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Executives

Douglas Wilburne - Vice President of Investor Relations

Scott Donnelly - Chairman, Chief Executive Officer, President and Member of Management Committee

Frank Connor - Chief Financial Officer and Executive Vice President

Analysts

Carter Copeland - Lehman Brothers

Cai Von Rumohr - Cowen and Company, LLC

Robert Stallard - RBC Capital Markets, LLC

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

C. Stephen Tusa - JP Morgan Chase & Co

Ronald Epstein - BofA Merrill Lynch

Heidi Wood - Morgan Stanley

Alexander Virgo

Jeffrey Sprague - Citigroup

Jason Gursky - Citigroup Inc

Noah Poponak - Goldman Sachs Group Inc.

Myles Walton - Deutsche Bank AG

David Strauss - UBS Investment Bank

Textron (TXT) Q4 2010 Earnings Call January 26, 2011 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Textron Fourth Quarter Earnings Call. [Operator Instructions] And I'd now like to turn the conference over to the Vice President of Investor Relations, Doug Wilburne. Please go ahead.

Douglas Wilburne

Thanks, Leah, and good morning, everyone. Before we begin, I would like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release.

On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website.

Moving now to fourth quarter results, which appear on Slide 3 of the presentation. Revenues in the quarter were $3.1 billion, up 11.2% from a year ago, which yielded GAAP earnings per share of $0.19 compared to a loss of $0.23 in the fourth quarter of 2009. During the quarter, we recorded $54 million in restructuring charges or $0.13 per share on an after-tax basis. This was higher than we had previously forecast as we accelerated a number of cost actions at each of our Manufacturing segments and corporate, which brings our restructuring program to an official close.

Going forward, we do not expect to record restructuring costs as special charges, although we will certainly continue to pursue cost improvements as part of our ongoing business initiatives.

Moving back to the fourth quarter. Excluding special charges, EPS from continuing operations was $0.33 per share compared to $0.15 a year ago. One clarification. Fourth quarter EPS reflected an $0.08 per share benefit for settlement of a few international tax items as we discussed on our October call.

Moving to cash flow. Manufacturing operations generated $518 million in free cash flow during the quarter, bringing our full year amount to $692 million.

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

Scott Donnelly

Thanks, Doug, and good morning, everyone. We capped off the year with a solid fourth quarter in terms of demand, strong operating performance of Bell and Systems and continued success in liquidating our non-captive Finance portfolio. Our cash flow was strong, primarily due to higher volumes in Cessna, Bell and Industrial. In the quarter, we took the opportunity to make a $350 million voluntary contribution to our pension plan and also made the first $300 million payment on TFC's $1.75 billion credit line.

The most encouraging news in the quarter was a noticeable improvement in the demand environment for business jets, as well as commercial helicopters. At Cessna, we booked the highest number of quarterly gross jet orders since the third quarter of 2008. The improved commercial order flow also reflected, we believe, bonus depreciation provisions in the U.S. as well as a relatively stable global economic environment. Because we had inventory available, we were able to meet the increased spot demand of Cessna and delivered 79 business jets in the quarter, bringing our full year total to 179.

We were also encouraged with improvements in the used aircraft market as units for sale continues to trend in the right direction with Citation availability now down to 14.5% from 15.4% a year ago and a current cycle peak of 17.3%.

Business jet usage also continues to improve, and as a result, Cessna's aftermarket revenues increased 20% during the quarter. On the basis of these trends in the marketplace and the availability of bonus depreciation, we continue to believe that 2011 deliveries will be up slightly from 2010.

Moving to Bell. Overall performance continued to be solid, reflecting good management of overhead costs while we were continuing to ramp production volumes. On the commercial side, the strong demand environment led to 71 helicopter deliveries in the quarter, up from 50 in last year's fourth quarter and up from 24 in the third quarter this year. We also had good execution on the 429 program as we delivered 16 units in the quarter, bringing 2010 deliveries to 20.

We're encouraged with what we're seeing in the commercial helicopter industry, and we believe that Bell deliveries in 2011 will also be up slightly from the 131 which we delivered in 2010. On the military front, we delivered seven H-1s and seven V-22s. And importantly in the quarter, the Zulu attack version of the H-1 passed its op eval and was approved for full rate production in late November.

Staying with the military, Systems also had a solid quarter with revenues up about 5%, delivering 10.4% margins. Looking forward, we continue to believe Systems will generate top line growth despite pressures on the DoD budget, given the nature of our U.S. programs and international opportunities. For example, December, we were awarded a contract worth over $250 million to deliver 512 sensor fuzed weapons to India. We are also working on an initial contract for a foreign military sale of armored security vehicles that will start with production prototypes and deliveries this year.

Moving to the Finance segment. We ended the year with another good quarter of liquidations, reducing managed receivables by $359 million at a cash conversion rate of 84%. This brings our full year reduction to $2.4 billion for the full year cash conversion of 91%. Our non-captive portfolio has been reduced to $2.3 billion, consisting of about $900 million in the Timeshare category, another $900 million in the Golf portfolio, with the balance in Structured capital and a few other miscellaneous categories.

Looking to 2011, we expect liquidations in the range of about $750 million to $1 billion, reflecting the smaller portfolio. Cash conversion ratios will also be lower, again, reflecting the nature of the remaining assets.

Moving to Industrial. Revenues were up 11.5%, reflecting growth in all four business units in the quarter, with particularly strong automotive demand. This resulted in a full year revenue growth rate in Industrial of 21%. We also had good conversion on higher revenue at Industrial during the year with full year margins expanding 510 basis points, for a total 6.4% for the year. Looking to 2011, we expect modest top line growth and continued margin expansion in the segment.

In summary, I believe 2010 was a good year, especially given the volatility we experienced in the global economic environment. We made great progress on our exit from the non-captive Finance business, generated strong cash flow and reduced our consolidated net debt to $5 billion from $7.4 billion last year. At Industrial, improved margins demonstrate our ability, as volumes return, to leverage the cost actions we've taken. Bell had a strong year performance, reflecting the attention we placed there on execution. And I believe we are positioned in both commercial aerospace businesses at Bell and Cessna for the market recovery that appears to have begun to materialize in these industries.

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

Frank Connor

Thanks, Scott, and good morning, everyone. Segment profit in the quarter was $184 million, up $54 million from the fourth quarter of 2009. Let's discuss the factors that drove the improvement, starting with Cessna. Cessna returned to profitability in the fourth quarter from a loss in the third quarter, generating $23 million in segment profit. However, this was down $5 million from a year ago despite revenues being up by about $100 million. This was primarily due to manufacturing inefficiencies related to lower production volumes, lower deposit forfeiture income and higher used aircraft write-downs.

At Bell, fourth quarter revenues were up $173 million, and segment profit increased $54 million. The increase in profits was helped by better performance in pricing in excess of inflation, partially offset by higher R&D and S&A expenses.

At Systems, profits were down $10 million despite a $25 million increase in revenues, primarily due to lower pricing on ASVs, UAS mix and inflation. At Industrial, revenues were up $66 million, which drove a $7 million increase in segment profit. At Finance, our segment loss of $57 million was an $8 million improvement over Q4 of 2009, primarily due to lower loan loss provisions and portfolio losses, partially offset by lower interest margin on the reduced portfolio of finance receivables.

Looking at the balance sheet, with cash flow from liquidations and other cash flows, we expect to pay down the balance of the TFC credit line in advance of its maturity in April of 2012. Additionally, we plan to have a new Textron backup credit line in place during the first half of this year. As Scott mentioned, we ended 2010 with a net debt balance of $5 billion, which reflects a two-year reduction of $6.9 billion. We're comfortable with the strength of our balance sheet and believe we will continue to improve on our position.

Moving now to pensions, which can be found on Chart 7. Our pension cost in 2010 was $151 million, and we are projecting a 2011 level of about $185 million. This represents an approximate $0.04 per share headwind. These projections are based on a discount rate of 5.75% and assume the long-term rate of return of 8%, both of which are 50 basis points lower than 2010 assumptions. You can also see on the chart that a large portion of our cost is related to the amortization of actuarial losses.

Now turning to Chart 8, with respect to cash contributions. In 2010, we paid $417 million, which included mandatory payments of $67 million and the fourth quarter voluntary payment of $350 million. In 2011, we are planning to contribute about $250 million, with about $100 million of that being mandatory. Given the impact of voluntary contributions, going forward we will be providing cash flow guidance on the basis of manufacturing cash flow before pension contributions, and will continue to provide planned and actual pension contributions.

Looking at Chart 8, we are projecting 2011 manufacturing cash flow before pension contributions in the range of $800 million to $850 million.

Looking at Slide 9 we are projecting our 2011 R&D budget will be about $500 million and a CapEx budget of about $430 million. Increases of 19% and 59%, respectively.

Moving to EPS on Chart 10. We are projecting 2011 EPS in the range of $1.00 to $1.15 per share, an increase of 23% to 42%.

To give you a sense of the underlying improvement in our business, take a look at Chart 11, which is a walk from our 2010 GAAP EPS from continuing operations of $0.30 to the midpoint of our 2011 guidance range. $0.51 of the improvement relates to the elimination of special charges and $0.24 reflects the lower Finance segment loss. We have $0.30 in headwinds from higher R&D and depreciation, $0.21 from the lack of one-time discrete tax items in 2011 and an increase in U.S. income, $0.04 from pension headwinds and $0.07 from a higher share count, primarily related to the dilution from our convertible debt, which means that the underlying Manufacturing business is producing an approximate $0.64 increase in earnings per share.

With that, I'll turn the call back over to Doug for some additional outlook details.

Douglas Wilburne

Thanks, Frank. Turning now to Chart 12. You can see that our outlook includes an estimate for corporate expenses of about $130 million and interest expense of about $145 million. Our 2011 tax rate increases to 31% from 11.8% last year, reflecting the items Frank just covered.

Moving now to Chart 13. This shows our projection for each of the segments in terms of revenue and profitability. On the Manufacturing side in the aggregate we're projecting revenue growth of about 12%. And at the midpoint, we are forecasting about a 15% increase in segment profit despite the headwinds that Frank just discussed. We're projecting a segment loss of about $140 million at Finance, which incidentally translates to about $0.29 on an EPS basis.

Flipping now to Chart 14. Our estimated fully diluted GAAP share count for next year is about 322 million shares. We base this estimate on an assumed average share price of about $27.50, which is not a forecast on our part, but just the assumed basis for purposes of calculating EPS guidance. Keep in mind that this GAAP share count is disadvantaged by the exclusion of the economic benefit of the purchased call option associated with the convertible debt that we issued in '09. For valuation purposes, we would suggest that the per share calculation should be based on a share count that includes the impact of the option.

On that basis, we believe that about 298 million shares is the appropriate 2011 share count for valuation purposes. Just as a reminder, a dilution modeling spreadsheet is available in the IR section of our website. To wrap up then, we have several additional charts in the back of the presentation deck that we won't cover on the call but may be helpful to your analysis.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from the line of Peter Skibitski with SunTrust.

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

I guess the big thing that stuck out for me in the quarter is learning how to reconcile a pretty big revenue uptick at Cessna next year with the fact that backlog was down pretty sharply during the quarter.

Scott Donnelly

Sure, Peter. I think the way to think about Cessna for next year is that, again as we said, we're forecasting that we'll be up slightly in terms of our deliveries. I'd say we feel pretty good about that number right now. To be honest, we're not in a very different place than we were at the beginning of 2010 in terms of needing to have orders come in through the course of the year. But I think we sort of took a one-year delay here as we saw the market not recover as we expected in 2010. We're going to see that recover, we believe, in 2011. But it's mostly going to be the kind of a flow business. In other words, we did not see in '10, I would not expect to see in '11, a lot of positive backlog build because I believe most of the orders, most of the business will be transacting more in the near term. So it's not like we're going to see, I don't believe yet, in the cycle what you've seen in previous cycles where you have this huge build of backlog for demand out in future years. It is going to be more of a flow business. So even in an environment where you have positive net orders and are hitting the delivery rates we expect, I don't think you're going to see a big outyear order backlog build. So I don't know, at this stage of the cycle, watching backlog is probably not the right indicator in terms of how the year will play out.

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

And then on the margin guidance for next year at Cessna, are you kind of anticipating pricing pressure? Is that kind of the big driver of the lower margin rate?

Scott Donnelly

No, it's not so much on the pricing side of it. It really is just that we're still talking about very low production rates. So we still have a lot of inefficiencies built into the system. Even at the numbers we're talking about, they really are the kind of levels of numbers that we were talking about as being the sort of the 2010 levels. With low production rates, and overhead absorption is challenging in that environment, I don't think you're going to get big positive pricing. But I think we see the pricing outlook right now as being fairly stable.

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

Is 200 a good number for Citations next year?

Scott Donnelly

I would think that would be more than slightly up.

Operator

Next we go to the line of Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc.

Can you just help us square the slightly up comment on units at Cessna versus the $3 billion in revenue, which would imply kind of a mid-teens revenue growth rate?

Scott Donnelly

I think that the unit number, Noah, we are going to have a stronger bias towards more light midsized next year than Mustang. So you're going to see the total unit volume number up slightly, and you're going to see a better mix in terms of revenue per aircraft.

Noah Poponak - Goldman Sachs Group Inc.

So some mix and then presumably some good growth in the non-jet part of Cessna as well?

Scott Donnelly

Yes, we'll continue to see service grow. But I think a big part of it is you are going to see more of a mix towards light mid versus Mustang.

Noah Poponak - Goldman Sachs Group Inc.

And then, Scott, I wondered if you could maybe try to walk us through or describe the mentality of your customer that you're talking to today, because we've seen, as you say, inventory get better, utilization get better, the equity market has had a sustained rally, corporate profits are good. But we haven't really had that demand recovery yet. And presumably part of that is the political overhang or the do-more-with-less mentality, and so nobody wants to spend money. Can you maybe just talk about some of the conversations you're having with regard to how much those overhangs are starting to alleviate themselves, or just how your customer is thinking these days?

Scott Donnelly

Sure, Noah. I think most of my feedback would be coming from talking to the sales guys here recently, and their mood is fairly positive. Obviously, they feel like they have some momentum coming out of a strong fourth quarter. Customer conversations continue to be very positive. I would say the political overhang has fallen off significantly. The fact that the used market has been picking up and running off aircraft and seeing some stability in pricing in that environment helps the current -- a lot of our customers because they already have an aircraft. And so the trade-in becomes more feasible or the ability for them to sell the aircraft becomes more feasible. The only caution I have is that these are -- this mood of the customer as being willing and having very detailed and serious discussion about working themselves towards actually placing an order, we saw that happening last spring as well. And I think, again, the political overhang didn't change, but just concern over the economy. When the euro crisis hit, it kind of set people back a bit, and so they backed off. And frankly, they stayed away for the better part of nine months, coming back towards the end of last year. So I'd say the mood is very positive with the sales folks. The conversations with customers are very good. We really do have a lot of customers who now are at a point where they are a year, two years, three years from when they would normally want to roll aircraft. So they're eager to get back into it. But again, the key factors are their ability to dispose of their current aircraft. And in that case, the used market becoming more viable is helping them. And I think the political overhang is largely gone at this point. So that's kind of my view of the mood of what's out there, Noah.

Noah Poponak - Goldman Sachs Group Inc.

The Systems revenue number implies double-digit revenue growth there. Can you just give us the kind of couple of bigger items that are driving the very good growth in that segment?

Frank Connor

The biggest driver's SFW.

Scott Donnelly

Yes, ASV is fairly stable, UAS is up a little bit, although with a more of a mix of refurbishments than new units this year. And we do expect to see an uptick in the SFW business. We obviously have current orders that we're delivering on, and we'll start to see some of this India order flow through this year as well.

Operator

And next we go to the line of Jeff Sprague with Vertical Research Partners.

Jeffrey Sprague - Citigroup

Scott, could you also just elaborate a little bit on kind of managing production in '11? Obviously, the term flow business is not something that people -- is there something you need to do different to work through that? Is it work in progress airplanes that need to be kind of at the ready? And just the ramifications on cash and supply chain as you work through that?

Scott Donnelly

Sure, Joe. The way I'm looking at it right now is, as I said, it's not a lot different than it was last year, right? You're absolutely right. This is a business that used to building to a backlog. And the reality is, while there is some element to backlog and some number of aircraft that are spoken for, we're also at a large part at this point building to a forecast. So we took our best shot at that last year. It was kind of interesting as we went through the year, the view of the outside world is we were either building them and hoping people would buy them, or we were way underbuilding them. So it's anybody's guess. But we worked to a forecast. As we went through last year, as you guys know, we got a little bit nervous as we went through the mid-part of the year because the strength that we felt in the market, obviously, disappeared. So we got midway through the year, and we thought, geez, we're building too many airplanes. And then we saw November, December come in and turned out we built about the right number of airplanes. So we're in that exact same mode now this year. So we are building to a forecast. And it's the same way you'd run any other business. We sit down with the sales folks, and we try to understand where the market's going. And obviously, you have to do this on a model by model basis, and make an estimate about where we think it's going to come out. I'll say the exact same thing I said last year, which is my tendency at this point is I would err slightly towards having too many aircraft because if you get another run in December, which we had in '09 and now we've had in 2010, I want to make sure we have aircraft available. Now we're not going to go build tons of inventory, but if push comes to shove, we'll err a little bit on the side of having aircraft available. That worked for us this year, and I think we'll try to accomplish the same thing in 2011.

Jeffrey Sprague - Citigroup

And on Bell, just one question here on the current quarter and then thinking about next year. Frank, you mentioned performance in the margins. Is there some kind of performance award or something in there? 14% margin in Bell is, obviously, exceptional and you're not modeling that going forward. Is there a one-off of some sort there?

Frank Connor

No, there's no one-off there, Jeff. That's just reflective of the volume levels in that quarter, kind of spread across the base of Bell. So we're just benefiting from the volume increases. Obviously, the fourth quarter was a big quarter when you look at it kind of across the year.

Jeffrey Sprague - Citigroup

And then as we get further into the H-1 and V-22 ramp in '11 and '12, it looks like you're dealing with margin kind of mix pressure that you could conceive doesn't seem to be weighing on the business too significantly. What are the offsets there? Is it aftermarket? Is it the restructuring benefits? I just would have thought I would see a little bit more margin pressure as some of those big OE programs ramp up.

Frank Connor

Well, I'd say we are benefiting, certainly, from aftermarket. We're benefiting from just very good cost performance and restructuring activities across the business. And those programs are also performing very well. We've done a nice job of delivering kind of on contract, on schedule, and we are really benefiting from that additional volume across our base.

Jeffrey Sprague - Citigroup

And finally for me, I don't know if you've said it. But where's the funded status of the plan at year end?

Frank Connor

We're at about $1.3 billion.

Scott Donnelly

About $1.3 billion, yes.

Operator

And next we go to the line of Robert Stallard with Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC

Scott, I was wondering if you could help us with a couple of Cessna metrics, which could really give us a feel of how things are progressing. Notably, you had the whitetail situation shifted over the quarter, how much your slots have sold out in 2011, and what you think the book to bill might be this year.

Scott Donnelly

Well, Rob, I don't know if I want to do too many specific numbers in there. Obviously, as we were targeting through the year, we had some concerns as a result of the market being kind of soft through the course of the year that we would have a bunch of so-called whitetails toward the end of the year. Needless to say, the vast majority of those were sold or are now spoken for. So our inventory situation in terms of finished goods at the end of year came down significantly. Our order book in terms of the percent sold slots, as we've talked about, we kind of treat that as pretty competition sensitive information. But suffice to say that we're not in a situation very different than we were last year. So there's a fair number of aircraft that are sold, but there still requires some work to go here in terms of orders that need to convert to sales in 2011 to fill out our production plan and to hit our slight increase in unit volume. But again, as we sit here, as I said with Jeff, I mean, it is a forecast, but we feel like that's a forecast that we can hit, and we'll keep working that. Yes, on the book to bill, this thing is, I think on a backlog basis, is going to go sideways here for a while. You're not going to see -- I don't think we're at the phase yet in the cycle where you're going to start to see the demand get so strong that you're really pushing out and growing for future year delivery. So I think we'll continue to burn off some of that backlog for customers that are already in the order book and will take 2000 [sic] deliveries. And I think we'll be largely this year making orders that allows us to deliver our 2011 number that we give you. And of course, we'll have some future year, but of course there'll also be still some cancellations that will play in some of the outyears as well. So again, I think at this stage in the cycle, the backlog to me is not a number I look at a whole lot. I'm really looking at what's the current order run rates and how does that deliver on '11. And that's the information, frankly, that we'll look at as we go through the year that will help us, not only think about 2011, but also set our production run rate as we get towards the back half of the year into 2012.

Robert Stallard - RBC Capital Markets, LLC

Your comments on the end markets seem to suggest that the U.S. has done particularly well over the last couple of months. If you look more globally, how would you make any distinctions out there? Are you seeing a good recovery elsewhere as well?

Scott Donnelly

Well, I think I would say that, clearly, the bonus depreciation program -- you always have some tax incentive buying that happens at the end of the year in the U.S., primarily, anyway. And I think the bonus depreciation helped to fuel that. But even outside the U.S., the stability in Europe, Asia, I mean just having the global economic markets to be pretty stable here for the last six months has resulted in some strength and order flow starting to come out of those regions. So we did see a stronger bias here in the fourth quarter towards U.S. orders, and I would say largely because of the bonus depreciation coming out. But we also saw a reasonable order flow from the rest of the world. And again, I think that's just, generally speaking, the economic environment has been pretty stable here for the last six months.

Robert Stallard - RBC Capital Markets, LLC

And just finally at Bell, you saw a strong quarter for FMS sales there. What helicopter does that relate to, and how do you expect that to progress next year?

Scott Donnelly

Our FMS stuff usually is a blend between 412s and 407s, and I would expect that to continue going forward.

Operator

And our next question is from the line of David Strauss with UBS.

David Strauss - UBS Investment Bank

The R&D pickup and the CapEx pickup, can you give some color there, what exactly is going on, maybe split it up by business, what's the big driver of both of the pickups in both of those things?

Scott Donnelly

Sure. The vast majority of that is Cessna and Bell. We have announced, obviously, the Citation Ten at Cessna. We haven't announced specific programs. But as we have talked about, we do have a number of upgrade programs and a couple of clean slate aircraft programs that are underway at Cessna. Similarly at Bell, we have a number of upgrade programs. Some that have been announced, some that will be announced shortly, as well as some work that we're doing to sort of add-on to the family of helicopters at Bell. So as you look into 2011, and going forward, the level of R&D activity at Cessna and Bell is up significantly. That's the bulk of the number. So there's a modest increase in Industrial with some new product planned, and Systems is fairly stable at this point, I'd say.

Douglas Wilburne

And then, David, the CapEx is tooling and other spending related to those programs that Scott described.

David Strauss - UBS Investment Bank

And then on V-22. Obviously, you're under a multiyear contract, which gives you a fair amount of protection from any potential cancellation of the perm. But how do you feel about the potential risk that, given pressures on the budget, that the Marine Corps could look to stretch out the program and rather than rates continuing to go higher, maybe actually even drop or just flatten out?

Scott Donnelly

Well, I can tell you that, I mean, there's a lot of uncertainty, David. I'm always reluctant to say anything definitive here about the Defense Budget. We all know there's a lot going on right now in the Pentagon. But at least so far, the discussions around V-22 have been as they have been the last couple of years, which is the Marine Corps demand, the Air Force demand, the utilization of this air vehicle. It's a very, very unique asset, and we have not seen any indications from our customer about a desire to slow down or change the program of record for the aircraft. So it's just all I can tell you as of now, that is not something that's been put on the table in terms of a budget issue.

David Strauss - UBS Investment Bank

And last one for me, the smaller loss at TFC, obviously, the portfolio is strong. But what are you assuming for loss provisioning and just losses in the portfolio in 2011?

Scott Donnelly

I mean, obviously, we've done a lot of loss provisioning here over the last couple years with many of these assets, particularly in the Golf and the Timeshare world. But we are expecting that, net this year, we're going to see something probably around that $140 million of losses flow through the business.

Operator

And our next question is from the line of Julian Mitchell with Credit Suisse.

Alexander Virgo

It's Alex Virgo for Julian. I guess I just wanted to dig a little deeper on the incrementals at Cessna. If you could talk about maybe an update on the production shift in Mexico and give us maybe some color on how we should think about that this year.

Scott Donnelly

Well, I mean, specifically around the Mexico, that transition continues. We've made a lot of progress in terms of facilities. We've moved a number of items down there. So we're continuing to develop the workforce. And that program that we announced in terms of part of our overall restructuring has been moving full speed ahead. And that's true with Cessna, as well as Bell.

Alexander Virgo

And in terms of how we should think about incrementals at Cessna this year?

Scott Donnelly

In terms of the revenue line outs or...

Alexander Virgo

I guess I'm just trying to get a little bit more detail on how we can go from a very good top line guide to I guess slightly lighter than maybe we had expected on the bottom line.

Scott Donnelly

Well, I think, Alex, depending how you're looking at it, the thing that's really going to continue to be a drive for us is we are not going to see in 2011 a significant change in our production run rates. And so when you look at overhead absorption, inefficiencies in the factory, it does not have a marked change in '11 from '10 because the underlying production run rates are not significantly different. So there's a lot of stuff that we've been doing, obviously, on the cost front, but we also at some point need to have some volume grow to drive some efficiencies through those factories, in addition to, obviously, the transitions we're making in trying to put places in lower labor costs. But I think if you look at 2011, people do have to keep in mind, we are still running at very low production run rates.

Operator

Next we move to the line of Myles Walton with Deutsche Bank.

Myles Walton - Deutsche Bank AG

I was wondering if you could size, in Cessna in the quarter, the headwind on deposit forfeitures and used aircraft write-downs. And also on the used sides, what you're looking for in terms of -- or building in any headwind there or write-downs there into next year's guidance?

Frank Connor

So for the quarter, the forfeiture number was $5 million relative to $17 million a year ago. And used aircraft write-downs was $9 million, and there was no used aircraft write-down a year ago. So those are kind of the headwind numbers, so $20 million-plus of headwind. In terms of this year, we kind of planned the year without a lot of kind of headwind related to used or benefit of forfeiture. Frankly, we kind of, we planned it expecting those would offset each other.

Myles Walton - Deutsche Bank AG

And then with respect to TFC, I know it's beyond the current forecast, but is it potentially in the cards for a breakeven in '12? Or does that look more like a '13 event at this point?

Frank Connor

Well, as we've talked about, we think that this process is going to go on for a while, and we've always talked about kind of being able to liquidate within our capital cushion and having some excess available. And if you run through those numbers, it does not suggest a breakeven in 2012. So it suggests that we will continue to have losses at TFC in 2012. As we continue to wind it down, we think obviously that loss curve is going to continue to decline and decline quite rapidly, reflective of this year's numbers relative to last year's numbers. But we do expect that it will continue to be a drag on the non-captive business in 2012. The captive business, we will expect kind of will be around kind of breakeven-ish type levels for this year, and then we are working towards, obviously, profitability out in the '12 and beyond time frame.

Myles Walton - Deutsche Bank AG

And last one for me, with respect to the backlog at Cessna, are you starting or can you give some color around the order uptake you're seeing on the Citation Ten? And also, is the CJ4 still about 40% of that backlog or has that significantly moved around?

Scott Donnelly

So around Citation Ten, we have a lot conversations going on with a number of Citation Ten, both prospective customers as well as a number of fleet operators, guys that want a number of Tens. And really this program is kind of aimed a lot around that community, in giving them an upgrade path as they go forward. So those conversations are in process as we speak. And overall, the reception is kind of exactly what we expect it to be and very well-received. In terms of the backlog percent at CJ4, I don't know that I have that number in front of me. I will tell you that CJ4 is ramping through production volumes in 2011 as we expected it to do. So we saw about 18 in this year and that will elevate as we go forward.

Operator

Next we go to the line of Cai Von Rumohr with Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC

The number of the pre-owned Cessna in production planes as a percent of the population came down a lot in the January numbers, some 80 bps sequentially. And one of the avionics suppliers indicates that the number of whitetails, of which you're a major part of the fleet, went from 65 at the end of September to 10. Is that guidance essentially representative of the pattern of what you saw? And with those two metrics, it would suggest that, basically, demand got a lot better toward the end of the year. Some of that's seasonality. But can you comment sort of how things went throughout the quarter and kind of the pricing environment must be substantially less gory today than it was going into the fourth quarter. Is that correct?

Scott Donnelly

I think most of what you just said is true, Cai. I mean, there's a lot of different people saying a lot of different things about what's going on in the business jet world out there. But the phenomenon that we saw absolutely was we forecasted a year and ran a production run rate based around that. It was not linear by any stretch of the imagination, right? It disappointed for easily the first nine months of the year versus what we would have expected the recovery to look like as we went into last year. But it finished the year very strong. And so the whitetails that we were very nervous about -- and as I said before, we took the inventory risk on doing that as we went through the year because we can't build these things in short cycle. We need to sort of forecast them and build to that. We caught up a fair number of those things as we went really through November and December. And as you say, there is a natural cyclicality to this thing, but obviously it was much stronger in terms of the strength of that cycle in the last couple of months than you would normally expect. And that did kind of bring our total year forecast and inventory views and whatnot back pretty close to where we expect them to be as a result of the strength in November, December.

Cai Von Rumohr - Cowen and Company, LLC

Your current discussions with potential customers, is the pricing environment, I would think it would be a little bit better today than it was kind of in the October time frame. Is that correct?

Scott Donnelly

I think it's better than it has been through the course of the year. I mean, I think there were some cases where people were out there trying to move aircraft at any cost. And so if people were really looking to try to get a bottom of the cycle pricing deal done, they were trying to do that as we went through the mid-part, early to mid-part of this year. So yes, I would say that pricing did firm up a little bit as we went into the last couple months, and we would hope that and expect to see some price firming as we go forward through 2011. I think it's part of the natural course of the cycle.

Cai Von Rumohr - Cowen and Company, LLC

If you look at your R&D, while it was down last year and actually down the year before, the biggest chunk is at Cessna, and basically its volume has come down a lot. Is it fair to estimate that your R&D to sales ratio at Cessna was up some 100 to 200 bps last year and will be up another 50 or so this year? Is that the pattern, because that's what it looks like?

Scott Donnelly

Yes, it is, Cai. The numbers we're giving you obviously are absolute numbers. But it's safe to say that the Cessna numbers are at a very high level compared to historicals and growing in terms of percent of sales. But we think this is a necessary action for us to take because, again, the market does go through these cycles and the development cycle of an aircraft does not fit well in these cycles. And so we're clearly in a situation where, to make the right investments and do the right things in anticipation of the needs of the business going forward are just not lining up with where we happen to be in the cycle. And I think from a mid- to long-term perspective for the business, we need to go invest in these programs. And that is, for sure, driving very high R&D as a percent of sales numbers and putting some headwind on the margin. But it's numbers. And we've talked a little before, I think it's something we need to go do and, obviously, we're pulling the trigger on that.

Cai Von Rumohr - Cowen and Company, LLC

Last question. Industrial, while it was up year-over-year, the margins were down fairly substantially from the third quarter. And kind of looking back over prior years, some years the fourth quarter was better than the third with the auto shutdown, and some it wasn't. Was there anything weird in that? Why was it down as much as it was from the third?

Scott Donnelly

Well, I mean, there is some -- as you note, there is some natural cyclicality in terms of the margin rates in the fourth quarter and what's going on with the OEMs and whatnot. But we did have, in this quarter, a couple of situations where we've had warranty issues that had been hanging out there with a couple of key customers for some time. And in my view, you always have these debates back and forth as to who's responsible. And the bottom line is a couple of these have been hanging out there for some time. I don't think it helps our customer relationship having these things out there, and we chose to go ahead and resolve a couple of them in the quarter.

Cai Von Rumohr - Cowen and Company, LLC

And approximately how big was the warranty cleanup in the fourth quarter, and is there still an overhang going forward?

Scott Donnelly

I don't think I want to put the number out there specifically, but it was a couple specific items. And I would say, I don't see -- I mean, we always have warranty issues that are there and accrued and reserved and whatnot. And I don't see any particular significant ones going forward. There's always going to be warranty issues coming in and out of that business. But I wouldn't expect that a couple items we resolved in the fourth quarter would tend to repeat themselves.

Operator

And next we go to the line of Heidi Wood with Morgan Stanley.

Heidi Wood - Morgan Stanley

Actually, I want to dovetail off of some of Cai's questions. Just to be clear, when does R&D peak for Cessna? Is it in '11 or is it in '12?

Scott Donnelly

I think probably, Heidi, it's more like in the '12, '13 time frame. We actually, to be honest, spent a little bit less than we expected this year. But it's mostly driven by the fact we were just bringing people on board and ramping up the programs. Next year, the number steps up significantly, in part because those programs are on our ramp. And in part, as Frank indicated, we get to the point here now where you get the program mature to the point where you're building prototypes and you're going to start flight testing. So I think that, in terms of modeling this thing, '11 is certainly not the peak. Both Cessna and Bell, you'll see it ramp up through '11 and continue to see it ramp from '12 into '13 as we really enter into the kind of programs peaking in terms of their consumption of resources in terms of both expense and capital as we build prototypes and really enter into flight test programs.

Heidi Wood - Morgan Stanley

And then is it fair then, as we think of NBAA '11 that, that's where we'll see the product introduction that would explain the higher R&D in '12 and '13 then?

Scott Donnelly

Heidi, the one thing I'd point out is that, how we choose and when we choose to make the commercial announcement out to the marketplace is really going to be more based upon our view of the receptiveness of the market and ready to start to generate orders as opposed to the state of the program. I mean, as you know, sometimes people will go out and announce aircraft that aren't going to deliver until five years from now. And in a very strong market, maybe that makes sense to do that, and you generate a bunch of backlog and orders. But I think at this point, we're going to be more based on what we think the market environment is and how much order generation will that drive as opposed to necessarily the maturity of where the program is. So we'll drive the programs full speed ahead and make the commercial announcements when we think the receptivity in the market is at the right time.

Heidi Wood - Morgan Stanley

And then a last part following on that, Scott, and to a bigger picture strategy question for you. Can you remind us about your thoughts about the future of the Cessna brand? I mean, you canceled Columbus. It looks like you're somewhat ceding some market share to this new entrant, Embraer, that has, obviously, ambitions to offer product across the various niches. So how do you feel is the best way to defend against their sort of broader product strategy approach towards attacking your market?

Scott Donnelly

Well, Heidi, I mean, that's really what's driving, unfortunately, and part of what drove Columbus, was we saw a shift in the marketplace at that time. We understood the market settling down. We also understand that as that market comes back, you do see new entrants like Embraer, and they're dropping some new aircraft in the market where our aircraft historically have lived. And that's part of what's driving a lot of the investments that we're making. So we see the Mustang has been hugely successful. The CJ4 is having a ton of success in the market. But we also know that, as they come into those spaces, as well as up with the 450, 500, that we need to make the right investments, and again, both upgrades as well as clean slate aircraft, in that core space. And so that's why we've decided on really given where the market is, we need to make the investments in that light to midsized jet market and put off to another day any expansion of that portfolio into the larger aircraft like you would look at with a Columbus.

Operator

Next we go to the line of Ron Epstein with Bank of America.

Ronald Epstein - BofA Merrill Lynch

More Cessna questions. Scott, when we go into this next upturn, how do you expect the pricing environment to be, be it that there are more competitors in the market. And do you think the pricing environment for business jets will be tougher?

Scott Donnelly

Well, I think, I guess almost by definition, if you've got new competitors, you're going to have tougher pricing. I still think this is a market that, when you look at the cost basis out there given the global supply environment, a lot of the key people, it's hard to see that one competitor versus another is going to have some radical different cost basis than the other guys. I mean, we largely buy propulsion from the same environment, buy avionics from the same different suppliers. It is kind of a global cost base, if you will. And obviously, in the places where there's labor differentiation, we're taking action to make sure that we're not disadvantaged there. But this is a market that, historically, has been pretty rational in terms of pricing, and I would expect it to be that way. I think we shouldn't have expectations over the next few years that you're going to see pricing like you saw in '05, '06, '07, where you had this massive supply and demand imbalance going on. But would I expect that we'll see some pricing return to the marketplace? Yes, I do.

Ronald Epstein - BofA Merrill Lynch

I think in your remarks before you mentioned that there's been discussions with kind of the traditional fleet buyers. I'm assuming they're the fractional operators, I mean, do you see them back into the market again?

Scott Donnelly

Well, when I'm talking about our customers, I'm really talking more about corporate operators, guys that have multiple fleets, as well as investment driver fleet obviously, which are the single-owner type operators. Those are the folks that are looking at the roll. I think the fractional guys are going to have a similar challenge. But frankly, right now, there's more capacity out there than there needs to be. So I think most of the folks right now in the fractional world is going to be how do you consume that capacity over the next two or three years before people start thinking about really feeling pressured to do a lot of fleet renewal.

Operator

Next we go to the line of Carter Copeland with Barclays Capital.

Carter Copeland - Lehman Brothers

Just one quick sort of follow-up on the Bell commercial demand. And your discussion of Cessna demand progression over the course of the year was really helpful. I wonder if you could provide us some sort of similar color on what you're seeing in terms of discussions with your customers, what sort of buried into the outlook for 2011? Some of your peers have said they expect '11 to be weak and '12's where they really get the recovery. What are you seeing, and how do you expect that to progress over the year?

Scott Donnelly

This is on the Bell side?

Carter Copeland - Lehman Brothers

Yes, Bell commercial.

Scott Donnelly

Well, Bell was more stable on the commercial side, I would say, than Cessna was. We saw continued strength in emergency medical services and areas like that. So it was not as cyclical or quite as much change over the course of the year. Although as we finished, I'd say we finished pretty strong and feel pretty good about the market. The Bell, of course, the fourth quarter were also driven by the fact that we have the 429 coming in, right? So production rates are ramping up on that, deliveries grew dramatically in the fourth quarter, and we expect them to grow significantly as we go through 2011. So that helps a lot in terms of our view of having a stronger 2011 than we did '10. So I'm not sure. I haven't read what some of the other guys are saying. But I guess my view is we still see '11 as modestly better than we saw in 2010, and the market continuing to strengthen going through '12. But I certainly don't see or have any indication or belief in the market that we see to believe that 2011 should be softer than 2010 in terms of demand for commercial helicopters.

Frank Connor

And we've been saying that for a while. That's not new news. We did have a stronger fourth quarter, to some extent, than we expected, and we're still expecting to be up slightly from there for '11. And so that's really consistent.

Operator

Next we have a question from the line of Steve Levenson with Stifel, Nicolaus.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

Have you given any thought to consolidating or packaging the remaining non-captive finance receivables and monetizing them in some way?

Scott Donnelly

Was that an offer?

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

Not from me. Not my business.

Scott Donnelly

No, I think I would say that we don't see a market out there right now where the types of assets we have appeals to some buyer that would say, hey, we're interested in doing a deal for this whole asset class. I do think that as we go forward, whereas we've had a lot of the run-off to date has been our Distribution Finance business, which is relatively short cycle and moving out and small bits of our ABL moving out, that as we go forward there may or may not be opportunities to sell pieces of the portfolio. And obviously, we have people talk to us and we talk to people all the time about bits of that. But I think if anything like that happens, it's going to be in pieces of the portfolio. I really don't envision any buyer or the financial service entity out there that would want to take on the whole breadth of the asset classes that we have.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

And can you talk for a minute with the general aviation rules changing some in China, what you see as the opportunities there?

Scott Donnelly

Well, most of the talk right now is around opening what we would consider relatively low airspace. So they're talking about 1,000 or even 3,000 meters and below. So this is really a market that is good for that country to start to build GA because it really does open up air space for people to learn to fly. You're talking about primarily single-engine prop aircraft, which is obviously part of our market and very good position there today. But I think to see it really drive a lot more general aviation with respect to the jet business, you're going to have to see more liberalization of the en route flying at 30,000, 40,000 feet like you do in the rest of the world. And there's a lot of talk about doing that, and I think they are making progress on trying to make that happen. But most of the stuff you read in the papers, when they're saying GA and opening up airspace, this is low-altitude airspace, which is also good for helicopters. So I think that's a segment that's seeing the growth more immediately.

Operator

Next is the line of Steve Tusa with JPMorgan.

C. Stephen Tusa - JP Morgan Chase & Co

Sorry if I missed this. Did you guys talk about what the absolute order number was in the quarter for units?

Scott Donnelly

No, you didn't miss it. But we haven't been doing that.

C. Stephen Tusa - JP Morgan Chase & Co

And then just on realized price at Cessna in the quarter, was that up or down?

Scott Donnelly

Actually, there was some slight price realization.

C. Stephen Tusa - JP Morgan Chase & Co

And so you would expect that to continue into 2011?

Scott Donnelly

Yes, I do, Steve. I think that the commercial price that we've seen has stabilized, and I would expect some modest improvements to that as we go forward. Again, I don't think we should go back and model what we saw in the heyday because supply-demand is clearly more aligned at this point, but I do think we'll see some continued price stability and maybe some modest improvement.

C. Stephen Tusa - JP Morgan Chase & Co

And then one last one. Where would you see the first quarter play out from a delivery perspective? Or is there anything, I guess, from a higher level that we should think about with regards to the first quarter for total Textron, if there's anything unusual seasonally or you're just not getting some delivery at Cessna into the fourth quarter? I just want to make sure that everybody's kind of on the same page about what happens here seasonally in the first quarter.

Scott Donnelly

Well, I think you should expect, from a Cessna perspective, a soft first quarter. I mean, the first quarter is generally pretty soft, and it's not driven by any desire -- we had to pull things in necessarily but, obviously, you always get some tax incentive stuff happen in the fourth quarter. So I would think as you look at 2011 in total, it's going to start soft, but that's our plan would be to start soft. So I would not expect great things from Cessna in terms of earnings contributions in Q1, if that's kind of where you're going.

C. Stephen Tusa - JP Morgan Chase & Co

So you'll lose money in Cessna Q1?

Scott Donnelly

In all likelihood, yes.

C. Stephen Tusa - JP Morgan Chase & Co

And nothing else in the other businesses?

Scott Donnelly

Nothing in particular, I don't think.

Frank Connor

The other thing I'd just say in terms of the quarterly progression is keep in mind that Systems, given the kind of timing of SFW shipments, there's going to be kind of lumpiness and volatility in and around their quarterly results.

Operator

And our last question will come from the line of Jason Gursky with Citigroup.

Jason Gursky - Citigroup Inc

I was wondering if you could just generally talk or characterize the contracting environment on the Systems side, and generally just with the DoD, and talk a little bit about potential margin outlook over time for the Systems business and your interactions with the DoD on margins? And then, as well on the pace of program awards and whether we're continuing to see, just generally speaking, program award delays or whether we're seeing that process play itself out now and seeing a normalization of program awards?

Scott Donnelly

Well, in terms of price negotiation, is there a heightened sensitivity in the Pentagon [indiscernible]? Absolutely. But as we've had negotiations and we work our way through it, I think by and large, we're ending up in a position that's a fair price on the contracts that we're negotiating. In terms of the time and the difficulty with getting contracts definitized, it is continuing to be extraordinarily slow. In fact, the use of what they refer to as an undefinitized contract authorization in order to get work going has become virtually standard because you just can't get through the audits associated with a negotiation for a contract. They just stay open for very, very long periods of time. It's enormously counterproductive. It's driving a lot of cost in the business. I think it's driving an enormous amount of cost in the government. And that process is, in my view, just horribly flawed. But eventually you do get there and you end up with a contract.

Jason Gursky - Citigroup Inc

Would you characterize that, the latter part of your statement there, is continuing to get worse or is it kind of it is what it is and it's not necessarily getting worse or it's not necessarily getting better?

Scott Donnelly

It's certainly not getting better.

Douglas Wilburne

All right. Ladies and gentlemen, thank you for joining us today.

Operator

Thank you. Ladies and gentlemen, this conference call is available for digitized replay after 10:00 p.m. Eastern Time today through April 19 at midnight. You may access the AT&T replay service at any time by calling 1 (800) 475-6701 and enter the access code of 138126. International participants may dial (320) 365-3844. That does conclude your conference call for today. Thank you for using AT&T executive teleconference service. You may now disconnect.

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