Textron Inc. (TXT) Q4 2011 Earnings Report, Transcript and Summary

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

Thank you, Terry, 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 fourth quarter results, starting with Slide 3. Revenues in the quarter were $3.3 billion, up 4.1% from a year ago. On a GAAP basis, we recorded a loss from continuing operations of $0.06 per share, which compares to earnings per share of $0.20 in the fourth quarter of 2010. Last year's EPS included $0.13 in special charges. Because we're reporting a loss in the quarter, the per-share loss is based on a basic share count of 279 million shares. Looking at Slide 4. This year's result included a number of onetime items, which resulted in a $0.55 reduction to fourth quarter EPS. Before we go through each of the items, let me point out that the amounts on this schedule are based on fully diluted shares, specifically 292.5 million shares for the fourth quarter and 307.3 million shares for the full year. So starting with the first item. We recorded a $186 million pretax mark-to-market charge in the Golf Mortgage portfolio and our Finance segment in the quarter. We also recorded a $55 million pretax loss in corporate expenses reflecting the impact of convertible note purchases we completed during the quarter. As you may recall, we received $225 million in face value of notes in response to our public tender offer. Subsequent to the tender, we purchased another $159 million of notes. So on a full year basis, the total after tax impact of the convertible purchases was $0.13 per share, $0.08 of which related to the tender notes, and was included in our most recent full year guidance. We also recorded $60 million in pretax charges at Textron Systems. This included a $41 million charge for intangible impairments and an approximate $19 million charge for severance costs. Working in the opposite direction was $59 million in pretax income, resulting from a payment of a note receivable from the company's 2008 sale of its Fluid & Power business. $52 million of this amount was recorded as an offset to corporate expense, and $7 million was recorded as an offset to interest expense. So after adjusting for these items, our fourth quarter earnings were $0.49 per share with full year at $1.31. Moving to cash flow. Fourth quarter manufacturing cash flow before pension contributions was $545 million, bringing our full year amount to $1 billion. Full year pension contributions were $642 million. And with that, I'll turn it over to Scott.

Thanks, Doug, and good morning everybody. Capped off the year with a solid fourth quarter with Cessna segment profit up $37 million; Bell up $29 million; and Industrial, up $24 million. We all saw a continued progress with another $386 million in liquidations at Textron Financial. That brings our full year liquidation to $1.5 billion. At the end of the quarter, we also moved the remaining Golf Mortgage portfolio into the held-for-sale category. As a result of the mark, we are now projecting the Finance segment will be approximately breakeven for the year. Looking at Slide 5, our non-captive portfolio is now below the $1 billion mark at $950 million, with about $380 million in Golf Mortgage and about $320 million in timeshare. For the smaller portfolio, our annual liquidations will also be smaller, so we're anticipating about $350 million in non-captive receivable liquidations in 2012. Moving to systems. Revenues were down slightly in the quarter, consistent with what we've been seeing through the entire year, as a result of DoD program delays and project cancellations. Looking at 2012, with continued DoD spending pressures, we're expecting a relatively flat top line for the year. As a result, we're executing a rightsizing plan at Systems, which is reflected in the severance charge we recorded in the fourth quarter. We're taking these actions to improve our cost competitiveness in a tighter budget environment. We'll continue to invest in new products, DoD opportunities and prospects for foreign military sales. In the meantime, we have a number of important program proposals, which should be decided this year and should clarify the growth outlook for Systems. In terms of 2012, we anticipate flat revenues and margins in the 10% range. Shifting to Industrial. We continue to see good volume expansion in the quarter with Greenlee and Kautex, with Golf volumes relatively flat. We saw margin improvement at the segment with fourth quarter margins at 6.9%, versus 3.9% last year and 5.6% in third quarter. Looking at 2012, given the unfavorable prevailing foreign exchange rates and uncertainty in European markets, we have a conservative top line expectation for the Industrial segment, resulting in flattish revenues and margins. Moving to Cessna. We delivered 67 jets in the quarter, down from last year's 79, reflecting our success this year in balancing deliveries between the third and the fourth quarters. In total, we delivered 183 jets, up from 179 in 2010. The big driver of this growth was the excellent receptivity in the marketplace for our CJ4, as we delivered 48 in 2011 versus 19 last year. Order activity for the CJ4 remains good in large part due to the fact that the aircraft's performance is exceeding our expectations, as is usually the case with our Citation products. With respect to the overall order environment, despite continued economic uncertainty, the fourth quarter was our strongest order quarter of the year. As we enter 2012, we continue to be in a spot market, but believe the market demand should build throughout the year. Coupled with our enhanced sales and marketing capabilities, we believe 2012 deliveries will be up modestly. We also expect margin improvement with increased volumes, despite planned increases in R&D spending as we continue to improve cost productivity. Longer term, we expect jet growth will accelerate as the global economy stabilizes, emerging markets develop further and our new products roll into the marketplace. In fact, customer reaction to our 2 most recent entrants, the M2 and the Latitude has been very good, and initial deliveries of those models should contribute to growth as they continue to come to the market in 2013 and '15, respectively. Now to wrap up with Bell. Execution across our programs continues to be outstanding, and that was reflected in our strong margins in the quarter. We delivered 7 V-22s, 6 H-1s and 62 commercial helicopters in the quarter, versus 7 V-22s, 7 H-1s, and 71 commercial units in the last year's fourth quarter. On the military side, we continue to have excellent execution and delivery commitments, cost productivity and quality. Looking forward, we're actively pursuing FMS opportunities for both H-1 and V-22. In fact, we had an enthusiastic reception by a number of potential FMS customers at the recent Dubai Air Show. We took a number of them on demo flights so they could experience the impressive capabilities of V-22 technology firsthand. After a flight in an actual V-22, there's no question in the customers' mind with respect to how valuable this asset would be in the armed services. On the commercial side of the business, we're seeing the benefit of investments we've been making in product development and sales capabilities with very strong order flow. Most recently, our 429 helicopter was selected by the Turkish National Police for their fleet, with a requirement of 15 to 20 aircraft. The 429 also received an additional 500 pounds of lift certification from Transport Canada, increasing its gross weight to 7,500 pounds, which meaningfully increases the value of the aircraft for our customers. Looking to 2012, based on our current commercial backlog and customer activity underway, we expect a significant increase in commercial deliveries from the 125 aircraft delivered in 2011. Along with program increases in our military platforms, we expect Bell revenues to grow nearly 20% with strong margins. In summary, I think we had a good year despite continued volatility in a tough global economic environment. Textron Systems is clearly affected by the DoD budget challenges, but we are taking actions to improve our competitiveness in this new environment. And Industrial, last year's top line -- 10% top line growth reflected growth in auto volume and our continued investment in new products. Cessna showed good progress, improving cost productivity throughout the year, revamped the sales process and launched 2 exciting new products. Bell performance at an all-time record, and just as importantly, we announced new products with more to come. Overall, we substantially strengthened our balance sheet as we liquidated another major portion of our non-captive portfolio and generated strong manufacturing cash flow, allowing us to reduce our consolidated net debt by $1.5 billion to $3.5 billion. Looking forward, we believe our overall growth outlook is good, as we continue to pursue a strategy of rapid new product development. Looking to 2012, on a projected overall revenue increase of about 11%, our guidance for EPS from continuing operations is in the $1.80 to $2 range. Cash flow from manufacturing operations before pension contributions is expected to be $700 million to $750 million, with pension contributions of about $200 million. With that, I'll turn the call over to Frank.

Thank you, Scott, and good morning everyone. Manufacturing segment profit in the quarter was $268 million, up $27 million from the fourth quarter of 2010. Let's look at how each of the manufacturing segments contributed, starting with Cessna. At Cessna, revenues were up $51 million on a year-over-year basis, as lower jet deliveries were more than offset asset by higher volumes in propeller products and aftermarket. We posted an operating profit of $60 million, an improvement of $37 million from the fourth quarter of 2010, reflecting better cost performance. At Bell, revenues were up $35 million, segment profit increased $29 million, reflecting strong program performance. At Systems, revenues were down $14 million. Segment profit decreased $63 million, reflecting the previously mentioned charges and lower revenue. Industrial revenues increased $70 million, primarily due to higher overall volume. Segment profits increased $24 million reflecting improved performance and a higher volume. Finance segment revenues were down $15 million as a result of our ongoing liquidation activities. The Finance segment loss increased $175 million primarily due to the mark-to-market charge. Looking at Slide 8 in terms of credit performance, before taking into account the impact of the reclassification of the Golf Mortgage portfolio, non-accrual finance receivables decreased from $606 million in the third quarter to $566 million. And 60-day-plus delinquencies decreased from $275 million to $241 million. However, when receivables are transferred to held for sale, they are removed from these credit performance metrics. Therefore, non-accruals ended the year at $321 million and 60-day delinquencies were $166 million. Taking a look at Slide 9, our Finance segment capital structure reflects a 5.9x leverage ratio, well below our long-term target of 7x and consistent with our plan to achieve our liquidation strategy without the need for any new permanent capital. Moving to corporate items. Corporate expenses were $39 million, down from $48 million last year, primarily due to the impact that our lower share price had on compensation expense. Interest expense was down $10 million from a year ago, primarily as a result of the $7 million in interest income associated with the collection on the Fluid & Power asset sale. Turning to pensions and looking at Slide 10. We are reducing our discount rate and long-term rate of return assumptions, and we're estimating that 2012 pension costs will be approximately flat. We would've had an increase in pension expense given the discount rate and long-term rate of return revisions. However, the impact of changes in plan participant behavior and workforce demographics, and last year's cash contributions to the pension plans, offset these headwinds. Turning to Slide 11. We are planning to increase R&D spending for 2012 by $110 million to about $590 million or 4.8% of sales. This includes program-focused efforts in our businesses, as well as some product development activity at corporate. We also plan to invest slightly more in CapEx this year, about $450 million compared to $423 million last year. These investments are consistent with our emphasis on new product development and improving cost productivity. Now flipping to Slide 12, here's a summary of 2012 segment guidance. We're expecting about 14% revenue growth at Cessna and 19% at Bell, with a flattish top line outlook for Systems and Industrial. At Finance, as Scott indicated earlier, we're expecting non-captive receivable liquidations of about $350 million. with segment profit approximately breakeven for the year. Looking at Slide 13. We're projecting about $145 million for corporate expense, which reflects the impact of a higher share price and the cost for the previously mentioned product development activity. Interest expense at $140 million is flat with last year, and we're expecting an increase in our tax rate to about 32%, primarily reflecting the expiration of the U.S. R&D tax credit. And we're assuming an average share count of about 294 million shares. With respect to our EPS guidance, to give you a sense of the underlying improvement in our business, take a look at Slide 14, which is a walk from our 2011 GAAP results of $0.79 at the midpoint of our 2012 guidance range. $0.52 of the improvement relates to the elimination of the fourth quarter onetime items and $0.37 reflects the elimination of Finance segment operating losses. There's a pick-up of $0.09 primarily due to lower convertible share dilution. We have a tax rate headwind of about $0.04, primarily related to the expiration of the U.S. R&D tax credit, and $0.31 in headwinds from higher R&D and depreciation. This means that we expect our underlying manufacturing business to generate approximately $0.48 increase in earnings per share. I'd like to wrap up with a final comment about our liquidity outlook. With the financing actions we took last year and the liquidation success we have had with TFC, we have made significant progress from a capital structure and financing point of view. Looking at the next 2 years, we have $200 million of debt coming due in 2012 and $1.1 billion in 2013, which we believe can be satisfied even under a reasonable downside scenario with our current cash balance of nearly $900 million and expected cash flows at TFC in the manufacturing businesses. That concludes our prepared remarks, Terry, we can open the line for questions.

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

Scott, the book-to-bill at Cessna, when you calculate just straight up on sales, looks like it was about 0.7. But when you look just at the jet side, x Mustang, was that number closer to 1? Because I know the sales number includes a fair amount of service revenues, used aircraft revenues.

David, I haven't done the math that way to look at that. I mean, I'm sure it's a more favorable number, but I think what's more important at this stage of the game where Cessna is and where the light to medium-sized business jet recovery is, is this is all about selling aircraft. So for sure, there's some backlog there, but we're out -- as we look at our numbers and what we're guiding you to in terms of revenue in the business. This is all about selling airplanes and that's where we've been sort of for the last 2 years. So where we're guiding, where we think the revenue is going to go, where the jet volume is going to go, as we kind of say up modestly is really more based on our view of the current marketplace, the level of customer activity and what we think we'll be able to close in terms of orders, which largely we'll be converting to sales, just as they have been in the last couple of years. So my principal view is see us up modestly is based on sort of the tone of the marketplace and what's going on with the sales guys. And I'd love if we had this big backlog and could tell you, "Loo, it's all locked up," but that's not where we've been for the last 2 years. And we've been pretty accurate about gauging the market and getting the orders in, converting into sales and I think that's where we're going to be in 2012.

And our next question comes from the line of Heidi Wood with Morgan Stanley.

Scott, a question on Cessna's pre-R&D margins. Can you give us a sense as to where you were in 2011 and '12, considering that R&D is going up this year? How shall we think about it in a pre-R&D basis?

I think on a pre-R&D basis, we are seeing some margin expansion. This past year, I think, we've even seen that through the course of the year as we attacked particularly the cost issues around the CJ4, and have gotten that where it's now back to reasonably healthy margins. So I think if you look at sort of the contribution margin level, we'll continue to see improvements in that through the course of the year. We're assuming relatively flat on the pricing side. So I think the improvements you're going to see are going to largely -- because obviously, there's some benefit and some additional volume. We obviously have the headwind of the R&D, but I do think just the underlying contribution margin will continue to improve.

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

Just a quick question, Scott, on the -- you talked about the tone of the market. I wondered if you might speak to what you're hearing, seeing from the sales guys on a geographic level, U.S. versus Europe versus emerging markets and what sort of things, particularly, you're seeing in the U.S. with there being such a large market and having presumably some sort of pent-up replacement demand. Is that an area of strength? Or any color there would be helpful.

Well, it certainly is, Carter. I mean, I think if you looked at the sort of, geographic lay of the land, our deliveries over the course of this year have largely been U.S. It's probably around the 70-30 split U.S., versus international at this point. That seems to be the trend. I would expect to see numbers pretty consistent with that 70-30 split as we go through 2012. So the U.S. as you say, very large installed base. Customers are used to upgrading, certain amount of pent-up demand, where people know it's getting to be time to do this. And I think that's what's driving a fair bit of the activity. The Latin America markets continue to be pretty strong. We still see some strength in some of the Indonesia, Southeast Asia regions that are creating some demand, particularly strong for some of our Caravan turboprop lines, some activity in Eastern Europe. Western Europe I would say is pretty quiet at this point. So again, I think, in total it's been sort of a 70-30 market. And I would expect to see that trend through 2012.

And our next question comes from the line of Noah Poponak with Goldman Sachs.

Can you give us an update on the V-22 program? I guess at one point, you all sounded fairly confident about a second multi-year, then that's ebbed towards maybe that not happening, and now that discussion seems to be picking back up. Can you tell us what you expect to learn in this Pentagon deliberations over the next few weeks on V-22? And if you could walk through the next several year kind of unit outlook you see there, that would be very helpful.

Sure. So I think, Noah, the conversations between ourselves and the Marine Corps and the acquisition side have stayed pretty constant with respect to V-22 and the outlook for another multi-year. We've submitted proposals. Those proposals have been going through the analytical process in the Pentagon in terms of justification around a multi-year versus a series of single-year contracts. That's usually a fairly long elaborate process, and it's proving to be exactly that. But I think that there's general views, both on from our perspective and the government's perspective, that a multi-year is the right answer for the program. So I would say I remain pretty bullish that, that's going to happen. It's certainly our desire. I believe it's our customers' desire to make that happen. So I think what you'll see happen now is -- the original basis was on sort of original program of record volume expectations. I think everyone has known for some time now that the reality would be that the rate of production, when you get out to 2015 and on, will be at a lower per annum number. And so we're in the process now of working through with the government and revising the numbers to reflect lower rates of production. But that process is continuing, and I'm still, again, fairly bullish that we will end up with another multi-year. And that process will work its way out here probably through 2012. I think again, we want to see that happen. The customer would like to see that happen. We all know it's the best economic outcome for the customer. So that being said, I do believe that the rates on V-22, which are still ramping as we go into 2012 and then they kind of hold steady through '13 and '14, my expectation is that the U.S. government side of this thing will be lower in 2015 and on. And that's why we're outworking FMS opportunities, looking at other applications of the product. There are a number of international customers that are very interested. And the way we have to look at it is that, sure, numbers will be down on the U.S. DoD side in '15, but that actually creates some production capacity to go address the Foreign Military side. So that's the process that we've undertaken. We're out selling, were interacting with a number of customers to try to fill what will be that production gap when you get out to the 2015 timeframe.

It sounds like you think this is up next year, flat '13, '14 and then potentially still flat depending on what you do internationally even beyond that.

Yes. The contracted numbers, Noah, are 39 in '12, 40 in '13, and 36 in '14. So up, then flatten, slightly down '13, '14.

But you're right now, this is, we're basically running at peak capacity for the next 3 years, and then we have production slots to fill for 2015.

And then on the Bell margin, can you speak to -- they've been very good and above expectations, can you speak to the degree to which you're theoretically over earning on V-22? Especially potentially V-22 aftermarket? Or if this has just been straight up performance or some mix of the 2?

Well, I think it's been straight up performance. I think our margins have been good on V-22. I think one of the things you're seeing a big swing is our historical margins on H-1 were very poor. And as we've gotten H-1 and the real production rates and running and driving productivity and efficiency into that, we're getting the VH-1 rates to where they should be. So I think V-22 and H-1 are fair rates as we've overachieved in terms of driving costs. We've been able to get some better margin and our customers have been able to get benefit out of that as well. So I think those programs are in good shape. They're healthy both in terms of original equipment and aftermarket. You don't see huge swings in the pricing on those original versus aftermarket on the military side. We continue to see reasonable volumes on our commercial business starting to build, the service business doing okay. The big difference is as we go into 2012 is you're going to see, again, some increase in V-22 as we talked about going up to the 39, but we expect to see pretty significant increases in original equipment commercial sale. And obviously, we're putting a lot of money into the R&D side of this thing, and we have a big announcement here at Heli-Expo, and we're ramping up pretty significant program investment. But all that being said, I think our margins will stay strong. I mean the guidance we're putting out there I think is a pretty solid guidance for a helicopter business. These are good margins and we'll sustain them.

And our next question comes from the line of Mitchell, Julian with Crédit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: I guess the first question would be around how you think about the cost base of the company? Because I guess you've got a situation where the backlog's still shrinking in Cessna, but the deliveries are looking better. So how are you thinking about capacity and kind of utilization rates given where capacity is today versus the prior peak? And then also, I guess how capacity relates to the defense side of the business where there is some restructuring going on, but you're optimistic on the V-22, you have a new multi-year program. So how are you thinking about managing that cost base down over the next few years? And what are you thinking about the cost base inside Cessna as well?

Sure. So I mean, Julian, obviously it varies a lot from business-to-business. So I look at Cessna, where we've done a lot of cost reduction over the last couple of years, which you would expect given the significant volume reductions that we had. I think we've probably now turned the corner on that. We had a slight increase this year. I think we'll have a modest increase next year in terms of the production volumes. Obviously, the number of new product programs is increasing. So we're sort of at a point now where we would expect to be growing our -- some cost associated primarily with R&D at Cessna. We obviously don't need to invest anything in growing raw capacity at Cessna. Now we do have some additional CapEx. But again, that's all driven around tooling for these new product programs. So in terms of the physical infrastructure, manufacturing facilities, metal bonds, paint boost, that stuff is all in place and ready to go. So there's no increased capital in that area, but I don't think we need to do any more rationalization of that cost or facility because we're actually now going to probably start to turn to higher levels of utilization. At Cessna -- I'm sorry, at Bell, the situation, in fact, we had a note that was out a couple of weeks ago. One of the things that we're looking at is our capacity as we start to see the levels flat or even decrease in terms of things like V-22s out in 2015. Historically, we've done most of our commercial aircraft final assembly in our facilities in Canada, and we've done primarily our military V-22 and H-1 final assemblies in Amarillo. So we announced that this new program, the product which will be announced here at the Heli-Expo shortly. We've already announced that the production, the final assembly of that product will be in Amarillo even though it's a commercial ship. And the reason for that is we already see capacity expansion or capacity being pretty tight up in our Canadian facilities. But we know we can have some softness on the military side, so we're going to put that production capacity in Amarillo to help balance our utilization of what was wholly dedicated to military to put some commercial volume in there as that commercial volume grows. If you look across the Systems business, part of what we announced yesterday in terms of our restructuring is exactly aimed at an expectation that you will see some lower volumes and lower demand across those businesses. And obviously, if we end up winning some programs and you see some growth, then we'll address that. But I think it's prudent in an environment where you know the budgets are going be tighter and things are going to tend to be delayed and scaled down, that we're taking the appropriate charges and size in the cost structure of the business. So that even if it's a smaller business, it's a profitable business.

And our next question comes from line of Robert Stallard with Royal Bank of Canada.

Scott, I was wondering if you can comment on the order situation at Cessna, it tends to be in the past that the fourth quarter has been a strong quarter for business jet sales, and then things have maybe dried up a bit in the subsequent quarter. Do you see a similar sort of pattern this time around?

Yes, Rob. I think the nature of this thing, the way it works with tax incentives and whatnot is we've always had the cyclical nature of the fourth quarter being a strong delivery quarter, and the first quarter tends to be a fairly weak delivery quarter. And I think that you're going to see that. I think that's fairly natural in the way these industry cycles work. That being said, given the strength of what we see on the order rate through the fourth quarter and continuing into the first quarter, I certainly expect that we'll have better performance in the first quarter than we had a year ago. So in terms of profitability, it will probably be more in the breakeven. But I think the good news is, we won't be digging ourselves a big hole in the first quarter as we have the last couple of years.

Okay. And then just to follow up on the Textron Systems, you said you expect the revenues this year, 2012, to be roughly flat. What sort of backlog do you currently have there? Because given the pressures you have in the DoD, that would seem like a relatively optimistic forecast.

Well, the backlog was $1.3 billion Rob, it was down just a little under $200 million from the third quarter. But again right now, backlog is a difficult metric for Systems because of the undefinitized contracts and the like there.

Yes I think -- exactly. The backlog, first of all, Rob, as you know, I mean you have to kind of look at the different pieces of the business to try to kind of understand backlog. And there is an awful lot, too much, in my opinion, of undefinitized contract work going on where you can have an entire contract executed under an undefinitized contract, which means it never goes into backlog, because it's not a definitized contract. So that's a metric that I would be cautious about. I think if you look at the 3 largest businesses in there, ASVs are pretty well spoken for in terms of volume in 2012. When you start thinking about 2013 and '14, it's largely going to be around what happens with programs like the Canadian TAPV program, so again, I don't think that was backlog per se. I think 2012 feels good and again based on contract awards, we'll see how things are going into the future in the defense systems, Sensor Fuzed Weapon business. That's a business that I feel pretty comfortable where we are in terms of customers and backlog and order rates, that, that's probably going to sustain for a number of years at kind of the rates that we're running today. And then the UAV business is probably going to be in reasonable shape for the year. It's a number of different contracts, a number of different programs, mostly upgrades, there's some ISR Services programs, there's SMSF opportunities. There are programs that have to be won but in terms of where the budgets are in the government, where our backlog is, what programs we're executing on, I think, it again aims towards being a relatively flat year.

And our next question comes from the line of George Shapiro with Access 3:42.

42, LLC: Scott, just in Textron Systems, I mean how realistic do you think it is to have flat revenues there as opposed to down to some extent?

Well, George, again, I think that for 2012 we have pretty good insight into the ASV business, which is a good size part of the business that's already -- program that we're executing and we'll deliver through the course of the year at the SFW side of things, and we know what that is. Those contracts were already won, we're already executing the programs. There are some things that need to be won on the unmanned air vehicle, unmanned air system side of the business, but there are several opportunities. So I think we have reasonable visibility on the year. I mean, depending on what happens in the budgets, we can always have some additional haircuts. But I don't think they'll be dramatic, and that's why we kind of guided to flattish. I mean it could be down a little bit but also it could be up a little bit. I think it will depend largely on how those program win opportunities go through 2012. And obviously, I think even more important, that will give us a lot better insight into what '13 and '14 look like.

42, LLC: And then one in Bell. I mean, the past 2 years, you kind of blown away your Bell margin guidance by a lot. Why wouldn't you still do a lot better this year since I'm figuring you're at the tail end of the current V-22 multi-year, and usually you wind up getting some contract pick-ups in that last year of the contract.

Well, I mean I think there's a couple of things here, George. I mean we are forecasting 13% to 14%, which are pretty healthy margins. We do have R&D headwind as we ramp up a significant program in that business. With respect to these end-of-contract kind of things, we have been, I think, much more diligent at working very hard to make sure that our estimates of completion on these program accounting areas are much more, I don't know, I won't say realistic, but I mean, we're trying to make sure that we're doing a better job of forecasting the total program margin and try to avoid having these big end of contract, onetime sort of cum catch accounting things. So I think that the margins that we're booking associated with our revenue are pretty accurate to what the real margin of the programs are. And to take out some of the conservatism perhaps that others put in there and then end up with these big gains at the end of contract period.

42, LLC: Okay. And then one just quick one on Cessna. I mean given that you're more relying on the spot market, I mean, how do you factor in the margin guidance that you're giving? It would seem like you probably got to be somewhat on the conservative side.

Well, I don't know George. I mean this is kind of year 3 of this. So trying to understand where the market is, what customer event [ph] is going to look like, what's going on competitively in the marketplace, it really is -- it's a forecast. But again, we've gotten to be fairly good at this. I mean, there's always the disclaimer if jeez things really went -- changed radically in terms of the marketplace, then we could see some additional pressures. But we've aligned our production forecast to where we think it's going to go. As I said earlier, I think we've seen sort of a flattening of price for the most part of the markets. So we kind of assume that's going to happen. And then obviously, we look at what activities we have internally around cost productivity to support that level of margin rates. So I think just our view is given where the market is, the level of activity on the order rate, the discussions with the customers, what we're doing inside, what we're doing on R&D, we feel like this is a, hopefully, a fairly accurate projection of where we're going to be.

And our next question comes from Cai Von Rumohr with Cowen and Company.

So your R&D, you projected is up 50 bps for the year. Is it fair to assume that all of the businesses, except for Systems, you're going to see some increase of about 50 bps?

Yes. I think that's fair, Cai, though I think the majority of it, you'll see around Cessna and Bell.

Right, right. But those are the biggest absolute numbers. But so as we think forward beyond 2012, is R&D at Cessna now likely at sort of a plateau level or near a plateau level?

Well, I think you could still see some increases in the absolute dollars, Cai, but I think given where we think we're going with revenue, you're going to start to see that flat line in terms of on a percent of sales basis.

Got it. Okay. And could you give us a little more color? You have a number of competitions in the Systems area. Could you give us a little more color in terms of what those are, when the decisions are and your chances?

So well, I like our chances, Cai. The most significant programs that are out there, you've got the Ship-to-Shore connector, which will probably be, I think it will be a first half decision. I don't know if it will be in this quarter, but it will probably be in the first half of the year. You've got the TAPV program, which is the armored security vehicle, light air platform in the Systems business, which is probably going to be likewise. I don't think it will be first quarter, but more likely in the second quarter. We have several programs in Sensor Fuzed Weapons, which I feel very good about in terms of winning in places like the UAE and Saudi Arabia. We also have some programs on the Unmanned Air Vehicle side and medium UAS and ISR Services that are programs which, again, are probably in the first quarter, second quarter this year.

Terrific. And lastly, your Golf area that's held for sale, are you in negotiations? I mean, is there a reasonable chance that, that could be gone within the first 6 months?

No, and no. I think it's not -- Cai, the reason we put it into held for sale is, as you know, our strategy on virtually all of our assets has been to just hold for investment, run them in due course and in the event somebody's solicited to acquire and look at them, we would do that and move them to sale at that time. And that's obviously been very effective in all of our other asset classes. Because there's not a lot of liquidity going back into the Golf Mortgage portfolio area, we felt that a change of strategy to say we'll hold them for sale so because now we can go out and more actively market those and try to look for opportunities to do that. So we've obviously just made that change in strategy and obviously, taking the accounting that reflects that. So now we're in a position where we can go out and start to market those assets. I don't think it's going to be one big transaction. I don't think it's going to happen within 6 months, but I think it gives us the ability to go out there and get a better feel. Look, I mean, it's not our objective here to fire-sale these things or feel like we need to do something in 6 months. Our cash position is great. But it's just not an asset class that is turning or one where we're getting a lot of inbound traffic. So I think it's appropriate that we change the strategy, put them up for -- it's held for sale and then go start to make inquiries and see what we can do. So I mean, I still think this is probably more like a 2-year time horizon kind of a deal but at least we can get out there and start to market them.

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

Scott, can you speak or maybe, Frank, just speak to the cash flow outlook for 2012. Obviously, downticking from '11, it looks like D&A and CapEx kind of offset, is there anything else in particular that's going on in there that drives the year-over-year delta?

No. We kind of overdrove a bit on cash flow frankly in 2011, Jeff, kind of relative to obviously what our guidance had been, that the cash flow guidance for '12 is essentially 100% conversion on earnings. And so it's right in the area that we think is a normalized type rate with frankly some better performance in 2011, causing a bit of the kind of the negative comparability.

And I was also just wondering kind of last question for me, just, Scott, thinking about the cadence here in '12 with Cessna, you succeeded in '11 and relatively getting at level, although it always ramps towards year end of course, but do you see the same type of cadence in '12? Or given that the backlogs are a little leaner going into the year relative to kind of the forecast that maybe it tilts more back-end loaded again?

Well, I think I would expect it to look more like we saw in '11. So as I said earlier, Jeff, I think we're -- clearly our expectations in terms of at cadence in what we're doing out there in selling, combined with where customers want to go is that I would expect we'll get off to a better start this year than we have over the last couple of years. And we'll sustain at that better more level pace through the balance of the year. So we don't want to see this big -- frankly, it's very difficult to run the business effectively with these huge swings. So the focus of the business clearly is to make this thing more level. We were successful doing that between Q3 and Q4, and I think we'll be much more level this year. I want to be cautious. I mean the third, fourth quarter always going to be stronger than the first, second quarter. I mean the first quarter is a challenge. But again, I don't think we will dig as big a hole in the first quarter, and we will have something that's more like what you saw in the third and fourth quarter last year in terms of trying to level this thing out.

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

Scott, you talked by the business becoming more a spot business and obviously, you've done a good job in the last couple of years managing it to that extent. Can you give us maybe a little bit more granularity of the 183 jets you delivered in 2011, how many of those were actually bookings in year that were spot bookings?

I don't even have that number in front of me.

Can you give us any ballpark?

I mean, honestly, I'd be guessing. When you go through and you look at -- obviously, there's a lot of dynamics, cancellation to orders and whatnot that are in there. So no, I'm sorry, I would be completely guessing. I just don't have the number.

Also, I think the best thing to say is that we've gone into our delivery years with less backlog than in normal circumstances. And we were clearly in that situation now, and I think Scott went through a pretty extensive discussion in terms of those dynamics.

Yes. I guess was curious, though, if you had $1 billion burn in the backlog this year, was that largely because of cancellations? Or because of deliveries from backlog? Obviously, they would tell you 2 different things.

It was both.

And I guess a clarification on the $180 million outlook for pension expense in 2012, Frank, how much of benefit did you get from the change in demographics, and I guess, choices by the employee base?

Yes. It was kind of $50-ish million, $60-ish million of benefit from kind of the various changes that have taken place in terms of kind of our employee profile and kind of attrition rates and things like that as we relooked at the employee base and the trends over the past couple of years. So it was a meaningful number and obviously, the kind that very much helps on a go forward cost basis.

And then the cash contribution was...

Yes. And then the cash contribution.

And our next question comes from line of Jason Gursky with Citibank.

Scott, you mentioned the Ship-to-Shore competition that might happen in the first half of this year. Can you just remind us, if you are successful on that, what your expectations are around revenue levels and timing?

It's not going to have a huge revenue impact in 2012. That program starts out as a development activity, completing the design, and then you go into a limited rate production, that's probably '13, '14 kind of timeframe. And then you'd really see production volumes out beyond that. So an important program obviously, but one that's not going to be a big 2012 revenue impact.

Right, okay. That's helpful. And then you mentioned several things during the call that pricing at Cessna at this point you expect it to be kind of flattish. In your experience, what are you going to take for pricing power to come back to the industry generally, I mean we're at pretty low levels of capacity utilization? Where do you think we need to get, kind of industry-wide, to see pricing actually firm up and maybe actually starts higher?

Well, I think there's 2 things. I mean obviously, just some demand in the marketplace never hurts. I think the other thing is more new products and more differentiation. So as we look at new products coming into the marketplace, things like Latitude where you have some significant differentiation and capability, M2 where you've got differentiation in product and some other new things that we have in the pipeline, there's no question that refreshes, updates and just flat out having a better product always helps a little bit on the price line as well. So I think it's that combination -- that's why I kind of see things flattish here over the next year because demand is just starting to come back, and the current product suite, which are great products, but there's not a lot of new stuff to say, "Hey, you're going to pay more than you would have paid 6 months ago because of some new capability." So I think you'll see some slight lift on price in the sort of the near to medium term just as demand comes back, and then you'll see better pricing, you should start to see more and more product differentiation.

Great. And then one last one, just on the Systems side. Do you have any ability to participate in the JLTV or what is it going to be -- your exposure going be there, if you're going to go that route as opposed to Humvee recap, and just kind of any other types of opportunities that you might see out there that you haven't already discussed either today or in the past several quarters?

So we don't currently participate in the JLTV program. We are one of the candidates to the extent they would look at a Humvee recapitalization program. There's a lot of noise going on right now in the building around that program, like a lot of programs, as to whether it will happen, won't happen, whether there's JLTV and some Humvee recap activity. There's been some very recent word out of Pentagon that they may not do the Humvee recap program, but this is all sort of new, news and obviously something that we'll need to understand and work our way through.

And we have a question from the line of Steve Tusa with JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Just a question, I know you're not going to give us kind of your backlog status for the year. And I guess you said that it's going to finish or at least start relatively similar to prior years, but maybe a little bit better given the indications you're seeing. At what point, if we assume that things don't play out in the consensus macro way and we do get further hiccups in Europe, et cetera, at what point will you make a production decision on 2013? I mean, is another production cut in your mind, maybe is there any probability of another production cut given what you're seeing for 2013? I'm just thinking about how kind of short cycle this business is now, and relative to the economy, and it just doesn't appear to me that the backlog situation to change very much coming out of the fourth quarter.

Well, Steve, I think normally just the way the cycle of the business works, the '13 decisions is really more in midyear '12 in terms of production rates, I mean, something we revisit and look all the time. I mean we're not -- just the nature of the long cycle manufacturing, it's not something we're -- we look at it like on specific dates. I mean, it's something that's kind of always a roll forward. In terms of the probability that you would see a production back off in '13. I mean as you said, if you had a major hiccup another 2008, 2009, from a global economic meltdown happen, absolutely, you would have a reduction, and we would act accordingly. I think that seems fairly unlikely given where we are right now and certainly unlikely given what that level of activity we're seeing with our customers, but something we always keep an eye out for. But the timeline here for '13 is something we would be looking at as we go into really more closer to the midyear for next year, when we'll start making that decision. C. Stephen Tusa - JP Morgan Chase & Co, Research Division: Sure. So I guess it doesn't sound to me like -- it sounds to me like the, I guess, the inquiries and customer conversations that you're having are at least enough to kind of make you feel good that you could grow or at least hold your production stable even in a kind of, now I guess we can call it a 2010 or 2011 economic environment, where it's a little bit more confidence based than actual dramatic declines in industrial production and that type of thing. Is that the right way to kind of think about it?

Yes. I think that's accurate. I mean, if you kind of stay where we are, then we would feel like we can make our 2012 numbers that we're forecasting to you, and then that would kind of hold steady through '13.

And our next question comes from the line of Ronald Epstein with Bank of America Merrill Lynch.

A couple of questions for Scott, maybe on the defense side of the business first. You mentioned before about things potentially slowing down in the DoD and some things getting pushed out. Can you give a little more color around how you're trying to reposition the business given that changing backdrop?

Well, I mean a lot of it is just around the cost structure of the business. I mean, we went through a period of growth through '06, '07, '08, '09. And as you sit here and you say, okay guys, things are going to be slower, we're seeing a fairly regular trend towards decisions being delayed, program starts being delayed, we need to size the business of cost structures, so a lot of the reductions we're doing. We're not taking big hits out of a lot of the areas that we think we need to invest to win new programs in the R&D and the bid proposal areas. Obviously, manufacturing-related costs, we will scale and have been scaling associated with the volume of those productions. But when it comes to a lot of the overhead functions, support and things like that, we really need to size that thing back to being a smaller business and if you win contracts, you get new opportunities, that's fine. You can add cost back in to execute them but I think it's just taking a general trend that, sure, we want to grow, yes, we have a lot of proposals out there. And if we win, most of them, we could see growth. But we have to, I think, have a mentality that says this whole industry, under the current payout trajectory of the DoD budgets, is an industry that's going to shrink. And so we want to try to get -- make sure we're ahead of that.

Okay, okay. And then maybe just switching gears a little bit to the commercial side of the business, maybe more specifically Cessna, when you think about the bifurcated recovery in the business jet market right now, I mean a lot of the really big stuff's kind of comeback already, the mids and the lights, it seems like they're starting to come back. Isn't that really tempting to do a bigger airplane to try to get into that piece of the market?

Well, I mean I think there's 2 things there, Ron. First of all, you're right. I mean, just the nature of how the cycle has played out, the big metal has come back faster than the light to mid, but the decision to go get into doing -- the big cabins where this stuff is really strong, is a much bigger aircraft. It would be a huge investment on our part to go do that, which I think we would have to do with the expense of investing in the core of our light to mid-size market. And it's not like the large market isn't pretty well served. So I mean, you're basically spending a ton of money and to go into a well-served market, I just don't think it will be the right use of our capital. The place where we've been very successful and we can make a lot of investment and be very competitive and be in the right position as the light, midsize growth comes back is just a better bet for us.

Now we have a question from Steve Levenson with Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: I think all the good questions were asked. Can you talk a little bit about the competitive landscape for Cessna as things begin to look up, what you see coming into the market, and what you see that might be going out of the market?

So I think from a competitive landscape, obviously, what you have new coming into the market, which is now been going on for a few years is Embraer. We've seen them come in with the Phenom 100 and 300. The announcements and introductions that will come in the future on the 450 and the 500. Clearly, when you look at some of the things that we've announced, the M2, which really puts a product out there, the issue we really had is a Phenom 100 kind of sat bigger than a Mustang but smaller than our CJ family. And so by coming in with the M2, we're providing an aircraft in that cabin class with better speed and performance was something that I think will be very, very good for us in the marketplace. Similarly, if you looked at where things were going on something like a 450, which was sort of bigger than our XLS, a little bigger cabin comfort in there, which has been our strong suit in the past. That's the reason the Latitude exists. It gives our customers, again, a product in that category, with those kind of performance features that's a better product. So I think that from a new product standpoint, and this kind of refers back with the discussion with Ron, investing in those kind of products, like the M2, like the Latitude and you're going to hear more things to come, really is positioning us with some outstanding products vis-à-vis what the competitors are doing. In terms of guys going out of the market, there's obviously a great deal of uncertainty around where Hawker Beech is going, and we'll all hopefully kind of see how that plays. But I think -- we look at the competitive market that's out there today, both the current guys, the new guys that have come in, and I think that our product strategy is in a great spot right now in terms of making sure that we have very, very competitive products that line up very well head-to-head with the overall competitive marketplace.

All right, Terry, I think we have one more follow-up question in queue and we'll finish up with that.

Okay. And our follow-up question is from Noah Poponak with Goldman Sachs.

Just a couple of follow ups. Given what you've done with TFC and the shape of the balance sheet and the cash flow statement are now in and the cash flow projection you just gave us, which looks fairly strong, when do you think about bringing back share repurchase and/or a larger dividend?

I think we've got another year here of being focused on continuing to work on the balance sheet, continuing to kind of fund the pension plan. We, obviously, with the moves that we made on the convert this past year, we did retire some underlying dilution associated with that securities and so kind of we did pay a premium for those securities to, in fact, remove kind of the dilutive impact of that. But we're going be largely focused as we look at, at least this year, and continue to kind of watch how the businesses continue to ramp, with continuing to improve the balance sheet and work on the pension plan.

Okay, fair enough. And just one other one, just one other one on the Cessna margins. I know there's a lot of moving pieces, and the volume outlook is relatively uncertain. But the midpoint of the revenue and the midpoint of the margin imply a year-over-year incremental that is a little bit below 20%, and that's comparing against a 2011 that had a huge negative number in the first quarter that I suspect you're not intending to repeat. And you have new leaders at Cessna that at NBAA went through a dozen slides on all the things they're doing on a productivity and cost standpoint. So it seemed like that would be low relative to those items. Is there more upside or downside risk to Cessna margins from where you see it today?

That's a different, difficult -- yes, I have to say that the answer to that question is yes. Look, I think if the volumes come through, there could be a little bit of upside to it. If there's volume softness, then there could be some downside to it. And I think that's kind of why we got it where it is. No, it's a phase in this program or for that business given where the market is, that we're uncertain on volumes, right. I mean there's a lot of aircraft to sell. We're out doing that. We're having pretty good success with that, I would say. But we're going to be selling airplanes all year to make those numbers happen. So when you balance all that stuff out, that's why we ended up where we ended up.

All right, ladies and gentlemen, thank you very much. That concludes our call for today.

Ladies and gentlemen, thank you for your participation and using the AT&T Executive Teleconference Service. You may now disconnect.