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Executives

Douglas R. Wilburne - Vice President of Investor Relations

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

Frank T. Connor - Chief Financial Officer and Executive Vice President

Analysts

Heidi Rolande Wood - Morgan Stanley, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

George Shapiro

Jason M. Gursky - Citigroup Inc, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Carter Copeland - Barclays Capital, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

Textron (TXT) Q2 2012 Earnings Call July 19, 2012 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Textron's Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Doug Wilburne. Please go ahead.

Douglas R. Wilburne

Thanks, Tricia, 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 second quarter results, starting with Slide #3. Revenues in the quarter were $3 billion, up 10.7% from a year ago. Our income from continuing operations was $0.58 per share, which compares to earnings per share of $0.29 in the second quarter of 2011.

Moving to cash flow, second quarter manufacturing cash flow before pension contributions was $121 million and from that, we contributed $21 million to our pension plans.

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

Scott C. Donnelly

Thanks, Doug, and good morning, everybody. Our second quarter performance reflects continued growth in our commercial aircraft and industrial markets and improved operating execution across our businesses. We also continue to secure a number of key program wins and made strategic product announcements in the quarter that should further contribute to growth long term.

Starting with Textron Systems, our Marine & Land Systems business won the Canadian Tactical Armoured Patrol Vehicle program. This contract calls for delivery of 500 vehicles beginning in 2014 with an option for 100 more, as well as an initial 5-year support contract. This was an important win as it extends our production of armored vehicles through at least 2015. This win also establishes a new family of our proven Mine Resistant vehicles, and we can now market to other customers around the world.

Our TMLS business also won the Navy Ship-to-Shore Connector competition, which starts with detail design and construction of a test and training craft to be completed by early 2017. The contract also provides options for deliveries of up to 8 initial production units through 2020. So the total value of this contract could amount to $570 million over the remainder of the decade, with even more significant opportunity when the program enters full rate production.

And finally at our Unmanned Aircraft Systems business, we recently received a $358 million award for engineering support and upgrades to retrofit 45 Shadow Systems with deliveries of these units beginning in late 2013.

So despite a difficult DoD environment, over the past several months we've won several significant new programs that help solidify the long-term outlook and systems.

Moving to our Finance segment, we had another successful quarter of liquidations as we reduced noncap to financial receivables by another $160 million, including a $70 million reduction in our Golf Mortgage portfolio, representing 19 loans. Our noncap to finance receivable portfolio now stands at $619 million.

Shifting to our industrial business, operating performance was solid with revenues up 5%. Volumes in our Industrial businesses reflect strength in the North American and Asian auto markets offsetting European softness.

Moving over to Cessna, we delivered 49 jets in the quarter, up from last year's 38, reflecting modest recovery and our success in the current market. We also had a number of strategic developments over the past several months at Cessna. First, we announced our new long-range super midsize Longitude business jet during the eBay show in Geneva. With a 4,000-nautical mile range and a speed of Mach .86, the Longitude will be designed to make nonstop flight between city pairs like New York and Paris; London to Dubai; or Beijing, Moscow. At a price of just under $26 million, we believe the Longitude will be the best valued 4,000-nautical miles super midsized business jet available in the world. We also continue to make good progress during the quarter with flight testing on our new Citation M2 and Citation Ten.

Finally, our newly announced Latitude was selected by NetJets to become part of their fractional fleet offering, which should add significantly to the long-term demand for this aircraft.

And to wrap up with Bell, on the military side we delivered 9 V-22s and 6 H-1s versus 9 22s and 8 H-1s in last year's second quarter. We saw a significant increase in our commercial business with 47 units delivered in the second quarter, up to 25 from last year's 22 deliveries. This growth reflects the overall strength in global helicopter markets, as well as the ramp-up in our 429 program and the success of our new 407GX.

To wrap up the quarter, overall manufacturing revenues were up 10% with manufacturing net margins improving 120 basis points. We believe this validates the investments we've been making over the past couple of years in new product development, our sales capabilities and manufacturing productivity.

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

Frank T. Connor

Thank you, Scott, and good morning, everyone. Manufacturing segment profit in the quarter was $288 million, up $59 million from the second quarter of 2011 on a $269 million increase in manufacturing revenue. Let's look at how each of the segments contributed, starting with Cessna.

Revenues at Cessna were up $111 million on a year-over-year basis, reflecting higher jet deliveries. Segment profit was up $30 million, primarily due to the higher volume. Excel revenues were up $184 million primarily due to higher commercial helicopter volume. Segment profit increased $32 million, reflecting the higher volume in a favorable mix in our commercial business.

At Textron Systems, revenues were down $63 million primarily due to lower volumes in our weapons and sensors and land and marine businesses. Segment profit decreased $9 million, reflecting the lower volumes and deliveries on lower-margin contracts. Industrial revenues increased $37 million, reflecting higher volumes across most of the businesses, partially offset by unfavorable foreign exchange. Segment profit increased $6 million, primarily due to higher volume.

Moving to finance, total finance receivables ended the quarter down $256 million from the prior quarter. Nonaccruals ended the quarter at $252 million, a decrease of $38 million from the prior quarter, and 60-day plus delinquencies were $169 million, up $26 million from the first quarter, primarily reflecting a few aircraft accounts.

Moving to corporate items. Corporate expenses were $20 million, down significantly from the first quarter, primarily the result of lower propelling share price, which reduced compensation-related expenses. Interest expense was $35 million, even with the first quarter. Our average share count during the quarter was 295.5 million shares, which was 19.7 million shares lower than last year's second quarter, primarily reflecting the benefit of having repurchased a large portion of the company's outstanding convertible notes.

To conclude, we are maintaining our full year EPS guidance of $1.80 to $2 a share, with cash flow from manufacturing operations before pension contributions of $700 million to $750 million.

That concludes our prepared remarks. So Tricia, we can open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will go to the line of Heidi Wood with Morgan Stanley.

Heidi Rolande Wood - Morgan Stanley, Research Division

Can you walk us through the strong improvements we're seeing in this quarter in Cessna? I think -- I can't recollect precisely, but I think Scott Ernest has now been there for 1 year. Can you tell us what has been changing with him and his team that's been most effective in these results?

Scott C. Donnelly

You're right. Scott's been in place for just over 1 year. And I think some of the changes that he's made in establishing real business segments, or P&Ls within the jets and propeller, military and service sector and the teams, the people we put into those leadership jobs are doing a great job on focusing both on where we're going in the future, product development, plans, kind of marketing strategy, but also sort of a stronger focus on their P&L and understanding their costs, understanding conversion costs and prior costs, warranty, really looking at the products a little more holistically along each one of those product lines. And I think the focus on that and trying to draw profitability back in the business is something that they're doing very well. And I think that's what we're seeing in the results.

Heidi Rolande Wood - Morgan Stanley, Research Division

Didn't we expect then, Scott, in the second half a steady climb in profits then as he gains, and he and his team gain greater traction?

Scott C. Donnelly

Well I think that you're going to see, obviously, the continued focus on the cost, but I do think we'll start to see a little more pressure on R&D spending as we continue to ramp up all the exciting stuff that we've announced. We actually have to go spend the money to make those things happen. And there's a couple of other headwinds. But there's going to be things that push back and forth through the quarter. But I would say I don't think there's any change in their focus around cost, and that will continue to support our margins. But we are going to have some headwinds around some of our R&D spending.

Heidi Rolande Wood - Morgan Stanley, Research Division

And last question, obviously given the conservatism in your guidance, you're baking in and implying deceleration in the back half of the year. Can you walk us through some of the puts and takes that kind of drives that conclusion?

Douglas R. Wilburne

Heidi, I mean obviously coming through the first half of the year, we feel pretty good about where we are relative to how we expected the year to progress. But I have to say that we still look at the back half of the year in terms of what's going on with economies around the world in a lot of uncertainty. I have to factor in that, that will cause concern with a lot of our customers as well. And so we still have, as we have had now for the last few years, an awful lot of activity, particularly at Cessna, which requires sales, orders that then convert to sales in a relatively short period of time. And I think there's enough uncertainty out there in the economy, in the markets around the world, that it's best to still anticipate it's going to be a tough back half.

Operator

Our next question is from the line of Robert Stallard with Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Scott, I was wondering if you could give us your views on revenues for the full year and whether there's been any changes in the allocation by division?

Scott C. Donnelly

No, there really isn't, Robert. I think things are really -- there's no reason to change the kind of guide that we've given you guys the beginning of the year around each one of the businesses. Bell, obviously, I think is on track. Cessna is certainly on track. Systems, as we sit here today, is probably a little behind. We guided the revenue around that business to be flattish for the year. We're a little behind where we were obviously at this time 1 year ago. I think that's reflective of just the general slowdown of getting things through the DoD process. But obviously with some of the wins that we've had here in the past few months and some FMS activities, I think we have reasonable line of sight to expect the revenue to catch up on that business and finish the year about flattish as we originally guided.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Okay. And as a follow-up on Cessna, you've given us the backlog number for the quarter. I was wondering if you could give us an idea of maybe how orders and cancellations might have panned out this quarter.

Scott C. Donnelly

Well, there were some -- certainly, still some cancellations in the quarter. I would say gross orders were pretty good. We still have some cancellations, and if you will just -- frequent of why we could still see cancellations at this point. And frankly, it's still driven by some orders that were in the backlog that date all the way back to sort of the 2007 MBAAs and CJ4 launches. And as you know, the backlog was way out for that model at that time and so as deposits come due, there still are some that are dropping out of that area. So I would say principally when you look at cancellations, that's what's driving it. The rest of the cancellation numbers are sort of immaterial.

Operator

And our next question is from the line of George Shapiro with Shapiro Research.

George Shapiro

Just follow-up on that, Scott. Was the gross book-to-bill at 1 or above 1 in the quarter then?

Scott C. Donnelly

I think if you look at gross, it was just barely above 1.

George Shapiro

Okay. And what happened to the aftermarket at Cessna? I mean, how much did that grow in the quarter?

Scott C. Donnelly

The aftermarket was up sort of in mid-single digits. On a comparable basis, it wasn't as strong as we've been seeing, but we had a very strong comp from the second quarter of '11 because a lot of fleet refurbishment activity was going on. But it was still up a healthy, healthy mid-single digits.

George Shapiro

And you had very strong incremental margins. I mean is that just a volume, or did the large number of XLS deliveries help that? And why shouldn't we expect that incremental to continue if you adjusted for the higher R&D?

Scott C. Donnelly

Well, I think if you look -- I mean for sure, gross margins continue to be good. I don't see a change in that going forward. But as I said, we are going to see more R&D coming into this thing, and we're still at a point here where the numbers are relatively small. And plus or minuses, whether it's inventory adjustments, that will have an influence. It's bigger than we would like just because the number's relatively small at this point. So at this stage of the game, I mean, I certainly feel good about what the guys delivered on the quarter. We'll continue to drive hard but at this point, I would say I don't see a reason to guide outside of the margin range that we gave you for the total year.

Frank T. Connor

And George, the comps going forward at Cessna are going to be a little tougher, too. As Heidi pointed out, the new management team got underway a little over 1 year ago, and so some of that immediate impact started to flow in the third, fourth quarters of last year.

Operator

And our next question is from the line of Jason Gursky with Citi.

Jason M. Gursky - Citigroup Inc, Research Division

Just a couple of quick clarification questions. First, on TFC and the outlook for the rest of the year and moving into 2013. Obviously, we've had some better-than-expected performance relative to your initial guidance of breakeven for the year. Can you just give us some updated thoughts on -- yes, look, not just for this year, but as we kind of move into next year given what you know today?

Scott C. Donnelly

Well, I think that most of what we're seeing that has been upside to what we would have guided, Jason, has to do with our successful liquidation in the Golf Mortgage portfolio and the fact that we've been able to liquidate those notes at better than where we mark them when we took the mark last year. And so obviously, those come through as a gain. Now eventually, obviously that's going to stop. I mean, we've had 2 good quarters of those liquidations. I think we'll continue to see good liquidations of that through the balance of the year but obviously as we start to think about 2013, we have a better sense of how those are liquidating now. So when we get around to kind of guiding you toward 2013, we'll consider that but that is going to end, right? I mean those receivables are dropping fairly quickly, which is good news. But as you look out, I'm going from -- starting the year with 381, we're already down to 244. These things are going to run through the book. I hope we'll continue to run through the book pretty quickly. I would hope that we will continue to see some positive numbers come out of that as we liquidate them better than their mark, but that will end.

Jason M. Gursky - Citigroup Inc, Research Division

And as far as the timing on the ending, do you have a sense of that? Is it in calendar '13 or we see that this year?

Scott C. Donnelly

Well, I mean our -- it's hard to tell, right? But our pace right now has been sort of in that $60 million, $70 million over the last couple of quarters. So even if we continue that kind of run rate, then you're going to be -- the portfolio we have, what it was as we get to the end of the year, which means it'll...

Frank T. Connor

We'll still in number -- in '13. We still expect, obviously, liquidation activities in '13. As Scott said, it's going to depend on the pace of liquidations for the second half of this year and where those liquidations take place relative to where we have, at least, the Golf portion marked and then we have other liquidations coming out of other pieces of the portfolio. It will continue.

Scott C. Donnelly

I guess what we're saying, Jason, is you can't assume that level on a go-forward basis. I mean, that's not something we can bake into the TFC model on a go-forward basis, because it is really driven by a particular asset class and how that's liquidating. And as you know, that will come to completion as we finish that liquidation.

Jason M. Gursky - Citigroup Inc, Research Division

Right. Just 2 quick follow-ups then. On the Cessna cancellations, can you give us a sense of how much that might have contributed to operating profit during the quarter? And then Scott, can you just give us an update on V-22 international sales?

Scott C. Donnelly

On the former, Jason, the cancellation foreclosure numbers is de minimis. I mean, it's $1 million or something. There was not an impact on the quarter in terms of the margin rates really. In terms of V-22, on foreign military sales opportunities, we just came out of Farnborough. I would say we had a great show. The Marine Corps had 4 V-22s. Over at the show, they were providing demonstration rides for a lot of Foreign Military customers. It was a packed few days. They were terrific, in terms of supporting us. We had a lot of folks flying the aircraft, a lot of fabulous feedback. I would say we are in serious discussions with several different countries around the V-22 sales opportunity, and we remain pretty bullish that several of those deals are going to close. We'd obviously would love to see one happen this year. I think there's a possibility for that to happen. Remember, we're really trying to look at production slot availability out in that 2015 time frame as you start the second multiyear. So I would say right now, there is not a complete signed contract on any of those, but there are several there and -- that I think are real opportunities, and they're going to start to happen.

Operator

Our next question is from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

I just want to go back to the full year earnings outlook question from the first questioner. And I just want to make sure I'm interpreting you correctly in that, I think you were saying the reason for just keeping the range and not raising it despite the large beat, at least versus our expectations, is simply because of the broader, higher-level macro and not because of an expectation for specific segments to get worse in the back half. Because you earned $1 in the first half, so you have to earn less in the second versus the first to get to the midpoint of your range, which in any normalized year historically has never happened. So just wanted to make that clarification, and if it is the businesses, which ones are the drivers?

Scott C. Donnelly

No, it is exactly as I said. We're -- I think if you looked at where Bell is today and where the industrial business is, the systems business I talked a little about, I think I have a reasonable degree of confidence in forecasting what their performance will look like through the balance of the year. But at Cessna, we are in the same mode that we've been in for a few years here, where we're taking orders and selling in sort of a 3- to 6-month window for the most part. And I still worry about the back half of the year in terms of what the market's going to look like. And that's just driven by, I believe, a lot of uncertainty in economies. I think there's a lot of concern about heading toward November, a lot of small midsized business guys who are our customers are very concerned about the balance of the year and where things are going in terms of election and politics. You've got debt ceilings, you've got sequestrations. You've got massive changes to tax policy. So I remain concerned that we'll have too many people sitting on the sideline as opposed to guys that are willing to make significant capital investments and hiring people and things like that. So I think it's proven at this point, given the uncertain nature of the economic and political situation particularly in the U.S., that we'd be a little bit cautious about the second half of the year.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay, understood. And then as a follow-up to the Cessna order topic, orders weren't through the roof, but they were certainly -- they kind of held in there relative to how bad the macro was in the quarter. Can you talk about whether or not part of that is share gain? And you have new management and new product strategy and the degree to which you think you're taking share back from competitors that maybe had some inroads versus you. And then as a second question, when you mentioned gross book-to-bill being above 1, I think that's been the case for a few quarters. So what's the timing at which you think the cancellations finally end, such that even without core gross order improvement, you'd automatically have book-to-bill above 1?

Scott C. Donnelly

Noah, I've been trying to stay out of the guessing game on the order book, but like, let me just say it. I think we feel good about what gross orders were in the second quarter. I think that it feels like we're taking some share. I haven't seen the MBAA numbers yet. Embraer's put their numbers out, but I haven't seen numbers from any of the other businesses. We'll obviously, we'll see that here in the pretty near future. But I would say that I think our sales teams are doing a great job in terms of coverage. Certainly a lot of new products that we've announced. This generated a lot of interest in our brand, and our product continues to be very well received in the marketplace. So I think we're continuing to do well, and I would guess that we have seen some share pickup in the quarter and I would expect that to continue. So it's not like I feel bad about where we are in terms of orders. Our order rate has been pretty good. I think the guys are doing a nice job out there. It's just caution in the macro environment that would cause us to feel strong enough at this point to take our overall guidance number up.

Operator

And our next question comes from the line of Jeff Sprague with Vertical Research.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Just a couple of questions, just back to R&D. Obviously, you do have a lot going on and R&D has to go up. I think in some of your prior conversations though, the thought was yes R&D goes up, but it doesn't outpace sales growth once we get beyond this year. Is that view changing?

Scott C. Donnelly

No, I don't think so.

Frank T. Connor

No, I think the comment, Jeff, was just that it's more back-end loaded than front-half loaded this year, but the longer-term look at R&D is still the same.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Right. And Scott, can you just share some thoughts on sequestration? You've taken the view that it won't happen. Unfortunately, you're taking that view because you're a logical businessman, right, and we're operating in a world where maybe things aren't so logical. So whether you think it's going to happen or not, what does Textron do if it does happen? I mean, how do you posture? Can you do things in advance? Do you even know what sequestration would mean for your businesses at this point?

Scott C. Donnelly

Yes, Jeff, I mean it really is something at this point that you can't plan for, because the fundamental flaw, in my view of sequestration, is it's just bad policy. If people decide that there needs to be a further reduction in the defense budget and obviously, the defense community doesn't like that idea. But even if you are going to take it down, the issue is you surely would never do it in the fashion it's laid out in the sequestration law, right, where you do a -- spread it across everything, every program, every spending item, everything gets hit by a common percent. I mean first of all, it would be a disaster for the government because that means every contract, every worker, everything out there gets impacted, which is going to result in a massive deluge of contract changes, requests for equitable adjustments. I mean it would cost the government more money than they would ever say. I mean there's actually contracts. You can't just go out there and arbitrarily change contracts without having ramifications of that. Just from a pure administration standpoint, you would never do that. The other course is if you're going to take more money out, and I'm not betting against, by the way, that they're going to take more money out. I think that there still could be, when they work their way through, I'd be very surprised if it's a lame-duck process -- session. But when you get into a new Congress and they actually start to figure out what they got to cut and what they're going to do about the deficits, that there could still be a further allocation of cuts to defense. But I think you have to let that go work the way it normally does, just like the first $0.5 billion of defense is already taken, where you go to the Pentagon, you go to Congress, okay, we're going to take up this much money. And there's actually a thoughtful rational way about what programs get hit, what programs don't get hit and you proceed down that path. So I think I wouldn't be very surprised if sequestration gets invoked just because of inaction in our political process. That wouldn't surprise me a whole lot at this stage of the game. But I think once that hits, there will be some emergency sessions and people will actually say, "Okay, if we're going to cut money, here's how we have to do it." And the problem with planning for that is you don't know what programs they're going to go try to take money out. So I don't think it's going to be an across-the-board deal. I think that's an administrative -- it's bad policy. Administratively it's bad. It's bad for defense. But knowing where the cuts ultimately will come at this point would be absolute guesswork, and I just don't think we can -- we're wasting our time to even try and to do so -- a plan for that.

Operator

And our next question is from the line of Carter Copeland with Barclays.

Carter Copeland - Barclays Capital, Research Division

Just a quick question on sort of big picture on Cessna, Scott, if you -- I wondered if you might compare and contrast the demand environment to the sort of summer slowdown periods we've seen in the past couple of years, and whether it's any different than what we saw last year, better or worse? And then a point of clarification with respect to the order book and the NetJets order and whether there's any portion of that that's included in the backlog?

Scott C. Donnelly

Okay, in terms of the macro view of Cessna, I mean we certainly are not where we were 2 summers ago where when the euro, sort of crisis first hit, it sort of froze the market. We have not seen that level of reaction. Frankly, even with what's going on in Europe right now, we still continue to see order flow in Europe. Obviously, it's in -- mostly around countries that are still economically doing better than some others. So we haven't seen that sort of falling off a cliff where everybody just stops. So I guess in that regard, it's more like it was last summer, right? I mean we went through it and we kind of -- we muddled along, we continue to get orders. And I think there is still demand out there, obviously, for the product. There are still people who want to do upgrades, and they want to put new aircraft, and that's the flow that we're seeing. And so our belief is that's why we think we're going to continue to have a solid year. But there's still the macro overhang of it. So the macro level is certainly not like it was 2 summers ago when the market just absolutely stopped. It is much more like last year, and I would hope it will continue like that. That's what we seem to see in the demand right now. In terms of the NetJets order, no. None of the NetJets order is into our backlog. The process of how we're proceeding is that we will put aircraft into the backlog as we identify a specific serial number to be delivered to NetJets to fulfill their customer demand. And obviously with this aircraft coming into market in 2015 in the -- just really getting into the marketing and the selling process on the NetJets side, I wouldn't expect to see those aircraft going into the backlog for some time because again, we won't put them into the backlog until we see assigned specific serial numbers. And we'll do that on an aircraft-by-aircraft basis. We will not put that entire order into the backlog at any point in time. It will come in on a aircraft-by-aircraft basis.

Carter Copeland - Barclays Capital, Research Division

And one other just sort of brief follow-up. You mentioned the aftermarket performance at Cessna. I wonder if you might comment on what you're seeing on that front at Bell?

Scott C. Donnelly

Bell aftermarket performance was good as well.

Frank T. Connor

Yes, kind of still good growth there.

Carter Copeland - Barclays Capital, Research Division

Similar to the mid-single digit at Cessna?

Scott C. Donnelly

Yes.

Operator

Our next question comes from the line of David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Scott, last quarter you talked about the price environment being tough, being a headwind last quarter. Could you address pricing year-over-year and sequentially at Cessna?

Scott C. Donnelly

I would say still a difficult pricing environment. As I indicated on the call in the last quarter, we saw tougher pricing on a year-over-year basis than we would like to have seen as we're kind of battling our way through things. In terms of sequential, we actually saw some modest improvements. We actually put a couple of those price increases out there in the market and then pull back on some of the allowances. And I think our sales team has done a nice job of closing a lot of orders and getting a little bit of price back.

David E. Strauss - UBS Investment Bank, Research Division

In terms of the Cessna, you noted your conservatism obviously with all the macro issues. But could you maybe talk about where you are in terms of being sold on the rest of the year relative to whatever delivery number you have baked into the revenue guidance, and how that would compare to the last couple of years when you were midway through the year?

Scott C. Donnelly

No, we're not talking about unsold positions at this point, David. But as I've said, I mean I think the reality of the market where we are and have been now for some time is that it's safe to assume a lot of the aircraft are going from an order sales process that's in the 3- to 6-month kind of time frame typically.

David E. Strauss - UBS Investment Bank, Research Division

Okay. Last one, Frank, on the pension side, will you guys benefit at all from the recent change in the pension legislation smoothing the discount rate? From a funding standpoint, I think you were looking at pretty meaningful contributions on a go-forward basis.

Frank T. Connor

Yes. No, it won't have a big impact from a minimum-required pension contribution. It helps us to the tune of $30-ish million or so, so it's not a big number. And we've been making contributions just because of our funded status at levels, as you know, well above our minimum contribution levels and kind of we anticipate and continuing to do that for a bit longer. So it doesn't have really any impact on how we think about that.

Operator

And our next question is from Cai Von Rumohr with Cowen & Company.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Scott, could you give us some color on the demand at Cessna, both by product, by geography and kind of the pace going through the quarter? Did it sort of slow down, as I would assume, kind of in the last part of the quarter, early July?

Scott C. Donnelly

You know, Cai, we didn't see much of a slowdown. I would say in terms of geography, both our orders and our deliveries at this stage of the game are kind of sitting in the 60-40, 60%, domestic, 40% international kind of market. And I would say it was pretty steady through the quarter.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

And by product, I mean we've been hearing that maybe the mids and super mids are firming a little bit. You seeing any sort of areas stronger or weaker?

Scott C. Donnelly

It's relatively balanced. I mean the XLS plus had a very good quarter. We continue to see strong position in the CJ4s. There were some CJ2s, 3s. Mustangs were about flat, so it's pretty well across the portfolio.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Okay. And then help me understand your comment, the guidance is the same, and yet your corporate expense is way down. And unless you're assuming your stock price surges, it looks like that's going to come in a fair bit lower than you expected. And you indicated expecting some more favorable adjustments on liquidation. So it looks like TFC is going to do better than expected even if it about breaks even for the year. So is this really conservatism, or help us understand why that guidance didn't change.

Scott C. Donnelly

Well, I think that if you would accuse me of conservatism, Cai, I would say that it probably is conservative on our view of how we will do on Cessna for the balance of the year.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Got it, got it.

Scott C. Donnelly

You're right that there's obviously some of the upside we've seen at TFC, associated with the Golf Mortgage liquidations. Kind of when you look at our overall guidance, I mean that will tend to push us towards the high side of the guidance based on that number being a number that is stronger than guidance. And I would -- I'd say that's going to be true, but I still think we're going to be a little conservative if you're on the total of your Cessna number.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Understood. Now you mentioned that R&D is going to move up in the second half, up sequentially from where we were in the second quarter. And was the second quarter may be not up much from the first and not up much year-to-year, so it's really the R&D profile has something to do with the numbers of the full year?

Frank T. Connor

Well, we've never talked about quarterly kind of R&D because it does fluctuate, Cai, depending on kind of different things that are going on with different programs. But it will -- and we always expected it to be a bit back-end loaded relative to the first half of the year.

Operator

Your next question is from Julian Mitchell with Credit Suisse.

Julian Mitchell - Crédit Suisse AG, Research Division

So I guess firstly, just on Bell commercial, you've been fairly positive on that for sort of 6 or 9 months, and it certainly seems to be coming through in your numbers. Could you talk a little bit about your expectations for volume delivery growth in Bell commercial over the next sort of 12 months? And also, what's happening on the pricing side there, given that you've had this inflection on volume?

Scott C. Donnelly

Well, I think on the volume side of Bell, the year is playing out very much as we expected and guided, so we are going to see for the total year, significant growth in terms of Bell deliveries. And I think you're seeing that here in the second quarter as we had pretty strong deliveries on the commercial side. I expect that will continue through the balance of the year. I think we'll see particularly strong mix increase on the 429s and our 407s. As I said, I think both products are doing very well in the marketplace, and pricing has been good. The market -- the demand is strong around the world and so as you would expect, there's been some pricing power as well.

Julian Mitchell - Crédit Suisse AG, Research Division

And then just sort of yet another question on Cessna, unfortunately, but if -- I just wondered how you're thinking about the sort of business jet, taken from landing data to the sort of the traffic data, and how that affects your outlook for the second half? Because I guess the U.S., you had good growth for sort of 3 years, and that's largely expired. The U.S. traffic seems to -- in Europe, sorry, traffic seems to be down a little bit. So how does that -- when you're thinking about, I guess, second half or the next 12 months, the core assumption around traffic growth versus market share gains that you can get from price, how do you think about those 2 drivers for Cessna volumes?

Scott C. Donnelly

We don't look at that a whole lot in terms of volume driver. I mean we certainly look at average deal utilizations, and there's some tie-in, in terms of looking at the service business and there are people using their aircraft or not using their aircraft, and that's been pretty steady in the last year or so. It went down a lot, obviously, from the '07, '08 kind of numbers. But the number that we see right now, in terms of the ADUs for the quarter are very consistent with what we saw last year. So people are using their aircraft, and as a result they're coming into the service centers, and they're – having maintenance work done and upgrade work done. So I think it's -- that, that piece of utilization is something we look at more around what is it driving in the service business as opposed to new aircraft sales. On new aircraft sales side, we tend to look more at the metrics around what's available in the used market and what percentage of the fleet that's out there is available for sale. And those numbers continue to go the right direction. We were down -- we believe our fleet now is down somewhere just above 12%. And in particular, if you look at the models that are still in production models and what's available for sale in the market of those model types, for most of our models that's now down in the mid-single digits.

Julian Mitchell - Crédit Suisse AG, Research Division

Okay, great. And then finally just on the industrial business, very good core growth, sort of 11% much better than a lot of other industrial companies this quarter. What's the update there on the sort of the investment program there, and how you're thinking about the cost base? I mean, are you investing sort of substantially to make sure that type of growth continues, or is it sort of largely a one-off court, and do you think the growth will normalize from here?

Scott C. Donnelly

Well, I mean, a lot of the growth is driven. I mean if you look at our Golf and Turk markets, those were pretty hard hit. Those have started to rebound a little bit, so I think we saw good performance in the E-Z-GO business, across not just Golf, but also the commercial and consumer markets. We had a reasonably strong quarter with Jacobsen. You see more people going back and having to replace mowing equipment. The industrial tools business did well. I mean we had some FX challenges there, but volumes and profitability continue to be recovering in the industrial tool world. And Caltex, we've kind of hung in there. As we said, we've seen some softness in Europe, which is our, probably our biggest market for that business, but that was offset by a continued strength in the North American market. And I would say probably growth is not as strong as it has been in Asia, but it's still growing in Asia in terms of the automotive market.

Operator

And our next question is from the line of Myles Walton with Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

Scott, I think you're probably going into or in the 2013 strat planning sessions and looking at Cessna and coupling that with your commentary about the second half's economic geopolitical uncertainty. Are you still looking for higher production at Cessna into 2013 that you'd kind of preliminary pass along to the supply chain come September?

Scott C. Donnelly

Well, I mean, you're right. We have -- we are in that process. In fact, we've just completed doing that with all the businesses, so we are developing a view, I would say, at this point in time. But I would say we're not at the point where I would start to talk about issuing 2013 guidance on the businesses.

Myles A. Walton - Deutsche Bank AG, Research Division

I guess the near-term activity, if you decouple it to that second half kind of event risk situation, I mean, would that still make you comfortable that you're in what you've talked about before of kind of consistent recovery, maybe it's slower than previous cycles, but still a recovery nonetheless?

Scott C. Donnelly

Yes, absolutely. I would say the macro level, I wouldn't change the tone of our view that we will expect sort of a steady slow recovery in the market. The issue, of course, is that can have some peaks and valleys along the way, and so we always have to keep an eye out for that. But no, there's certainly -- in terms of talking to customers and looking at the activity that's going on in the market, looking at demand and where it is, we don't have any reason to feel differently than this, like the midsized jet market, will continue and make a slow steady recovery. And obviously, part of what we factor in is with a lot of the new products that we're putting out in the marketplace, we would expect -- certainly expect to see some share growth over that period as well. So I don't think anything versus what we've told you in the past is different in terms of sort of macro mid- to long-term view of the business.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. And then a clarification, I guess, on delinquencies. I know it wasn't a big pickup sequentially, but I think it's the first one that was seen in the last couple of years, if not longer. And I think you said it was aircraft customers. So I'm curious when is the trend going to start going the wrong way? And is that indicative of either higher-risk customers coming into the portfolio or customers who've been in there a while starting to show weakness?

Scott C. Donnelly

No, I mean, you're right. The 60-day delinquency trend was driven by a couple of sizable aircraft accounts. I mean I never liked to see a data point that goes the wrong direction, but I mean it did go the wrong direction, but I don't think that's going to be a trend. I mean these are customers that we know, we understand, there's a couple of specific issues that are going on, but I don't think they're -- I don't find it personally alarming at this point. I think it's something that we'll be able to get under control and get the delinquency heading back in the right direction.

Myles A. Walton - Deutsche Bank AG, Research Division

And these aren't necessarily customers, or are these customers who entered the picture in the last 24 months or customers who have been in there longer?

Scott C. Donnelly

No, no, no. For the most part, these are guys that have been on the book for quite some time.

Operator

And our next question is from Steve Levenson with Stifel, Nicolaus.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

I think all the good questions have been asked. I just wondered if you had any commentary on the developments around Hawker Beechcraft, the price discussion and if you think the door is absolutely closed to any sort of participation by Textron?

Scott C. Donnelly

Well, the HB process is certainly not closed to anyone at this stage of the game, right? I mean they basically have entered into a negotiation process with a, what is effectively a stocky horse in the normal bankruptcy process. So I don't think it's certainly technically not closed to anyone. On the other hand, I'd say the number that's out there is a number that's a pretty high number, so we obviously, as everyone will kind of watch it as it goes through in a pretty public process and just going to see how it plays out.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

I guess you might like to get that valuation for Cessna.

Scott C. Donnelly

Well, I -- we think we should.

Operator

Our next question is from the line of Ron Epstein with BofA.

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

It's Elizabeth in for Ron this morning. Just a follow-up on the last question. What implications do you think there could be for Cessna from the recent deal to sell Hawker to the Chinese with your Chinese partnership?

Scott C. Donnelly

Well, I mean again, this is a process that I think is still fairly early on. We'll see how things work out. If in fact the Chinese do buy Hawker, then it means Hawker's still in the market. So we've been competing with these guys for a very long time, and we'll continue to do that. Frankly, I think if you look at the investments that we're making and things like the Latitude and the Longitude, the things we're doing with our service network, for the reasons that we've been very successful versus Hawker Beechcraft in the last couple of years are the reasons that we would continue to be very successful against those products and that capability in the marketplace regardless of who happens to be the equity behind it, so...

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

So what about your deal to build a new airplane with the Chinese?

Scott C. Donnelly

Well yes, I mean, we're still continuing our discussions with AVIC. I think the Chinese market is going to be a big market. And there's going to be a lot of competition in China. Obviously, the things that we've been trying to do with AVIC is to give us capability in the country that we think will be attractive to customers to help make us competitive in China, but I don't think by any means do we think we'll ever be the only guy to oversell in China. I mean everybody sells in China today, and I think everybody will sell in China tomorrow. We continue our discussions with AVIC to see if that's not something that gives us a competitive advantage in that marketplace. And so from that perspective, I don't see that as a change.

Operator

And we have a follow-up question from George Shapiro with Shapiro Research.

George Shapiro

Yes, just a couple of -- it's probably more nitty things. But was there any LIFO benefit at Cessna in this quarter like you had in last year's second quarter?

Scott C. Donnelly

No.

George Shapiro

Okay. And that's a -- there was a slight sequential decline in the margin at Bell even though revenues were higher, and maybe it's too small to worry about going from 14.6 to 14.4. Any reason for it, because commercial was better?

Scott C. Donnelly

Well, I mean commercial, obviously the commercial mix is usually somewhat dilutive in our margin. We did have -- when I talk commercial, I'm talking about OE, right? So when you see more unit volumes, things like 429s and 407s in terms of the original equipment sale, those tend to have some dilution. But you're right, we get into 0.001 site, I wish I was that good, George.

George Shapiro

Yes, that's what I figured.

George Shapiro

All of our businesses, as we've seen, have a fair amount of quarterly volatility to them. There's lots of ins and outs.

Operator

And we do have another follow-up from Carter Copeland with Barclays.

Carter Copeland - Barclays Capital, Research Division

Just one quick one, back to the Hawker Beechcraft process. Obviously, the defense piece of that portfolio, the trainer businesses is still out there. I wondered if you might comment on whether that's something you'd still be interested in or any comment would be welcome.

Scott C. Donnelly

Carter, I think that we have the same general view. These are assets in which we have an interest but again, it would have to be at a value that we thought was appropriate. In general, I would say this whole situation with HB, we've always expressed an interest. I think some of the assets of the company are interesting and would be a good fit in our company, and that we could do the right thing for their existing customers and our customers. It would all work. But at the same time, whether it's the overall HB situation or the defense piece, these are things that I think, given the investments we're making, given the position where Cessna is today, I feel great about what our team is doing. So we don't have to do something here. If it's the right value and it will be accretive for our business, then absolutely we're interested. But if it's not something that's going to be a good financial deal and it's not going to be a good investment for our shareholders, then we'll pass on these things.

Carter Copeland - Barclays Capital, Research Division

Is it your perception that, that piece is going to have a sufficient number of interested parties?

Scott C. Donnelly

It's a good question, I don't know. I mean you can imagine a couple of people that would be interested in it, but I think we'll have to wait to see how that plays out.

Operator

We'll go to the line of Noah Poponak with Goldman Sachs for a follow-up.

Noah Poponak - Goldman Sachs Group Inc., Research Division

I just had one follow-up on systems. You've obviously put up a number of nice wins there that start to flow through beyond 2012. And right now, we're seeing the business show negative growth. And beyond the 2012 period, you probably still have a number of headwinds. I know you don't want to talk specifics beyond 2012 yet, so I wondered if you could just say, with everything you want and everything you know about the legacy business, do you think systems is up or down in 2013?

Scott C. Donnelly

Well again, Noah, I think it's -- it would be premature to get into 2013 guidance at this stage of the game. The only thing I'd really talk to is around 2012, and we are behind a little bit where we would like to be on the revenue side of things for '12. But I think with some of the wins we've had and some of the dynamics of the business right now that we still think we'll probably get back to about flattish for the year.

Noah Poponak - Goldman Sachs Group Inc., Research Division

And can you comment on just directionally, positive or negative next year or too early to do that?

Scott C. Donnelly

I think it's too early to do that. I mean a lot of these programs we've talked about on Ship-to-Shore is a relatively small impact to this year. It's a little bit bigger impact to next year but again, primarily driven around research and development. TAPV, there are -- is a fabulous program win, but that really is production volumes that are -- later on, I mean we're already kind of where we need to be in terms of maintaining productions as we go through next year. So the TCDL win obviously is something that will help a little bit next year. So I think -- I don't think you're going to see a big swing one way or the other in 2013.

Operator

We'll go to the line of Jason Gursky with Citi.

Jason M. Gursky - Citigroup Inc, Research Division

Just one last question here on systems, and I apologize if you've already answered this question, but I didn't quite hear the details. The outlook for the rest of the year to get back to roughly flat, can you just give us a little bit of detail, Scott, on what needs to happen in the back half of this year? What programs specifically do you think are going to see an acceleration in the revenue outlook for the back half of the year?

Scott C. Donnelly

Well, we had a couple of programs that drove some of the -- caused us to be under where we are today, primarily driven around some FMS transactions where it was a matter of getting through the finitization of contracts and getting things signed, which I believe have happened now. So I think we will be able to firm up more in the back half of the year. I guess I'd rather not go into a specific contract-by-contract basis. There's a lot of contracts going on, right? I mean we have talked about some of the larger and more strategic wins. But when you look at things that are going on, options that are being exercised on armored security vehicle business, upgrades that are going on in the UAV business, some FMS sales in our precision munitions business, these are all sort of full business, if you will. But those things, many of those things have been just difficult to get through the whole process and get the finitized contracts done. So the things that we knew we were going to have, there was no question about, was the program going to happen or be funded or not, it was just a matter of getting under contract, getting finitized and getting everything lined up so that we can get about with doing the production and test and sell them. The slowdown, that was what caused the first half to be a little softer, but I think we'll recover that in the back half.

Jason M. Gursky - Citigroup Inc, Research Division

Okay. And then to your question -- your comment on pricing, it says in some of the price increases, is that fairly broad based at this point or is that kind of model specific?

Scott C. Donnelly

It was pretty broad based. The price increases were on a couple of specific models. But incrementally, on a quarter-over-quarter basis, we saw some pricing improvements in virtually all models. And I think there's only one model I can think of where the pricing was sort of flattish or -- versus before. But on a quarter-over-quarter, virtually all the models were off a little bit in price.

Douglas R. Wilburne

Okay, thank you, ladies and gentlemen, for joining us today.

Operator

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