency weakened against the dollar that sort of slowed down Europe as a region. But I would say its generally been small to mid-size business, probably strongest in the US, still some reasonable strength in Latin America and some in Asia.

Noah Poponak - Goldman Sachs

And just one more. On the 429 at Bell, when was first delivery, and Dunn I think you reiterated this, 25 and 10, 15, 11. Is that correct? And at one point you were talking about the 300 letters of intent and I think the story was, the downturn that kind of came right as you would normally start assigning serial numbers there. So you sort of held off and there has been some movement in the backlog. Can you just kind of update us on where you are in that process and how strong that backlog is today?

Scott Donnelly

Sure, absolutely. You are absolutely right. The 300 letter of intent that was out there was unfortunate when this 429 kind of came to the market in a pretty tough spot in terms of the commercial helicopter market. So the conversion rate on that 300 into the current backlog has been very low.

On the other hand, I would say over the last quarter or so we have been moving 429s into backlog as configurations have been identified. I would say that I feel probably better about the level of customer activity and the number discussions that are going on and the number of orders that we're starting to create in the 429 that I did from the beginning of the year.

So I think we are really starting to feel some pretty strong momentum. And that's really a function of getting these aircraft out there, a lot of demo rides, getting it into service, people starting to get some feedback on how it's performing with the actual aircraft.

So I feel probably better about the 429 right now than I have over the past year. So I think we're going to wait through that cycle, but also having aircraft out there and really being able to go out and start marketing and selling hard, it's doing very well.

E75, through the balance of 2011, I still feel very good about. We are, I would say, moving and not getting there as quick I'd like this year in terms of getting specific interiors defined and the associated certifications that have to happen with those. So it's always been backend loaded; it's still very backend loaded in terms of 429 shipments.

Most of that frankly though, is on us to get the configurations defined and get the certifications completed. So right now, I'm hopeful. We're sitting close to the 25 this year. But then if we don't, obviously I think we go out in the early part of 2011.

So I'd say the bottom-line in terms of the 429, it was unfortunate that the thing finally, actually came into production and launched at a pretty difficult time in the cycle. But the demand as we see it right now is strong and increasing, and I feel good about getting up to the production rate, the delivery rate we can talk about.

Operator

Next we go to the line of Jeff Sprague from Vertical Research Partners.

Jeff Sprague - Vertical Research Partners

Just a couple quick ones. I guess first, just thinking about adjusting the Cessna production potentially, it sounds like you're on the cusp of trying to make a decision there. I just want to get a sense of, if that's where the cash caution is. We've got earnings going up and maybe cash trending down. I would think the supply chain is probably geared up to that original production forecast.

But just give us a little sense of how you manage that and what the working capital ramifications might be if you do turn down the production forecast this year?

Scott Donnelly

Sure, Jeff. Yes, I mean you're absolutely right. The pressure point that would push us to being low range in terms of our cash expectations would attract working capital at Cessna. So as you know, these are pretty long cycle manufacturing operations. An awful lot of material is already in-house or crafted or underway, and we understand that.

As we see how these orders are playing out, we can obviously make adjustments in terms of what aircraft we build out and what aircraft we don't build out. But regardless of that, we'll still have some trapped inventory in there that will put pressure on the cash from a working capital standpoint.

And as you know, that's offset by the fact that in the other businesses we're generating high [NOP] than was in the plan and good working capital measure in all through the rest of the businesses. But that would be the pressure point for us is, is that we do need to turn down the rate of production. We certainly will do that, but given the long cycle nature of these things, which is why you have (dug) them in the pipeline anyway, it would create some working capital pressure at Cessna.

Jeff Sprague - Vertical Research Partners

Now on the flip side of that Scott, if you get to multi-year on the Zulu or further negotiation on the next tranche of V-22, does that drive some cash progress payment through deposits or anything that's favorable in the back-half of the year?

Scott Donnelly

Not really, Jeff. We have not on those programs had to go out with a lot of long lead material or something we would take at a risk and then catch up. So having a lot H-1 done is great. And then obviously, the discussion we are talking about on V-22 multi-year, now that's up in 2014. So haven't even begun to expend any kind of cash on that program.

Jeff Sprague - Vertical Research

Is there anything else in the pipeline on favorable adjustments, like maybe even on the ARH, I think there was some dispute on whether or not some of that would come back to you. Is there on any of these programs, V-22, H-1, ARH, anything else in the pipeline that comes back as a favorable adjustment to you that you can see?

Scott Donnelly

As you know, we have some reserves up on things like ARH. But I don't think those are in a situation where they're going to be settled anytime and in the real near future.

Frank Connor

And I think it's fair to characterize that our outlook includes any of those miscellaneous types of (earnings) as a matter of course, Jeff.

Jeff Sprague - Vertical Research

And then finally, can you just give us a thought on how the CJ4 ramps from here? I see you got the first three out of the door in the quarter?

Scott Donnelly

That will continue on that trajectory, Jeff. So there really has been no change at all on the CJ4. We'll probably end up 15 this year which is what we were anticipating.

Operator

We have a question now from the line of Steve Tusa from JPMorgan.

Steve Tusa - JPMorgan

Just on Bell, I'm curious the $21 million, you said it was a combination of the two items. Could you tell us what the reimbursement number was this quarter?

Scott Donnelly

None of that cash was in this quarter. It was second half.

Frank Connor

Yes. The settlement in terms of the revenue and the [NOP] impact of that REA is in Q2. But the cash won't issue till later this year.

Steve Tusa - JPMorgan

Right. I'm curious about the [NOP] impact.

Frank Connor

That happened in the second quarter.

Steve Tusa - JPMorgan

Right. How much was that?

Frank Connor

$21 million.

Steve Tusa - JPMorgan

Okay, got you. I thought that was the combination of the two items. Okay, great, $21 million. And then just on the commercial side at Bell, I think your previous target was 150 commercial deliveries. You've delivered I think 40 or something year to date. How do you think about that production target out in the back half of the year?

Scott Donnelly

If that's still the target we have, Steve, and I feel pretty good about it. Obviously, it varies by model. I think when you look at 412s, I feel very good about it. I think the 429s we are going to be pretty close to where we want it to be. There's still some softness for variability a little bit in the 407s and 206s.

But as you know, from our perspective and the bulk of the cash is tied up in those larger aircraft. So I think we're in pretty reasonable shape as we head through the balance of the year on the commercial front.

Steve Tusa - JPMorgan

And then one more question just on the 429. You're talking about 75 now for the next couple of years. We're hearing numbers from the press that you guys have about 20 of those orders right now and that will, kind of, I guess you confidence about delivering this year. Is that around the right number as far as firm orders for that aircraft?

Scott Donnelly

We haven't had that number out there, but I actually think it's a bigger number than that. And again, a lot of this, Steve, we don't put them into the backlog until we have definitized the contract and have all the configurations and all that stuff done. So that creates a bit of a lag.

So I think in terms of what I see in the marketplace right now both what's in the hard backlog, what's under negotiation, what we're specifying working with customers on, I feel very good about that 75 number.

Steve Tusa - JPMorgan

And then one more question. You guys got a pretty decent amount of price this quarter. The only place you really mentioned was in Bell. Where are you guys were getting at price, because your commercial deliveries are obviously down. And I can't imagine on the OE side, there is a ton of pricing power right now.

Is that mostly in the aftermarket or is that a function of mix, I don't know. Maybe you could just explain where the $30 million, $35 million price is coming from?

Frank Connor

We got some at Bell. Year-over-year, on a quarter basis, we got some at Cessna as well, in different pieces of the Cessna business.

Steve Tusa - JPMorgan

And is that on the OE side of Cessna?

Frank Conner

Yes.

Steve Tusa - JPMorgan

Is that a function of the backlog, kind of a trailing? How do we think that price going forward at Cessna?

Frank Conner

I think as we've said, at Cessna, we're not expecting that we're going to get price in the current environment or in the near future environment. So I wouldn't expect to continue to see a lot of price benefit, but just year-over-year on the comparative basis, we get.

Operator

And we have a question now from the line of George Shapiro from Access 342.

George Shapiro - Access 342

I had a question on Cessna. You've mentioned the forfeitures net of write-downs was about 0 this quarter. Now that compared to $15 million of net positive in the first quarter?

Frank Conner

Yes, I know the forfeiture number was fifteen in the first quarter. I think we are about flat on used and first quarter price.

George Shapiro - Access 342

Okay. And then second, at Bell, if you take out the $21 million you still had about a 10.5% margin, is that sustainable or is the comment about commercial pricing being above inflation this quarter or is that only a quarterly thing?

Frank Conner

The Bell margin when back out the REA was about 11%, because there is a revenue impact as well to that REA piece. So on an adjusted basis for the REA, it was 11%. That's at the high end or higher than what we've guided to kind of generally in dollar, we had very good performance during a quarter at Bell.

George Shapiro - Access 342

Is that also related to the fact in the subsequent quarters you don't expect to get a benefit from commercial aircraft pricing in excess of inflation?

Frank Conner

The real drive on the second half, we'll probably run a little bit less than 10% of Bell in the second half, and the primary driver there is the ramp in the H-1 which is below average margin.

Scott Donnelly

Yes, there's going to be some mix shift.

George Shapiro - Access 342

Okay. And then one last one. Industrial, was the mix as the percentage of business from auto this quarter pretty similar to what it was in the first quarter?

Frank Conner

Yes, pretty similar.

Operator

Thank you, and we have a follow up question from the line of Noah Poponak from Goldman Sachs, please go ahead.

Noah Poponak - Goldman Sachs

Hi, thanks. I just wanted to follow up on this industrial margin performance. You potentially have some favorable mix here and the revenue recovery has been very strong. So we're printing these really nice margins relative to history, but we are doing it on revenue numbers that are substantially lower than where revenue once was in the middle of the last cycle. So I guess the question is, how sustainable are these and is this sort of a new norm and the new starting point? And I guess how much higher do you think they can ultimately go as revenue continues to recover.

Scott Donnelly

Although I would say that we did have strong mix in terms of the growth on the Auto side in the segment where I think we've done all our restructuring and we have gotten strong leverage. I think the answer is that is that sustainable? Yes, it's sustainable. But I do think we will see some degradation in volume for second half of the year. So I mean Auto always goes through bit of the cycle, but we're seeing I think we will continue to expect to see higher margin rates on similar volumes that we've had in the past. I do think we'll continue to see this kind of expansion in terms of the margin rates across that entire cycle.

Doug Wilburne

Okay, ladies and gentlemen, I believe we have no further questions in queue. We thank you for joining us today. Have a good day.

Operator

Ladies and gentlemen, this concludes the conference for today. There will be a digitized replay of this call beginning today at 10:00 a.m. eastern time until October 20 at midnight. You can access the AT&T replay service by dialing 1800-475-6701 or 320-365-3844, access code 138124. Once again, to listen to a replay of this conference call, you can dial 1800-475-6701 or 320-365-3844. The access code is 138124.

That does conclude our conference for today. Thank you for your participation and thank you for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: Textron Inc. Q2 2010 Earnings Call Transcript
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