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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

Robert Stallard - RBC Capital Markets, LLC

Cai Von Rumohr - Cowen and Company, LLC

George Shapiro - Citi

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

Ronald Epstein - BofA Merrill Lynch

Stephen Tusa - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Jeffrey Sprague - Citigroup

Jason Gursky - Citigroup Inc

Julian Mitchell

Noah Poponak - Goldman Sachs Group Inc.

Myles Walton - Deutsche Bank AG

David Strauss - UBS Investment Bank

Peter Skibitski - SunTrust Robinson Humphrey, Inc.

Textron (TXT) Q2 2011 Earnings Call July 20, 2011 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Textron Second Quarter Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Doug Wilburne, Vice President of Investor Relations. Please go ahead.

Douglas Wilburne

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

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

Moving now to first quarter results, which appear on Slide 3 of the presentation. Revenues in the quarter were $2.7 billion, up 0.7% from a year ago, which yielded earnings per share from continuing operations of $0.29 compared to income of $0.27 in the second quarter of 2010. Last year's results included $0.02 in special charges. Second quarter manufacturing cash flow before pension contributions was $171 million compared to $186 million during last year's second quarter.

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

Scott Donnelly

Thanks, Doug. Good morning, everybody. I'll start by saying results in the second quarter improved over first quarter, including a return to operating profitability of Cessna, primarily reflecting an increase in aircraft deliveries and aftermarket volumes.

As you know, at the end of May, we hired Scott Ernest, as the new CEO at Cessna. And we're excited to have Scott on board. His strong leadership, his deep industry experience and focus on talent development should have a meaningful impact on growth and performance success going forward. He's already implemented a regular integrated operations review cadence focused on improving the accountability and cross-functional coordination in the business.

On the market front, we saw an increase in gross orders from both the first quarter and last year's second quarter. Availability of used Citations also continue to improve, dropping to 13.7% of the installed fleet from 14% in the last quarter, and a high in the cycle of 17.3%.

Aircraft usage was also up in the quarter with average daily utilization reaching 0.71 hours compared 0.68 last quarter and a year ago. The higher usage also helped drive an increase in our aftermarket revenues in the quarter. Based on overall customer activity and the availability of U.S. bonds depreciation tax treatment for orders placed by the end of the year, we're still planning for full year jet deliveries to be slightly higher than last year.

Moving to Bell. Performance was particularly strong with second quarter margins of 13.8%, reflecting solid execution especially on our military program ramp-ups. We delivered 9 V-22s and H-1s versus 8 V-22s and 3 H-1s in the second quarter of 2010.

Looking into the future, we've begun a number of preliminary discussions with potential foreign military customers for these 2 aircraft, and we continue to discuss the next multiyear contract with our U.S. DoD customer.

Our OH-58 Kiowa Warrior upgrade program is also progressing as we delivered the first A2D replacement cabin to the army. This is the first of 19 cabin conversions under contract. And we're currently working with the army on potential new cabins to replace those units in the fleet that have incurred wartime damage. The Kiowa Warrior platform is important to the Army, and we're making investments to modernize the design to meet the army's future requirements.

In fact, last month, our OH-58 Block II prototype demonstrators successfully proved hover out of ground effect at maximum gross weight of 5,500 pounds and an altitude of 6,000 feet in a 95 degree environment, a critical milestone for this project.

On the commercial side of the business, we delivered 22 commercial helicopters in the quarter, up from 21 a year ago. And we're working a significant number of active prospects around the world. Customers' interest was decidedly better at this year's Paris Air Show as we signed contracts for 18 aircraft. We also displayed our new 407GX and 407 AH models at the show. This marked the beginning of an international tour for the GX and the AH, highlighting their capabilities to customers in Europe and the Middle East. These helicopters are receiving positive feedback and interest from customers worldwide.

On the aftermarket front, Bell continues to expand its service footprint. Last month, we broke ground on a new joint Bell Cessna service facility in Singapore, which will support our growing base in Asia. Expanding our service footprint enables us to continue to provide top-ranked service capabilities to our customers wherever they fly around the world. Overall, our commercial helicopter outlook is promising as we leverage our market-leading customer support with our renewed commitment to new product development.

The Textron Systems revenues were down in the quarter primarily reflecting lower UAS deliveries and lower mission support volume. Much of the lower UAS revenue was really the timing of programs throughout the year, and we continue to expect full year systems revenues in nearly $2 billion.

On the ASV front, we were awarded an undefinitized contract for 440 units from the Afghan National Army. The base contract calls for 240 ASVs. The program also includes options for another 200 vehicles, as well as options for training and logistics support through 2014. In total, the contract and options are worth $525 million.

Moving to our Finance segment. We reduced our operating loss to $33 million in the quarter, an improvement of $38 million from a year ago. We liquidated $317 million of financial receivables during the quarter, reducing our total portfolio to $3.8 billion, with non-captive portion decreasing to $1.7 billion. Obviously, the pace of liquidation is slowing a bit as our remaining non-captive portfolio becomes smaller and the mix of assets have longer variations. Going forward, we will continue to actively liquidate the portfolio as quickly as possible balancing economics and risk mitigation.

Moving to Industrial. Revenues were up slightly, but volumes were approximately flat as we saw a modest automotive impact during the quarter due to events in Japan. The higher revenues were primarily due to the impact of foreign exchange, and operating performance was solid on a flat volume margins of 7.6%.

To wrap up the quarter, we continued to make progress with downsizing our Finance business. We posted solid results in Industrial and systems. Bell's execution on the ramp up of V-22 and H-1 continues to be very favorable. And at Cessna, I believe we're taking the right actions to position this business for the future.

Across all of our businesses, we continue to invest aggressively in new products and services. And as we look to the rest of the year, we expect commercial aircraft deliveries to be up significantly in the second half, similar to last year. As a result, we continue to expect slightly higher full year deliveries versus 2010.

Overall, we are on track for a full year EPS outlook of $1 to $1.15 and cash flow before pension contributions of between $800 million and $850 million.

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

Frank Connor

Thank you, Scott, and good morning, everyone. Segment profit in the quarter was $196 million, up $35 million from the second quarter of 2010.

Let's look at how each of the segments contributed to this improvement starting with Cessna. At Cessna, revenues were up $17 million on a year-over-year basis, primarily due to growth in our aftermarket business. Jet deliveries of 38 units were down from 43 in last year's second quarter. We posted an operating profit of $5 million which compared to $3 million last year. The improvement reflected profit on higher aftermarket sales, partially offset by higher engineering and development costs. At Bell, revenues were up $49 million on higher deliveries.

Segment profit increased $12 million reflecting improved performance on the higher volume. At Textron Systems, revenue was down $82 million reflecting the lower UAS and mission support volume in the quarter. Segment profit was down $21 million on the lower revenues.

At Industrial, revenues were up $58 million, primarily due to the favorable impact of foreign exchange as volumes were essentially flat, as Scott mentioned. We generated an increase in segment profit of $4 million on the higher revenues.

Finance segment revenues were down $23 million, reflecting our ongoing liquidation activities. Our operating loss improvement of $38 million reflected lower loan loss provisions and lower operating expenses, partially offset by lower interest margin on the reduced portfolio of finance receivables.

Looking at Slide 5, non-accrual finance receivables decreased from $836 million to $696 million, and 60-day-plus delinquencies decreased to $302 million from $418 million. Charge-offs in the second quarter were $38 million compared with $16 million in the first quarter of 2011.

Moving below the segment level. Corporate expenses were $23 million, up from $17 million last year primarily due to the impact of our share price add on compensation expense. Interest expense was $38 million, up $4 million from last year, primarily the result of lower interest income from the TFC intercompany loan.

With respect to taxes, our tax rate of 31.9% is up from last year's rate of 18.2%, primarily because last year's second quarter benefited from a number of discrete foreign tax items. On the cash flow front, we contributed $189 million into our pension plan during the quarter. We also reduced our TFC bank line by $690 million, ending the quarter with a remaining balance of $500 million.

With our solid manufacturing cash flow and receivables liquidations, we reduced our consolidated net debt by another $288 million, ending the quarter at $4.4 billion of total debt, which you can see on Slide 6.

That concludes our prepared remarks, and we're ready to take your questions.

Question-and-Answer Session

Operator

We do have a question from the line of Peter Skibitski with SunTrust.

Peter Skibitski - SunTrust Robinson Humphrey, Inc.

So I want to ask about Citation deliveries being down in the quarter year-over-year. Would you say the market is weaker now than it was last year? Or do you think it's just a timing issue? Or would there be some other reason they'd be down?

Scott Donnelly

No, I think the market, Pete, is modestly recovering. I think our gross orders being improved both year-over-year and over the first quarter are good indications that it continues to improve. We use the word stable. It's not rocketing back, I mean, certainly, the level of customer interest and number of orders we're able to book is improved over both those periods. And it feels like that will continue. So in terms of actual numbers, I mean, we're always going to -- I mean, as you know, our guidance for the year is to be slightly up. So we're going to see a little bit of above and beyond on a quarter-to-quarter basis here. But I don't think there's anything that is particularly concerning in that respect. I think, that's mostly just timing. There has been a little bit of positive mix towards the larger aircraft than the smaller aircraft, which is helpful to us particularly from a margin perspective. So I would say that the market is continuing to behave about as we expected it for this year, and with, generally speaking, modest improvement.

Frank Connor

I'd just point out in a detail. If you look at it, the Mustang is what really drove the decrease. In the larger cabin size in our markets, it's certainly stronger on a delivery basis as well.

Peter Skibitski - SunTrust Robinson Humphrey, Inc.

Got you. What's your guys' sense of when cancellations will have trough? You're obviously still at getting some. And I'm just wondering if we're at the bottom in that regard or what your perspective is on that.

Scott Donnelly

Well, I guess my perspective is that it is bottoming this year. Right? I mean, I would expect we will still see some trickle of cancellations through the balance of this year. And I think that's probably just about it. Most of the range of a lot of the long-term order books that were out there are pretty well drawn at this point.

Peter Skibitski - SunTrust Robinson Humphrey, Inc.

Understood. If I can sneak in one last one. Can you make some comments about CJ4 profitability? You delivered the same this quarter as Q1. Was the loss on those planes the same? Or have you been able to improve profitability on CJ4 already? I mean, any comments there?

Scott Donnelly

Well, CJ4 was modestly improved from last quarter. We're coming down the learning curve in terms of our labor. And so, I think we're continuing to make progress there. We have been working, as we mentioned before, with a number of our suppliers. These are not things that turn overnight, but I would say that we have come to terms with a number of suppliers in terms of trying to get the cost in line. And that input stream, if you will, from those suppliers at a lower cost will sort of feather in over the balance of the year.

Peter Skibitski - SunTrust Robinson Humphrey, Inc.

Would you be willing to say when you think it could turn positive?

Scott Donnelly

Well, I mean, I think we are positive in terms of what we generate in terms of the contribution margin rate, but we'll see the number continue to improve through the course of the year.

Operator

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

Noah Poponak - Goldman Sachs Group Inc.

I'm going to try the Cessna demand question a different way. Last year early in the year, you guys made some encouraging comments. And then, we had European sovereign debt and a 15% pullback in the equity market, and everything shut off. We've all kind of been sitting at our desks getting a slew of less positive macro data. It sounds like your tone though is not really changing, and that you haven't felt the impact of that. You're still seeing things get better. Is that the case? And maybe, if you could even talk to kind of quarter-to-date very recent activity, just so we can get a sense of whether or not things are changing because it's very dynamic.

Scott Donnelly

Well, I mean it is dynamic, Noah. And I wouldn't disagree with you. I mean, I think if you looked at how we felt last year through about the first 5 months of the year, we're similar, right? It was modest improvement over 2009, and you're absolutely right. I mean, from sort of June through the September, October time frame, the market just absolutely stopped. And I think that was reflected in what our deliveries looked like in the third quarter last year. It was very, very tough to get any kind of a momentum in the marketplace. I would say, where we sit this year -- the reason I say, look, it's modestly improved, right? It's not taking off. But I certainly have not seen any indications in the market in terms of customer discussions and level of activity that would indicate that things are going to be like they were last year in sort of the June to September time frame, the customer activity, the rate of order. Booking is maintaining positive momentum at this point. I mean, if something as dramatic as what happened at the macroeconomic level that happened last year, of course, the industry would be affected by that. But I don't think it's reached that point.

Frank Connor

And in terms of what's happening so far in the quarter, Noah, as we prepare for this call, we obviously make sure that whatever comments we're going to make are as up-to-date as possible. So when we say that we continue to see deliveries up slightly from last year, that's based on the sentiment as it exists now.

Noah Poponak - Goldman Sachs Group Inc.

Okay, great. And then, on the margins there, obviously, that's dynamic as well with the changes you've made in the business. We made a little money in the second quarter. Can you maybe just help us with the progression there in the back half?

Frank Connor

Well, Noah, what we had indicated for guidance was 1% to 3% margins. For Cessna, we said on the last call, we thought we'd be probably leaning towards the lower end of that range. And I think that, that's kind of still where we are, the lower half of that range. And kind of the progression will obviously depend on the delivery volume ramp that we expect to see. But that's how the full year maps up.

Operator

Next we go to the line of Jeffrey Sprague with Vertical Research, Pennsylvania (sic) [ Partners ].

Jeffrey Sprague - Citigroup

Vertical Research Partners. Scott, just one more question on Cessna, and I'll switch gears to something else. Given what you just said about kind of the tone of things, do you expect your back half to be a little more level loaded then, and not have such a crush and Q4 to get to the number?

Scott Donnelly

Yes, I do. I mean, I think there's 2 things at play, Jeff. One is we've been trying as hard as we can to try to -- to the extent we can, move people that would rather be fourth quarter than third quarter just because operationally, it puts an awful lot of pressure on the operation to try to deliver everything at the end of Q4. And of course, the other dynamic is I don't think we're going to have this dearth of orders and activity that we saw last year in sort of the late spring to beginning of summer, which also obviously impacted the softness of last year's Q3. So I won't tell you that I don't think it's still going to be Q4 will be the more heavily loaded. But that's very -- that's typical of the business anyway. But I do not think that Q3 will be as light as it was last year.

Jeffrey Sprague - Citigroup

And I guess the second part to the same question, I mean, the backlog, obviously, going into the back half is a lot lower than it was going into the back half of last year. Is most of what you're expecting in the back half kind of in sight in the backlog? Or how much backfilling is there to be done?

Scott Donnelly

Well, I would say, it's either in the backlog or it's largely in customers that we have line of sight to the aircraft deliveries.

Jeffrey Sprague - Citigroup

I just want to switch gears to Bell margins. Certainly, you've kind of continued to beat my expectations there. Can you just give us a little bit granularity on kind of -- even if it's directionally, not specifically, but kind of the margins on military programs and maybe the effect of aftermarket on what we're seeing in margins and where we should expect them to kind of -- what kind of trajectory we should expect from here?

Scott Donnelly

Well, I think clearly, our margin rates on the military programs have been improving. And there's a real mix in there, Jeff, of programs that have had solid margins for some time. And there are a couple of programs in there that frankly have had in some sorts negative margin, certainly very dilutive margins. And those programs, as they improve, and get back to where they should be, we reduce the amount of that dilution from a couple of those programs. Our aftermarket business obviously is still very strong and a very profitable business. And so, when you look at all this stuff, as we made improvements from a couple of these programs that have had real challenges in the past in terms of the margin rate and get them to sort of more healthy what you would expect to be good margin rates up in that sort of, in the military, 9% or 10% or so kind of numbers, you will lose the drag of that dilution. And you get a lot more of -- obviously, an overall stronger margin rate in the business. And I think that's what we're seeing. Now as we go forward, through the balance of the year, I think we're going to see fairly level in terms of our military deliveries. But we're going to see a significant increase in commercial deliveries through the back half of the year. And again, those, generally speaking, tend to be dilutive to that 13% kind of margin rate in new equipment. But that's more as the commercial market works, right? We got reasonable margins on most of those products, but they feed that aftermarket, which has strong margins. So I think that's the pressure point we're going to see. We'll a lot of 429 deliveries, a lot more the light 407, 206-type deliveries in the second half. And that's great. That builds our backlog. They're good products. They're decent margins, but they're not 13%, 14% kind of margin products.

Operator

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

Cai Von Rumohr - Cowen and Company, LLC

If I could shift back to Cessna, a couple of questions. Could you give us some color please, Scott, in terms of what you're seeing in pricing, the mix between U.S. and foreign demand? And lastly, what should we expect Scott Ernest to be doing differently at Cessna?

Scott Donnelly

Well, I guess, Cai, I would say let's first talk about the pricing side of things. So pricing in the used market, I would say, was fairly stable. There's a couple of models that moved down again. But generally speaking, most of the models, particularly most of the newer models, we've seen stabilization, even some increases in pricing, and I guess I'd also comment, much better volume. I mean, there's a lot more activity in the used market. So I think that has gone through the trough and is starting to improve. On the new aircraft front, pricing is still difficult. I mean, every deal is a very competitive deal but we're hanging in there. I don't think it's degrading a lot, but we saw a little bit of positive pricing through the earlier part of the year. But it's going to be tough pricing I think still for a while as the market is recovering. If I looked at the market in terms of where it's coming from, the orders and then talk to deliveries, I guess probably is the better way to look at it through the first half is about 65-35 domestic versus international. So I think this is going to fluctuate a little bit obviously over time. But it's -- I think long-term, it's still going to hang around the 50-50 mark over a period of time. In terms of my expectations for Scott and what Scott's doing is -- look, Scott is a pretty hands-on guy. He loves the business. He's a guy that's intending to obviously spend virtually all of his time right now, in Wichita, very inside focused on how do we look and measure and build a cadence around manufacturing, around sales, around service, day in day out kind of operations. He's very much digging into that. We've been looking at the organization and what we think we need to do. Organizationally, he's put some people into new jobs on his staff, particularly people focused around particular product lines like Citation jets, like our single-engine business, like our special mission business to drive more accountability, more sort of P&L responsibility, across these product lines, and that includes upstream marketing, so product development, product strategy and really having people that own those individual product segments as opposed to running the business all as sort of one chunk. And I think, that's something we've needed. I think it's a great opportunity for some people, and he has people coming into work every day that are very, very focused on those particular product segments. And of course, they continue to work through manufacturing and engineering on all the overall efficiencies and cost programs. So he's a pretty hands-on guy. He's a decisive guy. So I mean, you put issues on the table and the team will make the calls they need to make. And again, I think, he's great with identifying talent, putting the right people in the right jobs and giving them the right opportunities. And good things happen when that works.

Cai Von Rumohr - Cowen and Company, LLC

Terrific. And just one last one, shifting to TFC. You had very impressive improvement in nonperforming asset and 60-day delinquency ratios, sequentially. Could you give us a little bit more color what's happening there? What was the cash conversion in the quarter? And are the prospects to maybe unload some bigger pieces of this improved given the improvement you have in some of those metrics?

Scott Donnelly

So the cash conversion was around 80%, Cai. And that was -- we've been telling folks that we expect to see some quarters when that number comes down like that, at that number or even below that number. In this case, it was driven by one particular account we've had. It's been a problem account for some time, and it just went through a bankruptcy process so we took a charge-off, for which we were reserved. That also explains why the charge-off number was up a little bit in the quarter and of course, takes that out of accrual, out of nonaccrual. I think what you're going to see, going forward, Cai, and it was typical this quarter is that the portfolio, I would dare to say at this point, has sort of stabilized. Right? So the problem accounts, we've pretty well gone through and said, "Okay, look, these are the accounts that are nonaccrual. These are the accounts that are problem accounts. We're working our way through those." As we work our way through those, the good news is what we're not seeing is a lot of new accounts move into those categories. So I think that the performing parts of the portfolio have stabilized. So what you see now is things that are going to migrate their way through the nonaccrual accounts, through the charge-offs for which they're reserved and see that happen without a lot of new stuff backfilling and coming back into those nonaccrual accounts. So that's sort of what's going on. In terms of prospects for moving or selling significant parts of the assets, we did one earlier this year in the timeshare area. I think it's possible that we could do something in timeshare again. We believe there's a fair bit of capital liquidity that's come back into that market. A number people that are very interested in that asset class. To be honest with you, it's been a great asset class for us. It's just not something we want to do in the future, so we do see some interest on that side. On the golf side of things, we did sell a number of golf courses particularly in Canada to a company wanted to get in that space. But I'd say there's still not a lot of capital, not a lot of liquidity coming back into the golf side. So I think if I look at how the year would play off, there's no guarantee. And obviously, we won't do a deal unless we think it's a smart deal. But there's a probability we could do something on the timeshare side, but unlikely on the golf side is the way I would handicap it.

Operator

Next, we'll go to the line of Heidi Wood with Morgan Stanley.

Heidi Wood - Morgan Stanley

I guess, I'll going to go back to Cessna. Cai touched on the CSC questions I had. The cash conversion ratio is still pretty good for full year, I'd say. Can you tell us a little bit about the inventories that picked up? How much of that is finished goods, and where do you stand on white tail?

Scott Donnelly

So the inventory buildup, Heidi, I guess don't really think of it so much as a white tail now or would say that I feel like we're going to have much in the way of white tails at the end of the year. But obviously, our ability to run the production lines is a lot more linear than our sales forecast. So there's no question that as we work through the first couple quarters, we've been building aircraft at a particular pace. But as I said, I think we have pretty good visibility through either through what is in the backlog or through the customer prospect list and the activity that we're working on that we have pretty good line of sight that those aircraft are -- that we are building the right amount of aircraft, and we're building the right type of aircraft to meet the forecast for the total year. But that does result in some inventory build during the course of year just because of this disconnect between a fairly linear manufacturing flow and a nonlinear sales flow, which we can't line that up. I mean, there's no way we could run the production facility to meet the third and fourth quarter delivery demand only by building those things to have them in time for third, fourth quarter orders.

Frank Connor

And that's true at Cessna and Bell.

Heidi Wood - Morgan Stanley

Okay, great. And then, you talked about growth in aftermarket in the quarter. Can you tell us what's the run rate for aftermarket look like? Is it going to be in Cessna about $600 million, $700 million?

Frank Connor

That's about right, Heidi. The second half, we're expecting to be a little bit later than the first half just based on some timing. You usually think of the aftermarket as a lot parts and so forth. But there's also the aspects of refurb-ing planes. And we had a couple of fairly large programs in the first half that actually completed in the second quarter.

Heidi Wood - Morgan Stanley

Okay. And then finally, just to back out so we can get a sense as to what new aircraft performance is looking like. If we x out the aftermarket and if we were to normalize for the ramp in R&D, how much -- what would normalized margins look like year-over-year?

Scott Donnelly

First of all, these are normalized margins because this is how we're running the business. But R&D was --

Heidi Wood - Morgan Stanley

If we backed out -- I mean, but if we backed out the pickup in R&D and just looked at pure new aircraft outside of parts and others, where would margins look like from there on a year-over-year basis?

Scott Donnelly

How about if we tackle it this way. R&D was up $14 million at Cessna in the quarter.

Operator

Next, we go to the line of Julian Mitchell with Crédit Suisse.

Julian Mitchell

My question -- my first question was around the margins in Cessna. I guess your second half -- your full year guidance implies at the midpoint of the Cessna margin range for the full year around about 30% incremental margins, I think. And that's obviously against a low-teens incremental in Q2. Can you just add a bit of color around what your expectations are on costs for the second half? You mentioned that R&D was up $14 million in Q2. I think it was up $9 million in Q1. And also, in your Q1 discussion, you talked about inflation cost headwinds in Cessna in Q1. So should we assume that for the second half, those cost headwinds are largely parsing away and also the R&D ramp is less steep than it was in the first half, and that's what drives a big pickup in incrementals in the second half? Or is it just you're relying on volumes because deliveries were down in the first half and your full year guidance obviously implies a decent pickup year-on-year in the second half?

Scott Donnelly

The R&D rate is not going to change a lot. We have been ramping up the R&D rate, and of course, that will stick with us through the balance of the year. I think if I try to get to understand your question, I mean, clearly, the revenue, the volume is going to be significantly higher in the third and the fourth quarter. So if you take sort of the midpoint around where the overall guidance number is, and you look at where we are year-to-date, obviously, particularly after coming out of a negative number in the first quarter, obviously, that's all when we made up. But really, what drives it is we do have higher aircraft delivery volumes through the third and fourth quarter, which overcomes the increased R&D and whatnot. And as I said earlier, I think there are certainly cost actions that are kicking in, in terms of lower labor cost. We will see some benefit of some improved material pricing, particularly around the CJ4 as we work through the higher volumes of the third and fourth quarter as well. So all of that contributes basically to improve those overall margin rates in Q3 and Q4. So the net for the year, you end up in that guidance range of 1% to 3%. But it's mostly volume-driven.

Julian Mitchell

Got it. And then secondly, just in terms of Bell commercial. You'd mentioned that the Paris Airshow, that the term was fairly upbeat and so on. How is that -- how has the orders on commercial trended, I guess, in the first 6 months versus your expectation? I mean, obviously, commodity prices have been moving around net-net as they move up. That should be positive for your customers. But you've had some macro confusion. So maybe -- I mean is it sort of similar to Cessna where even despite all these macro changes, the overall run rate year-to-date is kind of what you thought?

Scott Donnelly

Yes, it's definitely what we thought. And we've seen some backlog accretion here in the first quarters on the commercial side. And I expect we will continue to see that through the balance of the year. We always felt that it would be fairly back-end loaded in terms of commercial deliveries because we were still coming out of sort of the challenges of 2010. But I guess, on balance, I would say that the market and how the market's recovering and where the opportunities are, are pretty consistent with what our view was coming into the year. Oil and gas is still strong. EMS is still strong. Asia has been picking up, Indonesia, Middle East. The areas that we expected to be strong are, in fact, turning out to be pretty strong.

Operator

Next we'll go to the line of David Strauss with UBS.

David Strauss - UBS Investment Bank

Scott, at Industrial, it held up pretty well despite what happened in Japan and what's coming through in terms of auto volumes. Do you still expect to see some impact, I guess at some point this year, maybe in Q3 from the slowdown in auto volumes?

Scott Donnelly

This is always a tough one to gauge. Right, what happens at the OEM level. But at least, what we're still hearing from the OEMs is that they're still fairly bullish on how the balance of the year is going to go. As you say, we had a little bit -- it was a little softer than we would've thought in the second quarter. And that was primarily plant shutdowns or reduced shipped rates, mostly in North America. Of the Japanese suppliers -- for a lot of key components were going back to Japan, obviously. But so far, we're not seeing a lot of modification of forecasts coming out of the OEMs in terms of the automotive market.

Frank Connor

And David, we're pretty much on track with respect to our original guidance of around $2.7 billion for the Industrial in total. So as we said back in the last call, we thought we'd see a little bit of a shift out of the second quarter, which we saw. And we think we'll make that up by the end of the year.

David Strauss - UBS Investment Bank

Okay. Doug, I guess that leads to my next question. Can you give a kind of a summary of where your guidance within the segments corporate, TFC has changed since the beginning of the year? I mean, I know systems, you're now talking to $2 billion versus $2.2 billion. It looks like corporate and TFC might be running a little bit better. The share count looks like it might be lower, given what happened in Q2. Can you just maybe talk about where things have changed?

Frank Connor

Well, I think in addition to what you said, the other aspects are that Cessna is still pretty much where we said. Bell will be a little better. You already said with Cessna. So net-net, we're kind of pretty close to where we started the year except for that shift between Cessna and Bell.

David Strauss - UBS Investment Bank

Okay. And last one for me, Scott, back to Cessna. The book-to-bill, I think, was a little bit better than most of us were expecting in the quarter. Can you give a little bit of color in terms of -- I know you're talking about it regionally. Can you talk about maybe by aircraft type, model type where you're seeing relative strength compared to -- comparatively? And then, I think you've talked about, on the last call, the book-to-bill getting to 1x by I think you said, towards at the end of year. Does that still hold?

Scott Donnelly

I think on the book-to-bill, David, it's still the best guess I have. I mean, I think we always felt that we would probably struggle to get to a 1:1 through the course of this year. I mean, obviously, I think, as we go into the end of the year, if it's anything like last year in terms of just sort of the customer demand behavior around both the end of this year as well as orders for next year and bonus depreciation playing into all of that, I think that is probably where we'll see that 1:1 or greater kind of a number. So in that respect -- I mean, it's still yes, obviously, but it seems to be playing out about the way that we thought. In terms of aircraft mix, we kind of expected -- and again, what we've seen is a bias towards the larger Citation jets, so XLSs and the CJs and Sovereigns, more slanted away from the Mustang. Although Mustangs are doing okay, but we expected, compared to the last couple of years, that we would start to see a move towards the larger aircraft. And that is what we're seeing.

Operator

Next, we go to the line of Steve Tusa with JPMorgan.

Stephen Tusa - JP Morgan Chase & Co

Just wanted to clarify a comment you made on the backlog. Obviously, there's timing differences as to when you're going to deliver something. So is the backlog actually in a worse position this year relative to where you were last year for current year deliveries?

Scott Donnelly

Steve, I have not looked at that, so I couldn't tell you one way or the other whether our percentage going into the second is appreciably different. I don't think it's significantly different. I mean, just from a day-to-day operation as we talk about the stuff, it doesn't strike me as being very different.

Stephen Tusa - JP Morgan Chase & Co

Right, because some of the stuff is for '12 and '13 and maybe a little bit beyond. And then just I think everybody's got kind of a different methodology for doing this, and you've got obviously moving parts around aftermarket, et cetera, and the revenue base. But we're coming up with something around 20 net orders from a unit perspective this quarter. Can you just give us any kind of color around that? It would be helpful for everybody, I think.

Scott Donnelly

We have not been giving specific order numbers. So I don't think I want to go there. We just haven't been giving that numbers, Steve.

Stephen Tusa - JP Morgan Chase & Co

Is there any point in time where you're going to start giving that, maybe when the backlog kind of fills up? I know it's obviously a very important number to, I think, most investors. And it would just be helpful for us to be able to gauge how this thing is going.

Scott Donnelly

Well, look. I mean, obviously, the backlog number will be out there, and we'll continue to provide that. My issue is that giving specific backlog and order numbers is also more helpful to my competitors. And I just don't think it's a number we want to put out there.

Stephen Tusa - JP Morgan Chase & Co

Right, okay. And then just as far as the progression through the rest of the year, are you expecting anything at NBAA? I mean, I know the helicopter show was pretty good for you guys, a nice milepost in kind of the recovery. Anything at NBAA that you'd expect to be positive?

Scott Donnelly

Well, we expect obviously that we'll have a good show. We have some things that we will be talking about at the show in terms of some new product. And in terms of the market, obviously, it's very hard to call. I mean, obviously, Paris, we feel good about where the market is on the commercial helicopter side. As we continue sort of this modest recovery, on the light to mid-size, I mean, I would hope that we're picking up some momentum as you get out there into that kind of October time frame. But we certainly will be talking about some new stuff and things that we think are good for the business. And hopefully, it will be a great show.

Stephen Tusa - JP Morgan Chase & Co

Okay. And then just final question on Industrial. I know you don't like to talk about the portfolio moves that much. But clearly, the business has kind of come back off of the bottom. You have a little bit of profitability there. There is quite a bit of private equity money that's floating around. Is there any kind of active ongoing portfolio review? And I guess, if you don't want to kind of answer it that way, is there any intention to add to that business and build that business? And then one final follow-up after that.

Scott Donnelly

Steve, right now, our focus really in that business is run the businesses. I mean, at 7-plus percent of margin is obviously generating a fair bit of margin for us. It's generating a lot of cash for us. And those businesses are a great part of our portfolio. As I've said before, it doesn't mean everything will be there forever? No. Does it mean we'll never add to it? No. I mean, I think that's not something that we spend a lot of time right now. Frankly, we're really much more focused on running them. That's how we've got them to where they are. And I think they have become profitable businesses and valuable businesses as a result.

Stephen Tusa - JP Morgan Chase & Co

And then one final question. What's the strategy on the big slag [ph] of debt that's coming due over the next couple years? I mean, any intention to kind of take care of that in the near-term given obviously, pretty volatile, or the potential for increasingly volatile credit markets out there?

Scott Donnelly

Well, our focus here for this past year really has been to try to be as aggressive as we can at paying down the bank line. So we've been doing that. We have a new line in place with good tenor to it. So we've kind of worked that part of the capital structure and feel pretty good about that. In terms of those future debt payments, I mean, they're of a magnitude and a duration at this point that obviously we feel very comfortable in our ability to pay that down as it comes due.

Frank Connor

Steve, when you look at the progress we made on TFC bank loan, we're down now at only $500 million. We expect to pay that off during the remainder of the year. That will essentially take care of all the 2012 maturities and between liquidations and cash flow. When you then look at 2013, we can take care of 2013 with the liquidations and the cash flows from the business during that intervening period of time.

Operator

Next, we go to the line of Jason Gursky with Citi.

Jason Gursky - Citigroup Inc

Just a quick question on Foreign Military Sales and things that are going on at Bell. Can you give us a little bit of color as to how things are going to shape up with regard to the V-22 in particular, and where you think that product is going to sell best and what types of things we, as analysts, ought to be looking out for in tracking Foreign Military Sales of some of your helicopter platforms?

Scott Donnelly

Sure. So if you talk V-22 firstly, there are a number of customers that have made inquiries and have expressed interest over time in that platform. Historically, Jason, there hasn't been a whole lot done with it because frankly, we don't even have production capacity to handle more than we're doing at the Marine Corps and the Air Force until you're out in kind of that 2015, '16, sort of a time frame anyway. So obviously, those discussions have become more real here over the last 6 months, I would say even or so. I want to be careful because there are some that are not public. One that is public, because I know the Israeli Air Force has talked about is they have expressed an interest. And the Marine Corps actually has hosted them a couple of times. They've flown the aircraft. They've been in the simulators. I think they've been very impressed with the aircraft and its capabilities. So that's one that's sort of in the first stages of putting together a potential FMS program around there. There's a couple other customers who also have inquired who are not quite that far down the path and again, they're not public, so I won't talk about them specifically. But I don't think -- the V-22, we're not talking about hundreds of countries that are going to buy these things. I think it's 10 or 12 countries that are going to buy these things. But the interest is certainly there, in a number of these places. And as I said, the initial ones are starting to actually progress. On the H-1, which is another opportunity obviously and I would say a much broader opportunity, a lot more countries that would look at H-1s both for the utility and the attack version. There are already some LORs that's been submitted to the U.S., expressing interest in these aircraft. So there's activity going on in the formal early stages of working quotations and working the government-to-government side of this thing. So again, early on but also one where we have not had production capacity to serve beyond the Marine Corps requirements. But as we see that requirement and that opportunity coming up in the sort of 2015-plus kind of time frame, we're now working those opportunities.

Jason Gursky - Citigroup Inc

Okay, great. And then just one Cessna question, somebody tried to ask this question a bit earlier. And I'm going to maybe do it at a different way. For the second half of this year, how much of your outlook for deliveries is dependent upon what I would describe as turns business or orders that you expect to both get and fulfill during the second half of the year?

Scott Donnelly

Yes, we don't publish what our current number of aircraft orders and sales are. So we usually talk coming into the year, how much sold out in the past. We're trying to get away from that, Jason, because it doesn't help us in the marketplace to say how many available slots we have. But suffice to say, obviously, there are some available slots. But at this point, the color I would give you on that is when we look at what we think our total year deliveries will be, consistent with the guidance that we provided, that we think we have pretty good line of sight of those aircraft sales because they're either a, in the backlog or b, we are in discussions with customers that we believe will close on deals to sell that number of aircraft.

Jason Gursky - Citigroup Inc

Okay, perfect. And then one last quick question. Can you just describe the focus of the R&D that you're doing there at Cessna? Is it towards the larger aircraft at this point?

Scott Donnelly

It really is a mix across the whole product line. So obviously, we have already announced the new X, which is our largest aircraft. We have a number of programs that are going on. And as I kind of said, we will announce at least one of those at the NBAA coming out in October. But the investment is pretty broad across all the various platforms. Some of those are upgrade programs like it is in the X and hopefully, some will be brand-new aircraft. But the one thing I would say is it's not a Columbus class aircraft, okay? I mean, the realm here of what you're doing and where we're investing really runs from our sort of that CJ-sized aircraft right through the X.

Operator

Next, we go to the line of Rob Stallard with RBC.

Robert Stallard - RBC Capital Markets, LLC

Scott, just a bit of clarification on TFC. You said it's relatively stable here. If we look at the income statement and what the TFC cost is going to be going forward, can we expect it to be, say, maybe gradually trending down from what you booked this quarter going forward?

Scott Donnelly

In terms of -- I'm sorry, Rob, on cost?

Robert Stallard - RBC Capital Markets, LLC

If you look on the income statement, what you've got there as your operating cost effectively at the Finance division flowing through the income statement [indiscernible] of this quarter. Would you expect that sort of level of loss to be gradually trending down from here through '11 into 2012?

Frank Connor

Rob, let me put it this way. I think kind of we've given the guidance of around $140 million loss for the year. And there'll be variability quarter-to-quarter on that. But kind of that -- that's the number for 2011. That obviously reflects both operating cost of the business, as well as kind of losses on liquidations. We expect, as we've said, that to trend down as the portfolio gets smaller and trend down meaningfully. But we will, we believe, continue to see losses into 2012 and possibly beyond time frame depending on what that portfolio activity looks like.

Scott Donnelly

I think, Rob, I mean, from the cost -- that's why I was trying to be careful, I mean, cost has been coming down from an operating cost standpoint, and we'll continue to do that. Obviously, as we reduce the number of assets we have, the cost base to serve those has been coming down with it. I mean, it's probably -- don't necessarily look at it like you would conventional metrics around returning [ph] asset and cost percent asset and things like that. But obviously, it's coming down. And as Frank said, we are going to continue to liquidate this portfolio. And we would expect to continue to see loss as you continue to see that liquidation. So we know we're going to have more liquidations as we go into 2012, and there's going to be loss associated with that. I would certainly expect that the magnitude won't be as great but again, there's some volatility. I mean, if you had an opportunity to sell a good chunk of the portfolio or something, you would take associated loss at that time.

Robert Stallard - RBC Capital Markets, LLC

Secondly, on the V-22, you mentioned that you're discussing the multiyear situation with the U.S. government. I was wondering if you're seeing, as this discussion progress, slightly more onerous terms coming through in terms of maybe the price per unit but also just the general risk-sharing contractual terms that the government is actually looking to get from defense contractors.

Scott Donnelly

Well, I would say that the primary discussion point and the primary objective of the government with respect to the multiyear is achieving a certain savings percentage as compared to if they were to procure on a year-over-year basis. So that's really where most of the discussion and most of the strategy, with both ourselves as well as our customer is how to make sure that in terms of unit volumes and times and whatnot, that if we're going to do a multiyear, we're able to figure out a way to achieve the cost ratio. So it's not a price discussion or sharing discussion so much. It's really around how do we get that savings as compared to if they procured on an annualized basis.

Operator

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

Myles Walton - Deutsche Bank AG

Scott, as you move into the back half of the year, you're really looking at setting the production rates up for 2012 more than anything else. I'm just kind of curious what your attitude is on the risks you're willing to take with respect to not losing share and gaining share versus obviously some conservatism with respect to the balance sheet. And kind of where do you think the backlog needs to be at year end to sustain this level of production you have in 2011?

Scott Donnelly

Well, I mean, first of all, you're absolutely right. We already are looking at what our production rates look like in the next year because the cycle time of these products from supplier procurement all the way through final assembly and test dictates that we started paying attention to that right now. So our view, obviously, we're not in the position yet to try to guide on probably next year. But suffice it to say that we continue to expect to see some modest improvement in the market. And that's how we think about it when we think our production rates. And just as we've done in 2010, and have now done in 2011, we will have to make some estimates in terms of what we expect that demand to look like. And as a result, we'll set those production forecasts. And yes, we will take some risk. But we'll take pretty thoughtful risk, which is the same thing we did in '09 and '10. And those have played out to be about right. So we will take some risk in terms of the balance sheet and some inventory because we know we're not going to have a backlog in 2012, where the aircraft is spoken for. We know the demand is going to be there for the course of the year, and just as we had for the last couple of years, we'll work as good, as hard as we can to try to make sure we're accurate in terms of anticipating what's going on in the marketplace.

Myles Walton - Deutsche Bank AG

And do you see any movements with respect to the tax accelerated depreciation coming into play at this debt ceiling in terms of how do you -- it would impact orders for this year either pull forward from 2012 into 2011 or otherwise?

Scott Donnelly

I don't think so. We have not heard any discussions with respect to bonus depreciation and any different handling than what has been out there. The talk that you hear around changes in -- tax-related changes for business aircraft. As near as we can tell, I mean, all the discussion is around changing the depreciation schedule to a 7-year schedule from a 5-year schedule, but that wouldn't kick in until you go back to the normal depreciation schedule. So in other words, it does not appear that there's any change, none that we are aware of, with respect to the bonus depreciation scheme. So it will just be a going-forward basis that when you go back to normal depreciation it's a 7 versus a 5-year plan. At least that, we believe, is the proposal that's on the table.

Myles Walton - Deutsche Bank AG

And last one for me. On systems, would you expect the back half of the year to have a pickup in bookings putting your book-to-bill above one to hopefully support that business revenue level flat into next year at a minimum?

Scott Donnelly

At systems, I would expect that. The only caveat I would put around that is one of the things that's been a pressure point for us this year is as we went through all the CRs and all the budget uncertainty. Some of these programs were pushed to the right. Most of those programs or several of those programs are important to us, should close and be decided by the end of the year. And therefore, you would have that in your book. But I mean, given all of the uncertainty and insurance [ph] in Washington, some of that could slide to the right. But the key opportunities that we've been working on should get into the book by the end of the year.

Operator

And next, we go to the line of Steve Levenson with Stifel.

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

On the assumption that you get some foreign military orders, could those be shipped concurrently with deliveries to U.S. customers? Or would they have to wait in line?

Scott Donnelly

A lot of that depends on what's going on with the budgets. But I would say that generally speaking, when you get out into the '15, '16 time frame, the Marine Corps in particular, which is our customer on the H-1, and a majority of our customer on the V-22 has been very supportive of these activities. They know it's good for them as well because it keeps higher levels of production in the factories. And I think -- I won't speak for the Marine Corps, but I think they're amenable to feathering in some Foreign Military Sales opportunities, if that will help to capture some opportunities and add some additional volume to the overall program.

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

Great. Just going back to Cessna. You've been talking a bit about mix shifting to the larger planes. Is that something you think will be evident in the second half or is that going to be something that's next year and beyond?

Scott Donnelly

Well, I think that will be something we'll continue to see in the third and fourth quarter this year as well.

Frank Connor

Particularly relative to Mustang volumes as it relates to the mid-light.

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

Got it. And just a question about that problem account in TFC, was that golf account or another category?

Scott Donnelly

It was a timeshare account.

Operator

Next, we go to the line of George Shapiro with Access 342.

George Shapiro - Citi

Can you tell us what forfeiture income net of write-downs was at Cessna in the second quarter and how that compares to last year?

Frank Connor

It was about $2 million, and it was roughly similar to last year's levels, a little over $2 million.

George Shapiro - Citi

Okay. And then, any way to quantify the impact of Japanese order production on Caltex in the second quarter and how it might recover as we go into the subsequent quarters?

Scott Donnelly

George, we've tried to do that. I mean, in some respects, it's not that hard because you can look at a particular plant, and we know they went from 5-day to 2-day shifts for a certain period of time. But what they were forecasting versus what they did. There is some murkiness around it. But let's say that globally for us, it might have been somewhere in the order of $15 million or $20 million worth of physical volume. It's not a huge number.

George Shapiro - Citi

Okay, it's not a huge number. And then, Scott, if you look at Cessna orders in June in the early part of July versus April and May, did you see any improvement?

Scott Donnelly

George, I don't even know if I have that in front of me.

Frank Connor

June was strong. Generally, the pace of order activity although there's volatility month-to-month has kind of improved generally as we went through the year.

Scott Donnelly

George, the seasonality within a quarter, you always have stronger end of the quarter, just human nature kind of a thing. So I wouldn't necessarily draw anything from that other than unlike last year, the quickest thing come out and have silenced. So we're encouraged by what we saw in June.

George Shapiro - Citi

And I was meaning, Doug, obviously, after the normal seasonality, you might expect with the stronger, normally stronger June but you're saying it's hard to separate it out.

Frank Connor

It's lack of bad news, as much as anything. So there was no bad news in June, which is good news.

Scott Donnelly

You always have some of this lumpiness, George. I tend to look at it on more of a quarter basis. I mean, we see that number every month, but I think of it more on a quarterly basis. And certainly, there's no tonal change. I mean, when I talked to Scott and I talked to Mark and the sales guys, nobody's coming in and saying, "Oh my gosh." Either nothing's happening or all of a sudden everyone wants to buy. I mean, it's been pretty steady.

George Shapiro - Citi

Okay. And then next quick one probably for Frank. The sales of the commercial tiltrotor to Agusta [ph], any financial impact from that in this quarter?

Frank Connor

No, because it won't close until later in the year.

George Shapiro - Citi

And then will there be a financial impact, then?

Frank Connor

Well, there will be some impact on an ongoing basis as a result of kind of various elements of the agreement. We will continue to support them and their development on a go-forward basis. And so we will have some engineering activities and support activity and things like that. But there will not be any type of kind of large one-time impact at the time of the close.

Operator

That would be the final question, coming from the line of Ron Epstein with Bank of America Merrill Lynch.

Ronald Epstein - BofA Merrill Lynch

Just quickly on Cessna, one thing we didn't really talk about was how is international demand? What are you seeing there?

Frank Connor

Actually, it's been reasonably strong. The Southeast Asia, Indonesia, these areas have been good for us on both Citation jet as well as Caravan [ph] has been good. The eastern European, Latin American markets are still strong. So it's been fairly balanced, I would say, Ron. I mean, it's not one particular region, but I would say the level of interest and the market kind of just sort of modestly recovering, we're seeing on a pretty broad basis.

Douglas Wilburne

All right, ladies and gentlemen, that concludes our call. Thank you very much for joining us. And the few folks that were still in the queue for follow-up calls, we'll get to you one on one then. Thank you very much.

Operator

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