Doug Wilburne - VP, IR Scott Donnelly - Chairman & CEO Frank Connor - CFO.

John Godyn - Morgan Stanley Pete Skibitski - Drexel Hamilton Robert Stallard - Royal Bank of Canada Julian Mitchell - Credit Suisse Jason Gursky - Citi George Shapiro - Shapiro Research Sheila Kahyaoglu - Jefferies Shannon O'Callaghan - Nomura Jeff Sprague - Vertical Research Joe Nadol - JPMorgan Cai von Rumohr - Cowen & Company Ron Epstein - Bank of America Merrill Lynch Justin Bergner - Gabelli & Company.

Welcome to the Textron First Quarter Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Doug Wilburne. Please go ahead..

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

On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. On March 14, we completed our acquisition of Beechcraft combining it with Cessna to create a new segment called Textron Aviation.

Therefore our first quarter results include the impact of the acquisition including 16 days of operating results. On this basis Textron’s revenues in the quarter were 2.8 billion of approximately flat with the first quarter of 2013. Income from continuing operations was $0.31 per share compared to $0.40 in the first quarter of ’13.

As shown on slide 4 of the earnings presentation the net impact of the Beechcraft acquisition during the first quarter was a reduction to EPS of $0.05 per share. Manufacturing cash flow before pension contributions was a $111 million use of cash compared to $425 million use of cash in last year’s first quarter.

First quarter pension contributions were 17 million and with that I will turn the call over to Scott..

Thanks Doug. Good morning everybody. Revenues in the quarter were up at our new Textron Aviation segment and across all of our industrial businesses. Overall manufacturing revenues were approximately flat as lower volumes of Textron Systems and Bell offset the higher revenues at aviation and industrial.

At Bell we delivered eight V-22s and five H-1s compared to nine V-22s and six H-1s in last year’s first quarter. On the commercial side we delivered 34 aircraft down from 48 a year ago reflecting timing of deliveries. Order demand was stronger than a year ago so we still expect commercial deliveries will be up in 2014.

We had a very good show again this year’s HELI-EXPO in early March highlighted by the unveiling of our new Bell 505 Jet Ranger X. We received nearly 200 customer commitments during the show for the 505 reflecting stronger customer interest in this entry level helicopter.

At HAI, we also featured our new 525 Relentless which we displayed in the search and rescue configuration. We received our first 525 letter of intent at the show for delivery of 10 units from Abu Dhabi Aviation.

They plan to deploy these units in support of a variety of missions including offshore oil and gas, emergency medical services, VIP transport and search and rescue. Bot the 525 and 505 were on track for first flight by the end of this year with expected entry into service in 2016.

During the quarter we also expanded the capability of our 429 product as we received Canadian and Brazilian certification of a retractable wheeled landing gear version of the aircraft which provide significant operational flexibility for our customers.

We also participated in the Singapore airshow where we displayed our 407GX and 429 commercial offerings and on the military side we had an H-1Z and a V-22.

We also had a number of positive developments in the Asia-Pacific region as we established a new sales office in Japan and announced the sale of eight 412s for the Philippine Department of Nation Defense and booked eight helicopter orders in China with options for seven more.

Finally we were named number one in helicopter services support for the 20th consecutive year at ProPilot magazine. Aftermarket support is a key competitive differentiator in the vertical of market and we will continue to invest and work to expand our support capabilities around the world.

Moving next to Textron Systems revenues were down as expected but we had a good program performance for segment margins of 10.7%. We continue to make progress on the Shadow TCDL upgrade development program and we’re on track to deliver production units beginning in the third quarter.

We’re also seeing continued performance improvements in our Aerosonde fee-for-service platform reflecting the successful deployment of Lycoming manufactured engines into the installed fleet for which we now have achieved over 10,000 hours of operation.

Earlier this month our new aircraft Simulation and Training business participated in the World Aviation Training Conference where we launched our new name and brand through simulation training.

This reflects our mission to ride [ph] realistic pilot environments for true to life ensuring pilots are fully experienced, competent and confident when they leave our simulators. Shifting to Industrial, we saw a good growth of Caltex reflecting strength in Asian and European auto markets.

We also continue to win new platforms at Caltex which bodes well for continued long term growth. E-Z-GO also continued to grow as top line based on new products. We have been rolling out across our golf, consumer, commercial and aftermarket product lines.

At Greenlee, growth is driven by continued market share expansion and our acquisitions of Sherman & Reilly and HD Electric last year.

We’re currently pursuing new electric utility transmission sales opportunities with the 12 city roadshow to demonstrate a new product line up, highlighting how our products can support our customers health, safety and productivity.

Also in the acquisition front we added in important new product line at Jacobsen during the quarter with purchase of Dixie Chopper, a U.S. manufacturer of zero-turn radius mowers. Expands our product offering to better serve the commercial and municipal market sectors.

Moving to Textron Aviation, with the acquisition of Beechcraft we delivered our first eight King Air’s during the last two weeks of the quarter. We also delivered 35 new jets up from 32 a year ago.

We were pleased that even at these relatively low volumes we were able to generate a $22 million year-over-year improvement in segment profit in the quarter. On the new product front our Latitude prototype took first flight on February the 18th and followed on February the 25th, the demonstration of its maximum flight envelope.

This included reaching a maximum speed of 440 knots or mach 0.8 and going on a direct climb to a maximum altitude of 45,000 feet with a maximum gross take off to 29,000 pounds. We continue to make progress towards the 2015 entry into service for the Latitude.

We also announced the new CJ3 plus which includes a state of the art fully integrated Garmin 3000 avionics suite, a redesign cabin and cockpit and new pressurization diagnostic systems. We also introduced CJ2 plus Alpine Edition, our Garmin 3000 cockpit upgrade option for existing CJ2 plus owners.

Finally Cessna achieved a noble milestone during the quarter as our installed fleet of 6600 citations reached over 30 million total flight hours of service. With the Beechcraft acquisition we now have a global customer base, operating over 9000 business jets as well as over 9000 turboprops and over 180,000 piston engine aircraft.

With respect to Beechcraft we’re estimating Beechcraft will add about 1.5 billion in revenue to the aviation segment this year.

This reflects an expectation for higher aftermarket revenue, lower military sales and slightly fewer King Air’s this year as we believe 2015’s volume is benefited from catch-up deliveries related to the uncertainties leading up to the Beechcraft bankruptcy. Therefore our 2014 revenue guidance for Textron Aviation is now 4.8 billion.

In terms of synergies, we began implementing restructuring activities last week and now estimate we will spend about 35 million in 2014 and reach an annualized cost synergy run-rate of about 80 million by the end of this year.

On this basis and including the impact of purchase price accounting right up to amortization, we estimate the acquisition will add about 45 million net to Textron Aviation segment profit this year. Therefore segment margin guidance for the year remains at 2.5% and 3.5%.

To give you a sense of the earnings power the segment going forward after adjusting for purchase price accounting items and giving benefit to full year synergies and fully annualized results. 2014 Textron Aviation margins would be about 200 basis points higher than the midpoint of our current guidance range.

While our restructuring process will not conclude by the end of the year we believe we will be able to offset any 2015 cost with additional savings and remain comfortable with our previous statement that we expect the Beechcraft acquisition will be accretive by $0.25 to $0.30 per share on a fully annualized basis.

To wrap up we believe we’re off to a good start on the year; we’re encouraged by what we’re seeing in terms of demand in the majority of our markets. We continue to make progress with operational productivity, our strategy in investing new products and distribution is paying off and we’re seeing good results from our M&A investments.

With that I will turn the call over to Frank..

Thank you Scott. Good morning everyone. Segment profit in the quarter was 219 million down 16 million from the first quarter of 2013 on approximately flat revenues. Let’s look at how each of the segments contributed starting with Textron Aviation.

At Textron Aviation, revenues were up 77 million from this period last year reflecting a 101 million of acquired Beechcraft revenue, higher jet, Caravan and aftermarket volume partially offset by a reduction in preowned sales and CitationAir revenues. The segment had a profit of 14 million compared to a loss of 8 million a year ago.

This reflected favorable pricing and higher jet and Caravan volumes. Backlog in the segment ended the quarter at 1.5 billion up 503 million from the end of 2013. This includes a $534 million contribution from Beechcraft.

Moving to Bell, revenues were down 76 million on lower commercial unit sales and decreased B-22 and H-1 deliveries partially offset by higher V-22 product support.

Segment profit decreased 33 million from the first quarter in 2013 primarily reflecting the overall volume and unfavorable commercial aircraft mix as we delivered only two 412s in the quarter. At Textron Systems revenues were down 66 million reflecting lower UAS and TMLS volumes offset by higher weapons and sensor volume.

Segment profit increased 1 million despite lower volumes reflecting favorable performance across most product lines. Industrial revenues increased 70 million reflecting higher automotive volume and the impact of acquisitions. Segment profit increased 9 million due to the higher volumes.

Moving to finance revenues in segment profit were down 13 million and 15 million respectively reflecting the impact of gains on the disposition of finance receivables during 2013. Non-accrual accounts ended the quarter at 98 million down 7 million from the end of 2013 while 60 day delinquencies were a 125 million up 45 million in the quarter.

Lastly moving to corporate items, corporate expenses were 43 million and we believe we’re still on track for a full year amount of about a 150 million.

Interest expense was 35 million down from 37 million a year ago reflecting the retirement of our convertible debt in May of last year partially offset by 7 million in interest cost related to the Beechcraft acquisition financing. Our tax rate was 30.4% reflecting a number of discreet non-U.S. benefits in the quarter.

We’re still estimating a full year tax rate of about 31.5%. During the quarter we repurchased 4.3 million shares through an accelerated repurchase program. This should result in a four year average share count of about 283 million shares.

Looking then to our full year outlook as shown on slide 5, we estimate that Beechcraft will reduce 2014 EPS by about $0.08 per share. On this basis the company now expects 2014 earnings per share from continuing operations will be in a range of a $1.92 to $2.12 per share.

Cash flow from continuing operations of the manufacturing group before pension contributions is still expected to be in a range of 600 million to 700 million. This reflects an approximate cash neutral net operating impact from the Beechcraft acquisition. That concludes our prepared remarks. So Greg we can open the line for questions..

(Operator Instructions). Your first question comes from the line of John Godyn from Morgan Stanley. Please go ahead..

Scott, I was hoping now that we've had some time to digest Beech that you could talk a little bit more about revenue synergy opportunities. You had some very good commentary on the cost synergy side, it sounds like on a run rate basis the outlook there is that it could exceed some of the prior comments.

I'm just curious what the outlook looks like or how it might have evolved on revenue synergies now that you've had some more time?.

With respect to revenue synergies, it's not something that I want to really put hard number around. We try to base all of our synergy and math around the things we know we can control which is really on the cost side of the equation. I'd also say from a timing perspective here.

We've been working pretty hard over the last few months on the cost side of things -- the team has been working together so that we were able to kind of come out of the gate right away executing on the cost synergies. Obviously we couldn’t get sales teams together prior to the official closing so those teams are now working.

We've got kickoff events and the folks that are in the particular regions that have been selling King Air’s or meeting with the teams that have been selling Citation jets. So we are certainly starting to operate to make sure that we can take advantage of what revenue opportunities or maybe, but it's not something that I would put a number.

Obviously we feel good about the fact that we now have a huge install base of Hawker jets and these are customers that are very, very important to us.

We’re going to reach out to them to work with them on the service front which also will hopefully over time increase our conversion rate or I guess retain those Hawker customers and as they move to a new jet we obviously want to see them move into the Citation jet family and we will do everything to make sure they have a very service experience to help promote that on a go forward basis.

But it's not something that we're going to come out with any form of real guidance around a specific number on the revenue synergy side..

Outside of a specific number, I mean is it fair to say that directionally now that you’ve had more time looking at Beech and the sales forces are communicating that you feel directionally better about revenue synergy potential as we think about it long term?.

I think John we always felt that this was an important part of the acquisition and something that would be a great add in terms of adding those additional sales resources and building those relationships and we have only being in to this now for a few weeks.

The teams have been getting together, I would say there is a great deal of energy around it, you know each of the sessions -- had around the world where we get these teams together, people are very enthusiastic, very bullish on working together to get out there and just increase our coverage and build more customer relationship.

So it was without a doubt an important part of the transaction and I would say so far as the teams we have gotten together we feel very good about it..

And then I was just hoping that you could elaborate on the general biz jet commentary and specifically what you're seeing with some of the legacy aircraft types. A lot of the data that the analyst community tracks has generally being a looking a bit better. Some people have gotten a bit excited.

I'm just curious what your perspective is as you read the tea leaves? Thanks..

So key metrics continue to move in the right direction in terms of used available for sale. You certainly hear some firming around the pricing in the use market which is encouraging.

For sure the number of aircraft and we watch this every quarter in terms of Citation fleet and what's available for sale, drop-down another 40 aircraft or so as the install base continues to grow. So I would say in terms of trends of some of those key metrics they are still going in the right direction.

We feel good about the fact that pricing has firmed in the use market. We feel good about the fact that pricing is incrementally better in the new market as well.

So if I had to kind of give overall color on a year-over-year basis as we sat here a year ago we were kind of saying we are little concerned about what we are seeing in the market and we were taking production back and sort of trying to firm pricing and we sit here a year later and while the overall numbers are not a lot higher in terms of unit deliveries we certainly feel better about what's going on in the market and feel a lot more confident about where we're heading here as we into the second, third quarter than we did a year ago..

Your next question comes from the line of Pete Skibitski from Drexel Hamilton. Please go ahead..

Scott, I wanted to ask about pricing. You mentioned -- in the release you have got some pricing on the new models, new model Citations. Just wondering if you've got any pricing on the balance of the Citation portfolio because I know you guys have tried to be a little bit more disciplined on pricing..

Yes we did Pete and in fact when you see the pricing numbers here they will come out, our pricing was up on a year-over-year basis and that really is a reflection of the legacy models. The M2s and the Sovereigns which were give bit of a volume here in the first quarter aren't going to be in that price number because they are new models.

So, the price was certainly up on the existing CJ and XLS families and that number is out there. The M2s and the Sovereigns obviously -- they are new -- will not show up in our pricing number but certainly pricing has been better than we've seen in the past..

That’s great and then I’m interested in kind of your new expectations for a peak margins at aviation. I mean it's tough to kind of figure out what kind of the go ahead margin rate at Beechcraft would be given it's kind of up and down history and Hawker has wound down but you’ve got $80 million in cost savings you’re looking at.

So can you give us some color around you know what peak margin can possibly be for the big aviation segment?.

Pete, I have to be honest I haven't tried to do that math yet.

We have been sort of focused here on making sure we can communicate to you guys exceptions in terms of what it means here at’14 and particularly how to model going into ’15, in terms of you know peak margins as you know we have always talked about trying to get through a couple 100s basis points better than in the past.

That’s obviously a little bit muddied up here because we’re going to have a mix of stuff that we don’t actually really know what the margins were back in those peak days because there was so much noise in all of the financials as Beech went through, the Hawker issue.

It is a very complicated model, Pete, so I can’t even really go back and tell you very well an actual real percent to know what to base that peak off of. I know that’s kind of a muddy answer but the math is -- historical numbers always had all kinds of special charges and impacts of things. It's just it's not an easy comparable..

I think the way to think about it is in Scott’s earlier comments about the 200 basis points adjustment for kind of a normalized full year run-way of the segment and then you are making your own assumptions on what you think volumes are going to do and what the pricing environment is and I think you can come up with a view of where your margins are going to go..

Okay.

Last question should we'd be worried that 412 was down year-over-year and 429 as well?.

I think Pete, that’s just timing. We had an awful lot of 412s that went out in the fourth quarter just based on customer demand and where they were, so we were very light in the first quarter particularly with respect to 412s which is an important part of the mix commercial business but I don't think that portends anything for the year.

It was just a light number deliveries based on customer demand and delivery dates for the first quarter..

You still think 4.5 billion for Bell for the full year in revenue?.

That’s correct. Yes, sir..

Your next question comes from the line of Robert Stallard from Royal Bank of Canada. Please go ahead..

Just a follow-up, I think you reiterated your Bell revenue guidance there.

I was wondering if you could comment on Textron Systems, whether you’re still comfortable with your full-year revenue guidance for that division?.

We’re trying to stay away from quarterly guidance here but we did try to tell people the real drivers of the revenue growth on a year-over-year basis is driven in large part by the TCDL program which is really going to be a third and fourth quarter program just because that’s when we’re going to be completed the final testing and it should be signed off in terms of starting customer delivery.

So we expected the first and frankly expect the second quarter to be pretty light in terms of the revenue line because you won't see those deliveries until the third and fourth quarter..

And then secondly on the aviation division, I was wondering if you can give us an idea what the sort of lead time is on a new jet at that moment? Whether that started to move out a little bit?.

It depends on which model. So it has -- got a little bit on some of the models and if you’re interested Robert we will push up as far forward in the list as we could..

No I was focused more on the ones where you have been operating a bit on a spot basis and whether that’s stretched down a little bit?.

It's a still spot basis on some of the lighter jets Robert, but as you get into some of the new models like the Sovereigns you’re starting to build -- again not a huge backlog but these aircraft for instance are -- I don’t think we can get to one of those Sovereigns in the second quarter.

So we’re kind of at a point where that production line is pretty well matching what the demand is sort of quarter ahead..

We will go to the line of Julian Mitchell from Credit Suisse. Please go ahead..

I just wondered in terms of the Beechcraft business, the lumpiness of sort of the margin profile there during the year.

I don't know if there's anything particularly important in terms of seasonality that you wanted to call out but obviously the margin number to the extent that it counts for you had in Q1 but very, very high versus the kind of 7% underlying margin guide for the year..

Well I think Julian if you look at the numbers it looks like a very high number because it really just reflects those last two weeks of a quarter and you had a lot of King Air deliveries which is fairly standard I think in this business. You tend to have a fair number of deliveries right near at the end of the quarter.

So the margin rate in that two week period looks particularly high but that’s because you had eight deliveries in a two week period of time over a relative short cost base. So I think that’s just a function of the fact that you’re just looking at a snapshot of the last two weeks of the quarter.

In terms of sort of a normal annualized looking at the business from what we have seen if its historical numbers it doesn’t look terribly different than the jet business.

Deliveries tend to be stronger in the fourth quarter than they are in the second quarter let’s say, but again it doesn’t look to us to be have historically being very different than what we see in the jet business..

Thanks and then on the Bell, I guess you are still sticking with that 12%, 12.5% margin guide for the year as a whole.

I just wondered if there's anything in Q1, any spillover in terms of the ERP type stuff that hurt the margins were it really was primarily around the commercial mix and that should come back?.

Well I mean there is both things in there Julian, so for sure as we talked about last year as we went through sort of the challenges on the new ERP system and the labor disruptions. We were running at a higher cost basis than we normally would and a fair bit of that did get inventoried just because it goes and then leaves off over a period of time.

So when we gave you the guidance around the margins we did expect that as that inventory went through and burned off over the course of the year that we expect that we would see about a 100 basis point drag on our margin rates through the course of the year and in fact if we look at those things that were -- those additional costs as they flow through in the first quarter it was about 100 basis point drag.

And so I think you will see roughly a percent of margin degradation in this year’s performance that was a result of those higher cost that we incurred last year but again that was factored into the guidance that we gave you in that 12%, 12.5% number..

Thanks and lastly very quickly R&D to sales.

You had indicated alongside the Q4 earnings that should be a tailwind to margins this year, year-over-year, is that still the case?.

I think it's a very slight tailwind and I think it remains that way as we bring Beech and the R&D as a percent of sales is kind of about what it is for the overall Textron Company. So no real change in terms of the overall R&D as a percent of sales and it's a very slight tailwind.

It's a little bit wider in Cessna because of the lower numbers of aircraft and certification. It's a bit higher at Bell as we have 525 and 505 and V-280 [ph] all going full tilt..

Your next question comes from the line of Jason Gursky from Citi. Please go ahead..

Scott, I wanted to ask a question around the sales force and the aviation segment you've gone through pretty big transformation in there over the last year or 18 months.

Was wondering if you could provide an update to us on the benefits, what you've got this far out of that transformation as you move more to a direct sales force? And whether these guys have been to populate some sort of pipeline in this tracking system and what that pipeline looks like on a year-over-year basis..

So I think there is no question we have been continue to grow our sales force both domestically and internationally as we have talked about before adding a lot more of our resources as opposed to be dependent on third parties to do that, so we continue to make progress I think in doing that clearly the acquisition of Beech helps, we have added a lot more sales resource through that deal and we have retained that sales force by the way.

So I mean there is still a team out there as it was with the Beech very focused on the turboprop marketplace and so as I said earlier we’re having a lot of sort of get to know each other sessions around the world, so that the teams have been out there selling jets and the team is selling turboprops and know each other and can try to find opportunities to work together going forward.

But we have largely retained all those folks. So it's increased the net size of our sales force which I think is good. I think we have a very good system actually that we use for keeping track of customer contacts and customer opportunities and sort of where people are in the cycle and I would say that’s the system we sort of use and look at it.

It's the system we looked at a year ago to say, hey guys we’re not feeling that great about where things are in terms of demand and that’s also the same system we’re looking at today and saying there is a more robust set of customer opportunities out there which makes us feel better about where we’re heading in the second, third quarter.

So the system is quite good. The sales teams around the world keep it statused and Scott and that team have a sort of once a week review with all the sales folks around the world on that data basis and kind of get an update on where it is and how things are progressing..

Scott, do you feel like you've been able to close more deals as a result of this direct sales force than you would have had you've been using an indirect sales force? As you look back, the year 18 months on without a doubt the right move you’ve made?.

Absolutely. Our indirect, our sales representatives or authorized representatives around the world is like anything, Jason. I think we have had some that have been outstanding and they do a terrific job and we still have a bunch of those and we keep the guys who are doing a great job for us.

The thing that was that led us to start to do more of our direct sales around the world is that I think we had too many that were great for us when things were good but when times weren’t good they had other things to go do and obviously when we put a direct person in, good times and bad doesn’t really matter.

The person is out there selling every day. They are not going to wait around for the overall market to become positive to go sell. They try to sell all the time and I think that we’re seeing the benefits of that..

Your next question comes from the line of George Shapiro from Shapiro Research. Please go ahead..

A couple of questions.

First Scott can you update us on where the Citation 10 stands, are we going to see deliveries this quarter? I'm not sure I’ve seen whether it's been certified yet?.

I think our past week was the last week of flight testing and so at this point it's now just into the paper work process and I guess the bottom line George is yes I would expect that the certification will happen this quarter and that you will see initial deliveries of 10s in Q2..

Okay, and then Frank, just to update if I look back at Beech you projected EBITDA of 215 in the December call. Now it looks like it is gone up a little bit.

We are talking 235 maybe, is that due to the 80 million of synergies you are talking now versus 65 before or if I'm wrong if you can clarify what that -- the comparison?.

Yes George I’m not sure if I’m following your EBITDA comparative but I would say 2013 came in from a historical basis, pretty much on top of what we had expected and the numbers that we’re talking about now are pretty much on top of what we had indicated at the time that we announced the acquisition probably achieving the run-rate synergy saving faster than what we indicated at that point in time.

But generally consistent with where we were at the time we made the announcement. .

Okay. And then one last one you had mentioned maybe a 100 basis point impact from the continued labor from the follow-up of the labor issues you had at Bell.

Is that more heavily loaded to the first quarter here where the margins were down a lot more or is that just a 100 basis points in the combination of the weaker mix?.

That falls across the year. Really as we sell product and it just rolls through cost of sales at a pretty consistent 100 basis points across each quarter..

Yes so the 100 basis points is pretty consistent, at least the way we forecasted or see it right now, George, the big comparative from ’13 to ’14 beyond that is largely driven by mix of principally commercial and largely 412 helicopters in Q1 of ’13 versus Q1 of ’14..

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Please go ahead..

My first question was about, I know you discussed pricing, it seems like there was a bit of a pricing benefit for the full-year just given there is a loss legacy aircraft, can you give us an idea maybe the gross margin differential between some of the newer products like the M2 versus the Mustang?.

We wouldn’t give those number specifically in numerical Sheila but for sure we’re going to have two dynamics I think through the course of the year. One is that we’re seeing stronger pricing on those legacy aircraft be it Mustang’s, CJ2s, CJ3, CJ4, XLS product lines.

I would say on a gross margin basis, you know the things they are not going to be reflected in pricing are going to be the M2s and the Sovereigns and the gross margins on both of those products is good..

Okay. And the first quarter out of the gate, seems like you've been successful with new product launches of their gains and momentum. I know it's a little bit early but looking back historically it seems like new products results in several quarters of market share gains. You have few competitors coming out with new launches in late ‘14 and ‘15.

I guess does the sales force have any strategic views on this or how you're thinking about that?.

Well I think if you look at the market historically it does, the new products do drive some market and share. We’re certainly seeing that with the M2 and the Sovereign and I would say we see that certainly playing out through the year and I would say right now the business and the sales force I think is very enthusiastic about where the Latitude is.

You know that really will be what drives our growth I think in the 2015 timeframe. So as we have kind of said we see the market sort of flattish with respect to demand for the legacy product, so we didn’t make a lot of growth assumption there, most of the growth driven by the introduction of new product.

So I came to Sovereign and TEN for the 2014 window and then you add on top of that going into 2015 the Latitude Program which we feel very good about. The flight testing has grown fabulously. We think we’re very much on track for that to having a meaningful impact for us in 2015.

Okay, got it and then just a last one for me. We saw some indications from Congress about the V-22s for carrier usage; can you maybe talk about the potential to expand the V-22 within the U.S.

government?.

We think there is a couple of opportunities that are pretty significantly in the V-22 for it's future. The replacement of the so called carrier onboard delivery vehicle, we think it's a great opportunity.

That’s one where there has been a fair bit of work, already conducted by the Marine Corps and the Navy looking at the utility of the V-22 to execute that mission. The issue I think in the long run will really be how they decide to specific that requirement Sheila.

So if the mission is just purely to go from a land based airport to a big carrier deck, that’s a fairly narrow mission and there is other ways including refurbishing existing equipment probably to get there.

The benefit of the V-22 is you can completely fulfill that mission but you can also go from any land site or any sea site, to any ship because of the vertical takeoff and landing capability of the V-22.

So I think it's still too early in terms of where that program is, there is not a hard requirement, you know that’s been written, there is a lot of study and analysis going on within the Navy.

So I think that program obviously is still a number of years out but we feel good about how we’re positioned because frankly that aircraft can do things and fulfill the mission in a way that there is -- that no other platform can do it and because it's a production unit and you don’t have a huge development program.

We also think it's a much lower risk approach than doing something like an overhaul of older aircraft. So obviously from our perspective we get a lot better value, you get a better mission and you get a lot lower risk but we’re few years from knowing the answer of that question, I think..

Your next question comes from the line of Shannon O'Callaghan from Nomura. Please go ahead..

Scott I think you mentioned the Sovereign you were booked one quarter out.

Can you just give a little color on how that's tracking versus your expectation and your initial plan for the year?.

I mean it's basically meeting our plan Shannon. We expected once we got this thing certified and the aircraft was out there and plenty of demo assets for customers to fly it that would drive pretty strong demand and that’s exactly what we’re seeing.

So I don’t want to say, hey it's the market is going crazy and you got a line up years in advance or anything like that but the aircraft is doing really well. It's flying very well, the performance has been great. Customers love the new interior, the added range, the more sophisticated capable cockpit. So far it's playing out as we expected. .

Okay. And then just maybe on this ASR you guys did. I guess that's a one-off in the first quarter.

I mean any changes, philosophy there and it doesn’t look like it really is much of an impact I guess it offsets dilution?.

As we said Shannon, clearly we’re committed to making sure that we do as a minimum enough stock buyback to offset the dilutive effects of all the employee programs and that’s really what that was.

We just did it in the first quarter to kind of make sure we got the full year benefit of doing that in terms of other buyback opportunities we would continue to look at that on sort of an opportunistic basis. But we will remain committed on a go forward basis, that is the minimum. We will always take out enough to offset dilution..

Your next question comes from the line of Jeff Sprague from Vertical Research. Please go ahead..

Just wanted to get my arms around a little bit more Cessna mix for the year and you kind of touched on it a little bit in your comments on the TEN and Sovereign.

So if I just look at Q1, right, 130, your deliveries are kind of - M1, M2, Citation 10 start to come in but should we actually expect this quarter to be the high watermark for Sovereign? You are kind of caught up on a little spike and unit volumes really don't rise sequentially from here on Sovereign?.

They probably won't Jeff; part of this is an artifact of the fact that we certified the airplane so late by the time we got through everything in the fourth quarter.

So there were a few Sovereign deliveries that we would have preferred to have made last year and that late certification which couldn’t get through the whole delivery process on a couple of them. So, it's a bit high in the first quarter but we should have reasonable volumes through the balance for the year as well..

Does that apply for M2 also that you had a Q4, Q1 catch up and it levels off or does that work its way higher sequentially over the course of year?.

I think the M2s are fairly stable through the balance of the year..

And then I was just wondering on pricing, from what I can tell it looks like orders were flattish to down slightly book-to-bill's 0.9 or 1 depending on how you round some things.

So do you think the better pricing is negatively impacting order intake or am I'm missing something there?.

No I don’t think so Jeff. I think a lot of it is just timing related, as I said if you look at the amount of activity in the marketplace, the number of customers, sort of just where they are in the order cycle. It's better than where we were before.

So as we look -- I mean obviously if it wasn’t a signed order book with a deposit we don’t put it into the backlog but there were a number of deals that were in negotiation and kind of working their way towards contract which has now been closing here as we entered into the beginning of the second quarter.

So from an order book standpoint in terms of meeting our plan, we think the trend is positive..

And just a quick housekeeping one for Frank.

So just looking at in Q1 the $40 million of PT&A step up that’s separate and apart from the $60 million of restructuring and acquisition cost, is that correct?.

That’s right and yes we will continue to see that step up will flow through segment profitability and impact the segment for the year and then we also have additional restructuring charges that we will breakout separately, it will be a separate impact..

Your next question comes from the line of Joe Nadol from JPMorgan. Please go ahead. .

Scott, just back to Bell and the 412 and the deliveries, I heard you say it was just all timing.

Could you speak a little bit though to, and maybe any detail behind that, were there fleet customers that they are transitioning? Is it literally just the dates that the customers want their aircraft and maybe just bigger picture about the demand for that specific model and what's in backlog and what you are seeing?.

Sure. I mean it really was just timing Joe. We haven't seen a change in the demand of 412. As you know a lot of times 412s do tend to be fleet orders and we had some fairly strong deliveries just again on timing in the first quarter last year of one of our larger fleet customers that had just scheduled a number of deliveries in Q1.

So, as we look through the balance of the year again 412s do tend to come in fleet as opposed to sort of onesie twosies but I think in terms of customer demand fleet orders, customer activities, that’s why we still feel pretty good about the total year 412s..

And you expect to be, you did 36 last year, you still expect to be higher than that for that model this year?.

Sorry Joe, I would have to go and look at my sheets on the exact number of 412s and we don’t usually publish that number but I don’t think it's appreciably different one way or the other. It really is, but our quarter is. .

And then on, maybe I missed it, but on Beech, what are the cost saves that are actually baked into your guidance now for this year? Not annualized, but actually in the plan here?.

We haven't given that Joe, and obviously -- I mean first of all we only have nine months. We’re in the process of incurring at this point most of the cost associated with those restructuring activities.

So we’re not going to break that as a separate number but we included all that in terms of the numbers we have given you, in terms of restructuring as well as the overall net margin number and so I don’t think we will break that out number separately other than to tell you it's receipt is about an 80 million run-rate for next year..

I'm just trying to think about the compare going into next year compared to this year how much, I mean we get -- the step-up I assume doesn't recur, you get a full year benefit obviously of EBIT. But then how much incrementally do we get from the cost saves in ‘15 versus ‘14 if we don't know what's in ‘14, it is hard to make that comparison..

That’s part of the overall 200 basis point normalization Joe. So it's part of that..

Okay.

Could you actually just run through that again, I heard that number, Frank, but I didn't quite get it in your prepared remarks, the 200 basis points?.

So if you look at a full year sales impact of Beech and if you look at the impacts that we expect to flow through from the purchase price impacts which are relatively modest going into ’15 but impact ’15 by about $65 million and then you look at the expected saving is coming off of that 80 million run-rate that we talked about.

You would get on a same volume as 2014, a 200 basis pick up in Textron Aviation margins..

I think gives you all the elements of the number and the reason we’re not trying to obfuscate anything, the reason we are doing it that way is it's hard to identify and will be hard to identify as we move forward here kind of all of the cost savings and where things come from and everything else and we’re really looking as a consolidated segment operations and just trying to focus on kind of what our cost structure will look like in ’15 and therefore core profitability levels..

Fair enough. And just one more. You've talked Scott quite a bit about demand for some of the individual Cessna models and pricing. I just wanted to touch on something that emerged a little bit last quarter which is the competitive environment in really in the midsize area in particular.

Is this something that's getting a little better? You've talked quite a bit in the past about how tough it is out there and I know you don't want to declare victory at all, but is everyone seeing things getting a little better and maybe taking a little more price across the board?.

I think that’s happening Joe. As I said on our legacy product where we compare price on a year-over-year basis, prices are up across the line. So but again it's still a very competitive market.

I mean every deal is a fight but I think as we go through that process obviously as demand is firming and a lot of is backed off in terms of how much capacity or what production run-rates are going that’s had the desired effect exactly as we anticipated it would.

So we’re starting to see that price firming, having some price firming in the used market, giving people that are out there looking to sell a little bit better collateral value as well as frankly just a stronger market so they can transact and get the liquidity.

I mean all those things I think are factoring into just a strengthening in the overall market and therefore you will expect a little bit of strengthening on the pricing side. So it's not overwhelming obviously. We would like to see it stronger but it's certainly improved over where we have been and that reflects in some of the improved pricing..

Your next question comes from the line of Cai von Rumohr from Cowen. Please go ahead..

Scott, you had good deliveries of the Sovereign and the M2. Obviously some backlog spillover from the fourth quarter.

Should we expect the seasonal pattern here, because of those strong deliveries in the first quarter, that you are really flat to up in the second, flat to up in the third as you burn off that initial backlog, and then a big fourth quarter, is that, as you think about the quarterly pattern, is that the way to think about it?.

I think that’s mostly correct Cai. I mean that’s been sort of the nature of the business, obviously, last year we had very challenging second, third quarters and then a much bigger fourth quarter.

We would like to see a flatter profile just in terms of -- it’s a little easier to run the business and little bit more productive to run the business a little bit flatter. But as we look through the course of the year right now we would expect it to be sort of up slightly as we move our way through the quarters incrementally..

We expect deliveries of the TEN to come in here in the second quarter as Scott indicated which will impact things..

Right. But I assume it is later in the quarter if you still have the paperwork to go or are you just all set so you could do you three of them in the quarter..

Yes and I think we will do several TENs, we have customers that are kind of standing by and ready and wanting these aircraft. The certification -- as we talked about before slid from where we wanted to do it.

We would originally like to have done at the end of last year and we just couldn’t get through that in terms of prioritizing getting the Sovereign through the process, flight testing has taken longer than we expected and we have customers that are waiting for their aircraft.

So once the paperwork is done we will certainly get a few deliveries here in the quarter..

So you delivered eight King Airs in the quarter.

Can you give the split between the 350, 250s and the 90s, and maybe give us some -- a little more color on where you expect those three models to be for the year?.

I don’t know if I’ve the exact number here in front of me, it was weighted towards 350s, Cai. And I think the full year will be weighted more towards 350s..

Okay. Good. And then a last one, so if we back out Beech, you did a 1.8% margin in the first quarter at Cessna and I think your guide is 2.5% to 3% excluding Beech, and seasonally things get better. You are talking about pricing improving.

Is that a realistic number? Does that have upside or is there something else happening in terms of the funding of R&D that would make that the real number and not really a bit conservative, which is the way it looks?.

I think it's a realistic number, Cai. As always we have said we will have a little bit better incremental volume as we go through the year not dramatically but I think we will also with the TENs coming in, we have a mix that’s more oriented towards a combinations of TENs and Sovereigns which is good mix for the business..

Right, but I guess my point is, if volume is going up and you have a 25% plus incremental margin, and mix is going your way, one would think you would get a little bit more than what is it, 70 to 130 bps off the first quarter given the seasonality you've got..

Again as we look at this right now Cai, we don’t see significant increases in terms of quarter-over-quarter. It will be up slightly but not dramatically..

Your next question comes from the line of Ron Epstein from Bank of America. Please go ahead..

Just a couple of questions to follow-up on the Cessna line of questioning.

Scott, can you give us some sort of feel for how demand is for the Latitude? I know it was received well but is there any maybe color you can put around that or numbers or something?.

Well we haven't been giving order books specifically by model. We have a number of orders already in the book for Latitude for sure.

But I think as we have talked about it before at this stage of the game we really need to have aircraft that are flying and fully outfitted and able to do demos and things of that nature, and really start to build out that order book into 2015. We have the initial aircraft that’s up and flying.

We have a couple of more that are in process including one of the aircraft which will be fully outfitted with the real interior design and that will be the aircraft which will be going to shows and starting to perform customer demos and I think we won't see a lot of order activity until that aircraft is out there because at this stage of the cycle I think before somebody lays a deposit on a $16 million, $17 million [ph] airplane.

They want to see the real airplane, and sit in the airplane and take a flight in the airplane. So we understand that and we have the first couple of aircraft, obviously we’re more dedicated to flight test programs. We’re in the process of building out the first one that will be a customer demo aircraft. .

Okay, and then maybe shifting gears a little bit. How is it, is there an early read yet on how the move into flight simulation has gone with the integrated product, last time I was up in Rhode Island we were talking about how Textron wants to offer an integrated package to the customers with flight simulation.

And how is that going?.

I would say right now we’re very happy with how it's going. Our order rate on the simulator side of the business is doing very well. There is a ton of opportunities out there in both the commercial air transport market as well as a number of different business jets and helicopter programs.

We already have our first development underway to support our own products that being the Bell-525 simulator. So the team down in Florida is already started to work with the Bell team in the design and development of the 525 sim and so I would say, obviously we’re only a few months into this thing but I feel very good about where we’re.

The thing is performing as we expected and the order rate seem to be pretty good..

Okay, great and then maybe one last one, back to defense. My favorite product, the Scorpion. Last time we spoke you had mentioned that maybe by the end-of-the-year a customer would emerge. How do you feel about that still and how is that program going..

So the program is going extremely well. The aircraft is flying terrifically. It's already over last week exceeded it's flight envelope, so we have seen speeds in excess of what we’re advertising and still had more throttle push for the thing. So the aircraft is flying very, very well. The guys are super happy with it and it's where we expected it to be.

We have a lot of marketing, sales activity underway right now. We have conversations going on with a number of different customers. We have had customers that have actually come into Wichita to see the aircraft, so I feel pretty good about where we’re.

But there is a big ways to go to get from that to where somebody signs the dotted line and actually places an order for the aircraft. So by the end of this year I still think that’s a possibility. We’re working hard to try to make that happen but I would say there is still a lot of work to make it happen..

Your next question comes from the line of Justin Bergner from Gabelli & Company. Please go ahead..

Two questions.

First question is in regards to Cessna after market, I realize that's something that you report in more detail annually than quarterly, but how is it tracking as we finish the first quarter and enter the second quarter?.

It continues to track positively. I say it's probably up mid-single digit kind of numbers..

Nothing out of the ordinary there?.

No, you know for that business Justin, if it just kind of continues to march along at that rate that’s very healthy. I mean it's really driven by aircraft utilization and people coming in for service activity and what not.

So that’s one where you kind of expect to see nice steady growth, that’s what we have been seeing and expect to continue see on the Cessna side and frankly we expect and just kind of factor that in as well in terms of Hawker and King Air size of business..

And my second question is just a little bit more general. You've been in your role now for around four years and you're really taking a big step forward and consolidating the private aviation market with this Beechcraft acquisition.

What is the company going to look like in three years from now and what would make you disappointed three years from now if something doesn't transpire as you expect it to?.

I think Justin, if you look at what’s really going to drive the business over the next few years particularly within the aerospace aviation side of this, be that the aviation segment or Bell, is -- I mean obviously you’re doing something like the Beech acquisition is a big deal but I think over the next few years what’s really going to drive our success in large part has to do with driving these new product program.

So we have the Latitude hitting in ’15, we got lot of other activity at Cessna, we will talk about it in the future in terms of new products and when you look over it at Bell you got the 525, the 505.

I mean these are big programs that I think are resulting in products that are going to drive a lot of demand and share for our businesses in the market. So those investments we’re making which are pretty significant right now. You know really are the things that are going to drive our performance improvements over the next few years. .

And it's interesting to hear you talk about new product. With respect to Beechcraft, I mean clearly that is an investment that is as large as many of the combined new product investments you are making.

What would be the upside scenario in Beechcraft and is it as likely now as it was when you announced the deal?.

We certainly feel just as good about it as when we announced it. The market, we think is still performing well for the King Air product line. It's a great product; it's always been very well received. Customers like it and it's a workhorse in that industry.

Obviously it's going to require sustained levels of new product investment and R&D and upgrades and just like the jet business does, so there are things that are announced out there that will be upgrades to that product line as it moves forward but I think what we thought we were acquiring in terms of that product is exactly what we got.

There have been no surprises whatsoever. I think the brand is still in very good shape, it's a strong brand in the marketplace, good demand for the product and it's a great product. It's exactly what we expected..

Your next question comes from the line of George Shapiro from Shapiro Research. Please go ahead..

Yes, just a follow-up Frank, to the question earlier.

So in the fourth quarter you had $0.20 of operating benefit and $0.35 of restructuring for $0.15 dilution and now we got $0.08, so if you just -- what's changed in that?.

The restructuring number is smaller than the cost that we had thought at the time that we did it. So I think if that’s the big delta George is the restructuring charges has come down a bit..

Okay.

And the operating number is about the same because it closed the same time you thought it would close?.

Yes, I mean the operating number -- those were annualized numbers versus partial year numbers and so that has an impact. As we indicated at the time we were going to have purchase price gross margin impact.

We have refined that number, that's now expected to be about $65 million for the year and so I think it's largely a function of the partial year versus the animalization and then the -- a little bit of a change on that restructuring number. .

And then just a follow-up Scott for you on the margin.

Is your comment that the margin won't go up a lot necessarily in subsequent quarters because the first quarter was somewhat high because of the high level of Sovereign deliveries which won't repeat?.

I think the margin rates will be incrementally better George, because we will have obviously the Sovereign, although Sovereign is probably a little stronger in the first quarter than the balance of the year because of the roll over for Q4 but then we also have the TENs based on now getting the certification done.

So the volumes will be up slightly through the balance of the year and I think the margin mix will be favorable. So we will see some incrementally better margins..

I was trying to follow-up to Cai's point arguing that I agree with his comment that incrementally you would think the margins; your guidance for the year would be low.

So I was just trying to argue that maybe the first quarter was a little bit higher because of the Sovereigns, otherwise I still think -- I agree the margin is probably -- your guidance is probably low for the year..

There is no question, we had a lot Sovereigns in the quarter, we probably won't have quite that number of Sovereigns on a go forward basis. We will have the TEN, so I think we’re just having a friendly debate about how much better should they be..

Okay..

All right George, thanks a lot. And ladies and gentlemen that concludes our call. Thank you for joining us and we will see you next quarter..

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