Doug Wilburne - VP of Investor Relations Scott Donnelly - Chairman and CEO Frank Connor - Chief Financial Officer.

John Godyn - Morgan Stanley Chris Sands - JPMorgan Sheila Kahyaoglu - Jefferies Julian Mitchell - Credit Suisse Jeff Sprague - Vertical Research Jon Raviv - Citi Cai von Rumohr - Cowen George Shapiro - Shapiro Research Pete Skibitski - Drexel Hamilton Robert Stallard - Royal Bank of Canada.

Ladies and gentlemen thank you for standing by and welcome to the Textron Second Quarter Earnings Call. At this time all participants are in a listen-only mode. Later on we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded.

I would now like to turn the call over to your host Doug Wilburne, Vice President of Investor Relations. Please go ahead..

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

On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Textron's revenues in the quarter were $3.5 billion, up $670 million from last year’s second quarter.

The Beechcraft acquisition, completed at the end of the first quarter contributed $425 million to the increase. Income from continuing operations was $0.51 per share compared to $0.40 in the second quarter of 2013.

Last year’s second quarter EPS was reduced by $0.07 per share and severance cost recorded at Cessna, while this year's results reflected a full quarter’s impact of the Beechcraft acquisition.

The Beechcraft impact included an $0.08 EPS reduction from fair value step up adjustments of acquired inventories sold during the quarter and $0.05 in restructuring charges, which were recorded on a separate line for acquisition and restructuring cost.

Manufacturing cash flow before pension contributions was $271 million compared to a $362 million use of cash in last year’s second quarter. Pension contributions during the second quarter were $27 million. And with that I'll turn it over to Scott..

Thanks Doug and good morning everybody. Revenues were up 23.5%, reflecting solid organic growth and contributions from acquisitions. At Bell we delivered 10 V-22s and 8 H-1s compared to 9 V-22s and 6 H-1s in last year's second quarter. On the commercial side, we delivered 46 aircraft up from 44 a year ago.

On the development front during the quarter, we received certification for the wheeled landing gear version of the 429 model in Taiwan and Argentina following first quarter approvals in Canada and Brazil which expands the appeal of the platform to a broader customer base.

We also delivered our first 412EPI model at the end of June to the New South Wales Police Department in Australia. Our 505 Jet Ranger X development program remains on track for first flight this year as total (inaudible) demonstrated maximum continuous power during the first engine test.

We also continue to make good progress on the 525 Relentless as we completed the first all-composite main rotor blade, received our first GE engine and began gear box testing.

Overall assembly of the first aircraft is also progressing and with the next month we will be ready to join the three main [capital] sections with initial flight targeted for late this year. On the military side, we signed the [another] contract for 24 additional H-1 aircraft worth about $450 million with expected deliveries beginning late next year.

We also continue to make progress to our potential foreign military sales for the V-22; negotiations are ongoing for the six initial units for Israel and we're working with a number of foreign governments which should result in additional [FMS] orders.

Moving next to Textron Systems, revenues were down as we expected but program performance and a favorable mix of contract revenues resulted in the segment margin of 12.1%. We continue to make progress on the Shadow TCDL upgrade development program successfully completing the final operational testing valuation during the quarter.

We also saw continued performance stability in our Aerosonde fee-for-service platform and we recently received a new task order to continue operating under the Navy ISR program. During the quarter we also won a $190 million contract for approximately 360 sensor fuse weapons to be delivered to Korea beginning in the third quarter of next year.

Most recently, we completed an acquisition for our new TRU Simulation Training business with the purchase of ProFlight an innovative provider of pilot training, specializing in Cessna CJ series and Cessna [Caravan plus] turboprops located in Carlsbad, California.

This acquisition of FAA part one 42 approved training operation was an important next step as we build our business aviation pilot training capabilities. In addition we were just selected by Boeing to develop and supply the full flight simulator training suite for the new 737 MAX program.

This is a significant strategic win for TRU as we expand the air transport portion of this business. Shifting to industrial, we saw a good growth across all our businesses reflecting our continued emphasis on innovation, new product introductions and bolt-on acquisitions.

For example in May we announced the acquisition of TUG Technologies, a leading manufacturer of the ground support equipment in the aviation industry significantly augmenting our line of specialized vehicles.

In addition to the obvious sourcing and manufacturing synergies with our existing E-Z-GO Cushman and Bad Boy operations we will be able to leverage sales of TUG products around the world based on our global distribution channels. Moving to Textron Aviation. In the quarter we delivered 36 business jets and 34 King Airs.

In last year’s second quarter we delivered 20 jets and Beechcraft delivered 24 King Airs. Trends of jet demand factor such as aircraft cycles, corporate profitability and availability of used aircraft all continue to move in the right direction.

Despite the fact that we remain an in-spot market new products are supporting demand in this segment of the industry. On the new product front FAA certification of the Citation Ten+ was obtained late in the quarter which allowed us to deliver the first three units.

We also completed the EASA certification of the new Caravan EX, the M2 and the Sovereign+ in the quarter.

Our Latitude Program continues to progress towards an expected 2015 entry into service, we now have two Latitude aircraft in test flight reaching over 100 test flights and expect a third to be available for certification activities later this month. Moving to the defense side Textron Aviation.

We had two new orders for our T6 military turboprop [tankers] during the quarter; one for the Mexican Air Force for 12 units and one from the U.S. Navy for 29 units which represent the last lot under the existing JPADS program.

Overall the T6 and the weaponized AT6 are generating significant international interest and we are pursuing a number of promising opportunities.

Our Scorpion program also continues to progress as it recently completed a 4,700 mile trip from Woodstock, Kansas to United Kingdom to participate in the Royal International Air Tattoo and the Farnborough air shows.

Interesting, the Scorpion at both shows has been very encouraging and we are in discussions with a number of customers with potential initial orders. Scorpion is also scheduled to participate in a U.S.

Government emergency preparedness exercise later this year sponsored by the Pentagon's Northern command, where we'll demonstrate its surveillance capabilities.

To wrap up, we believe we had a very solid second quarter with strong revenue growth and improved overall margins and cash flow performance demonstrating that our strategy is investing in new products and distribution is paying off and we are seeing significant contributions for our M&A investments. With that, I'll turn the call over to Frank..

Thank you Scott and good morning everyone. Segment profit in the quarter was $304 million up $91 million from the second quarter of 2013 on a $670 million increase in revenues. Let’s look at how each of the segments contributed starting with Textron Aviation.

At Textron Aviation, revenues were up $623 million from this period last year reflecting $425 million of acquired Beechcraft revenue and higher new jet volumes. The segment had a profit of $28 million compared to a loss of $50 million at the Cessna segment a year ago.

This reflected a $28 million charge taking into segment last year for severance costs higher new jet volume and the impact of the Beechcraft acquisition including a $33 million acquisition inventory step up impact. Backlog in the segment ended the quarter at $1.4 billion down $100 million from the end of the first quarter.

Moving to Bell, revenues were up $94 million reflecting higher commercial and military aircraft deliveries as well as a $41 million revenue benefit related to settlement with the U.S. DoD related to the Systems Development and Demonstration phase of the company’s former Armed Reconnaissance Helicopter Program, which was terminated in October of 2008.

Segment profit increased $6 million from the second quarter of 2013 reflecting a $16 million profit impact from the ARH settlement. At Textron Systems revenues were down $140 million reflecting lower overall volumes.

Segment profit was flat despite lower volumes reflecting favorable performance across all product lines and favorable mix of contract revenues during the quarter. Industrial revenues increased $93 million reflecting higher overall volumes and the impact of acquisitions.

Segment profit increased $15 million due to the higher volumes and improved performance. Finance segment revenues decreased $4 million primarily due to gains on finance receivable dispositions during the second quarter of 2013.

Segment profit decreased $8 million primarily due to prior year impacts of loan loss reversals and gains associated with the finance receivable dispositions partially offset by lower administrative expenses.

Non-accrual accounts ended the quarter at $88 million, down $10 million from the end of the first quarter while 60 day delinquencies were $96 million, down 29 million in the quarter.

Moving below the segment profit line, corporate expenses were $38 million, interest expenses $36 million up from $30 million a year ago, reflecting debt cost related to the Beechcraft acquisition financing partially offset by the requirement of our convertible debt in May of last year.

We recorded $20 million of restructuring costs in the quarter on the acquisition and restructuring line and we still expect full year costs of about $45 million. Our tax rate was 31% and we're still estimating a full year tax rate of 31.5%. That concludes our prepared remarks. So Rosanne, we can open the line for questions..

Alright. Your first question comes from the line of John Godyn from Morgan Stanley. Please go ahead..

Hi guys, thanks for taking my question. The Bell margins at least versus our estimate came in quite strong this quarter. The last that I remember, management had suggested that Bell margins might come in a bit next year.

Is that still the right framework or are we seeing some -- any kind of core operating improvements that might actually improve the margin outlook as we look out?.

Well John, obviously we're not at a appoint where we're going to give any kind of explicit guidance on 2015 margins. Obviously there was some benefit in the quarter of settlement on ARH, it was about $16 million which we would not expect to recur.

On the other hand, we are working our way through as you know some of the higher cost as a result of last year’s issue. So I think the margin rate in the quarter is about where we would have expected it to be in terms of operational performance. We all know, we'll see lower volumes on V-22s and lower margin rates on V-22s will be going to 2015.

So we still have some work ahead of us but we continue to put a lot of focus on cost control and tighten cost base to try to help us get there in 2015..

Got it. And as we think about the long-term outlook for biz jet, of course you have seen great contribution from some of the new product lines.

When we think about some of the legacy product lines though, do we feel like we're seeing enough here that it's fair to say that these jet trends have sort of stabilized and on their way to a rebound as we look out longer term? If you could just kind of update us on your thought process there that would be helpful..

Well, I think John stable is probably the word we would use right now. I mean I think the market is okay for legacy products, we're doing alright. Obviously most of our growth this year which we forecasted and are realizing is a result of new products.

So when you look at full year, Sovereign buses and M2s and now starting to get Citation TEN plus sales, most of what we're seeing -- all of what we're seeing frankly in terms of upside in the market and revenue versus what we saw last year is really driven by new product programs.

Of course, we expect to have a contribution in 2015 as a result of the fact that we'll have latitude as well. So, the underlying market, stable is probably the right word and we certainly hope to see it recover as time goes on.

As I said earlier, we're seeing fewer aircraft available for sale in the used market; all indicators are fairly positive, but it's been stubborn in terms of the rate of recovery. So, we're still largely banking on new products coming into the market to drive most of the growth..

That's helpful. And then just last question on the outlook for capital returns. Operations have been quite good, it seems like biz jet is stable, integration on Beechcraft is going well.

Of course you have some debt here to pay down over time but I'm just curious what management's thought process on capital returns to investors going forward?.

So, I think on the capital returns, as I said, we took some debt on obviously associated with the Beech acquisition and that’s kind of the top of our priority list in terms of getting that paid down to get back to where we think the balance sheet should be.

We will continue to do stock buyback to avoid the dilution of our employee plans and as we’ve said before we would, on a sort of as appropriate basis continue to do some stock buyback beyond that if it makes sense. So in addition to that of course we’ve had a number of small acquisitions.

And I will expect we will continue to see some number of small bolt-on deals. So it’s not a lot of capital but I would say that’s in total how we view our use of cash flow balance sheet..

Very helpful. Thanks..

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

Hi good morning guys. It’s actually Chris Sands on for Joe. Scott, wanted to ask you about the outlook for the 412. The first half run rate suggested that rate could be down quite a bit year-over-year which is in contrast to your expectation for growth overall in commercial.

Could you just give us any insight into the demand trends there?.

So, Chris, we were certainly very light on 412s in the first quarter. The second quarter 412s were comparable versus 2013 and about where we expected them to be. So we still do have sort of a heavier back half in terms of 412 deliveries.

And we don’t usually go down to guide on unit-by-unit basis, but there’ll be relatively comparative numbers versus 2013 is how I would think about the 412 deliveries..

For the overall year or just in the second half?.

For the overall year. I mean we are a little bit wider because of the first quarter was lighter, the second quarter was comparable. And I would expect as a result the backhalf will be a little heavier on 412s in last year, so the total year would be pretty similar..

Great.

And then in Systems you’ve commented on the strong program performance kind of across the portfolio, but can you quantify the overall level of [EACs] that added the margin in the quarter?.

Well we'll give you the guidance, the total EAC number for the company so I wouldn't break it down into the division-by-division, but we did have EACs in the quarter and I think we've seen pretty strong performance our procession ammunitions business is doing a nice job on productivity, we're seeing it pretty much everywhere across the different businesses.

The only thing that I think we would refer to is we did have very good mix i.e. in this quarter, we were very strong on our procession ammunition business which tend to be a positive mix for us. We didn't see a lot, we did get through the final test evaluation on TCDL but have not started shipping-in in those units yet.

And obviously we're sort of in the transition on the vehicle side where we are very wide in the quarter, because we are transitioning from the old April ramps and we'll now start to ramp deliveries for the Canadian program. So those will all be a lot more third, fourth quarter loaded..

Right.

And then overall your expectation for revenue and margin in the segments for the year hasn’t changed?.

That's right, it has not, which means you're going to see more revenue and a lower margin rate as we go into the back half of the year..

Right. Alright, thanks guys..

Sure..

Your next question comes from the line of Sheila from Jefferies. Go ahead. Please state your last name..

Thanks Scott. It is Sheila Kahyaoglu from Jefferies. Thank you for taking my question. I guess could you elaborate a little bit more in the conversion opportunities that you're seeing with hawker customers.

Has the sales force approached their owners? Any quantitative commentary would be great in terms of I think offering [March after] trade-in option, is it the service offering, how are you lowering them in?.

Well, I would say it is kind of couple of step deal. So the first step is as we talk about building that relationship so certainly reaching out to the hawker customers on the service front, folks are already operating these aircraft.

There has been a lot of work going on to just make sure we have spare parts flowing and getting that channel filled again and making sure that we are taking care of the customers that already own the aircraft.

Clearly we have started discussions with a number of those customers around what they are going to do in the future and making sure that when they want to flip over to new aircraft or upgrade it’s going to be under our line.

So we have frankly a dedicated group of people that are working that pretty hard and interacting with those customers, keep in mind it’s only been a few months that we have been doing this. And so anyone that’s going to entertain a new aircraft or upgrading an aircraft there is usually a process that takes a little while.

So I don’t think I would say at this point here is x examples of hawker customers that have decided to move their next aircraft into the Citation jet but we fully expect that will happen overtime.

So but again the job one and the first thing we put a lot of emphasis on is making sure that the level of service and support is back to where they expect it. And I think we are making some progress there..

Okay.

And then in terms of Cessna pricing of course or Textron Aviation pricing in Q2 could you comment on that? Did you sustain the momentum in Q1? And then also for overall Textron Aviation EBIT, how should we think about cost for the remainder of the year and how that progresses?.

So I think on the pricing front things have been pretty stable probably up just a little bit on most of the models in terms of our cost position I mean the run rate I think we are about where we need to be and we have the teams work pretty aggressively even before the integration period making sure we are ready to take the appropriate cost actions and for the most part those have been taken and we are I think more or less where we need to be at this stage of the game in terms of our cost run rate..

Got it, thanks a lot..

Sure..

Your next question comes from line of Julian Mitchell from Credit Suisse. Go ahead..

Hi, thanks. I just wanted to ask about the mix effect I guess within Textron Aviation. You talked about the mix effect in Systems as we look at the second half. On the Q1 call you talked about Tens and Sovereigns coming in should push up the Cessna mix on margins as we go through the year.

Do you still expect improvements in the second half versus Q2 or you think Q2 was a pretty representative quarter in terms of mix in Cessna?.

I think Q2 is pretty representative. I mean for sure Julian if you compare it on a year over year basis, we do have more sales obviously of the Ten+, the Sovereign+ in the mix. So, I think we're -- should be fairly stable in terms of the mix of the relative sizes of aircraft through the balance of the year..

Thanks. And then on R&D, I think that was down about $14 million year-on-year in Q1 for Textron overall.

Is that a similar progression in Q2?.

That's a good question Julian I have not gone through the number, it was reported….

I don't think that (inaudible) the case because we're consolidating Beech now and that would be added in so it becomes a…..

It’s just a timing issue. Yes..

Got it. And then just on now I guess your sort of first half clean margin is sort of 11%, 11.5% if you strip out the ARH’s gain that's implying as for the fully you have a decent margins step up in the back half sequentially even things like V-22 deliveries are flat.

Is that just kind of timing on cost savings about coming through in the back half or is it sort of the mix from…..

There is a bit of cost and there is a bit of positive mix in terms of the mix of commercial helicopters as well. So, now we would expect to see more 412 activity in the second half of the year..

Right. Thank you..

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

Sprague, do you have your mute button on?.

Thank you, good morning everyone..

Hi Jeff.

How are you?.

Hey, just a couple clean up items if I could.

First, just on Bell, has kind of the capitalized costs that are in inventory from the labor disruptions and everything kind of worked their way through, is there any residual impact to that left in the back half?.

Yes, there is Jeff. I think we've expected throughout the full year to see about a 100 basis points drag as a result of that working its way through. So that will be the same in the second half to the first half..

Okay.

So there is no kind of tail off even from a run rate basis?.

Really starts with the tail as we go into the beginning of 2015..

And then I was wondering just on turning the Beech inventory and getting kind of the PPA step-up behind us, where are we at on that perhaps Frank and how do we think about that in the back half for the year?.

Yes. So, we've gotten through 45 roughly of the 65 that we have talked about. So there is about 20 to go and that will obviously hit the back half, add that product and so, it's probably a little bit heavier in the third quarter than the fourth quarter but it depends on delivery..

And then also just wasn't clear on Beech.

Are you implying that kind of Beech net of the step-up and restructuring and everything is kind of OP breakeven or can you give us a little color on just kind of the underlying OP performance at Beech?.

Well, it's hard for us, Jeff because we’ve consolidated all these things together. So you're really, we're not tracking given all the SG&A, all the engineering, manufacturing; everything is sort of put together. So we can still get some visibility on the revenue front, the operations are totally integrated.

So we really don't have the ability to sort of tease out the differences between those. I guess the only guidance I can give you is gross margin on products is pretty equivalent. So I don’t think -- you can’t forget the accounting of the step up that the margin rates of the various product lines and their contribution are pretty comparable..

Right.

And I guess finally just directionally on Bell R&D, is that still have an upper or does that have an upward bias here with 505 and 525 also as you are looking at maybe kind of the overall Bell top-line coming down, obviously with V-22 next year, are you able to kind of compensate the R&D investment?.

Well there is some pressure on that Jeff and like 505 and 525 which will both go in the flight test programs late in the year or so, obviously through 2015 there will be a very active program and flight test for both of those and of course we have the V-280 program which is also ramping up.

So there is certainly pressure in terms of R&D, new product programs associated with Bell given that level of activity..

Okay, great. Thank you guys, appreciate it..

Sure..

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

Hi, good morning. It’s actually Jon Raviv on for Jason. I had a question about your M&A activity recently specially with the simulation business.

I was just wondering if you could talk about what the growth rate out gives you that business and how large you think it can get at this point? I know you talked about some numbers before but if you could update us there that would be helpful..

Jon, I don’t know we give any specific numbers in the growth rate. I mean I think obviously the reason that we went into the space was because we think at a macro level it’s an industry that’s going to be growing probably at least mid to high single-digits. There are different segments of the market obviously.

Our intent is to participate on the air transport side as a simulator provider. And I think you have seen that we’ve had sales that business has largely been in sort of the Boeing and Airbus commercial transport market. This win with Boeing to be the provider for 737 MAX is obviously very big deal for us.

And so obviously as the 73 MAX comes into production and they start shipping those around the world, we think we'll get some significant growth associated with that program. On the training side, it's obviously oriented towards our platforms i.e. by Cessnas and Citations, King Airs and Bell.

So, we would expect that business to grow as we introduce new products and start to do more and more training with our new customers that come on line for those platforms. So, I don't think we're going to give a specific number.

I mean it's certainly reasonable to expect that it should be in the high single-digit kind of growth based on what's going on in the marketplace. And clearly we would like to think that we can gain some share and that would help us always that to be a double digit kind of growth business for us..

Great, thanks. And I was wondering if you could update us on the cadence of business jet deliveries. It seems like things are going to be a bit smoother.

I was just wondering what your strategy has been in making that happen versus especially how it's been the past couple of years?.

We would love for it to be level loaded. Anytime you’re running a manufacturing operation and having a more consistent level load and that's how we like to manufacture and so having a working capital tie out. So revenue was great and this year has certainly been much better than last year and that was there.

And part of that is the market and gain a lot of it is driven by the fact that these are new products and so the demand has been steadier for those in the marketplace. We’re not competing with our used aircraft so things tend not to get all the way and trying to do deals at the end of the quarter.

So, I think the order flow while it’s not as strong as we’d like to see it ultimately. The order flow has been certainly a lot more level loaded through each quarter in the year..

Great. Thanks very much..

Sure..

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

Yes. Thanks a lot and good quarter.

Can you give us a split on the backlog between Beech and Cessna?.

No, I don’t think we are going to break that out Cai. Obviously you’ve got Cessna, you’ve got Beechcraft, King Airs, you’ve got the military business, it’s all going to be in that one backlog number..

Okay.

And then the margin given the size of the inventory step up look considerably better than I would have guessed for the level of volume you achieved, is that kind of -- is that sustainable or is there anything abnormal where there the used aircraft was a plus looked pretty good for the level of volume you achieved?.

No, I think we’re pretty happy with it Cai. I think that the restructuring activity associated with the synergies and combining the two businesses is on track with where we expect it to be and frankly we’re also seeing some good productivity as we’re bringing the teams together.

So it’s not just the synergies the reductions of headcounts, but I think the operational efficiencies throughout the factories were also good in the quarter and that contributed to help give us a pretty strong margin rate..

Where are you in terms of your expectation of synergies for the year, are they bigger, the same?.

I think the synergies are pretty well on track and again I think to the extent there is upside Cai, it’s the fact that we're just seeing better productivity and operation on top of the synergies..

Got it. And maybe Frank you could give us an update on pension? With the expectation of a transition next year to new mortality tables, discount rate is down.

Can you provide any color in terms of what we should expect from pension next year?.

Cai we're still looking at it and we won't have those numbers until we kind of formulate them at the end of the year and move into next year.

We have had pretty significant change in our workforce that we're running through as well and certainly interest rates where they are would put some pressure on things and the mortality rate, will put some pressure on things.

So I don't expect it to be a headwind it's just a question of kind of what type of tailwind might it be and it's probably going to be lower than what we might have thought it’s what we said here the year ago, but we're still working through those and can't give you explosive guidance on that until we actually run the numbers and get the guidance..

Terrific.

The last one TCDL are we likely to have any shipments there in the third quarter?.

Cai I hope so the biggest milestone that we needed to achieve is getting through the final operational test evaluation and we did that.

In the quarter, there are still a few things just in terms of final configurations and working through to do the official [submittle] of the ECP into the customer and so those conversations are -- and that review process is ongoing.

So I would certainly hope that we will see some initial sales in the third quarter and then the balance of our plan in the fourth quarter, but I would say worse case even if it's delayed somewhat I would still feel pretty confident that we'll get what we expect for the total year in the back half of the year..

Thank you very much..

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

Good morning, good numbers..

Thanks George..

I want to try Cai’s question a little differently.

Could you just sit there and provide of the $100 million decline in backlog how much of it roughly might have been due for Cessna and how much to Beech without breaking out the military part of Beech that’s applied to each?.

Yes, George I obviously don’t -- I do not even know the answer to it because I haven’t, we haven’t been splitting the number up that way, so I don’t think we’re going to provide that in terms of guidance or status because it will just be the segment backlog number as we would normally report.

And I don’t think there is anything that I even know to say that there have been a material difference between how much of the backlog burn off came out of the Citation jet business versus the King Air business..

Okay. And then one other on Beech. In the first quarter you’ve said dilution for the year would be about $0.08 a share.

Is that number still the same or are you just not going to even provide it given that you’ve combined everything?.

I mean, at this point, it’s a combined operation. We have reiterated our guidance that we gave the last time around. So, we’re really not tracking that separately now. It’s a combined business and we’re moving forward on that basis..

Yes. I mean George, we honestly don’t look at it that way, the engineering teams, the manufacturing teams, the sales, marketing all these teams are now fully integrated. So for us to even try to do that would be sort of arbitrary allocations of those functions to a product lines to try to come up with such a number.

So, again it’s not how we operate the business and as a result we really can’t report it that way..

Okay. And then just one in general Scott, I mean we’ve obviously seen business jet cycles improve and as you mentioned everything is going in the right direction.

Can you just kind of size up the lower end of the market versus kind of the middle end of the market as you see it today?.

So, I think the lower end of the market has been sort of stable. We’ve seen good demand and deliveries on our M2 which is a new product. I think things have been pretty steady for things like our CJ3s and XLSs.

We’re seeing a little more strength at the higher end of the market with the Sovereign pluses and the Tens but again I think that’s more driven by the fact that these are new products are getting out in the market as opposed to necessarily any real difference in generically speaking market demand between say light versus a mid or super mid size aircraft..

Okay. And then just one quick one for Frank.

What was the growth in the aftermarket business at Aviation?.

Yes, well and again it’s tough to look at the comparabilities because of we now have the Beech in the mix but we continue to believe and it’s trending at a mid kind of single digit higher single-digit type growth rate on aftermarket. So, business continues to perform well there..

Okay. Thanks very much..

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

Good morning guys, nice quarter..

Thank you..

Hey just on the strong Aviation margin this quarter the underlying rate of like 5.2%, I mean, will you guys attempt to kind of raise margin guidance for the full year from that 2.5% to 3.5% or do you have any performance concerns in the back half of the year just strictly the spot market nature of the business right now?.

It’s very much the latter Pete. I think that we’re pleased with how the integration has gone, the synergies are coming along as we expected, we feel good about plant performance, the operational side of things.

And while we like that it’s been a more stable market and we’re balanced, there is still a lot of work to do in terms of sales activity in the second half of the year result..

Okay, got it. And then just a couple of quick….

For Iraq, I just have to say I think that's our first temptation question in my experience doing IR. Thanks for that. .

Not a problem. I wanted to ask something -- a couple of program questions. It looked like you guys were negotiating with Iraq on a sale of AT6s, it looked like it could be a nice deal for you.

Is that -- what do you think about the timing on that given what's going on over there?.

Well, it's a very good question. So there has been discussions of an [AT 6T] over the Iraq. Frankly there are several things across our various businesses that have been in discussion with Iraq. And of course we sold things in Iraq before. So, I’d say, it's very hard to predict where those programs are going right now.

There is clearly a desire for the products, the Iraqis continue to express desire to acquire them, but government is awfully busy with a lot of other things right now. So it's -- the level of instability, makes any transaction difficult..

Understood, understood, okay. And last one on Scorpion. It wasn’t very long ago, the Scorpion seemed like it was going to be very kind of far out. But it seems like a lot of momentum is building and I'm just wondering what your view is.

I mean should we start thinking about factoring in some Scorpion revenue at this point for 2015, are we that far along at this point?.

I wouldn't get too far ahead of yourself just yet. So what we are encouraged, there has been an awful lot of customer interest having the aircraft to kind of make its debut publicly over here and to be seen by an awful lot of foreign militaries which is sort of our principal customer target at this stage of the game, has been encouraging.

But as you know when a military looks at acquiring an aircraft, there are budgetary cycles, there is a lot of work to do to translate something where somebody says, hey that’s very interesting, that would fit well and taking it from that discussion to an order and then a ramp up of production is going to take some time.

So I feel pretty good about where we are. I think the product is performing flawlessly. I mean the guys have done just a super job. It’s flying very well, everybody is thrilled with it, customers are very impressed with it but it’s going to take time. We really just started to market the product.

So it’s going to take a budgetary cycle or two to take interest and to turn it to doors..

Thanks guys..

Sure..

Your next question comes from the line of Miles Walton from Deutsche Bank..

Thanks, good morning and good quarter.

I think in response to question on a trajectory of Bell R&D, you talked about some of the upward pressures from the new programs and the dollar; I am curious can you do the same kind of commentary around Cessna, and particularly with the latitude probably winding down a bit on spend and a lot of it is just to do spend in particular how that cadence should look?.

So as we went into this year, we expected R&D to be down slightly at Cessna in terms of the jet business, I mean just comparing the old Cessna to the sort of piece within the current business. Just because we had so much (inaudible) activity last year that really drove certification activities that drove quite a bit of the R&D cost.

At this stage of the game, our principal aircraft that really is in the certification is latitude. So you have one instead of three and that does save us somewhat on the certification cost. So, I think that's the expectation I would have this year and I expect that to be the same next year.

I think it will probably hold reasonably flat on a consolidated basis. Right? So, if I look at what's going on, on the jet business, there was money obviously being spent at Beechcraft associated with upgrades and keeping the King Air line and T6 and AT6 lines active and I think we'll see that.

So, I guess my view going from ‘14 to ‘15 would be that it's probably neutral in terms of R&D as a percent of sales if you will. .

And is your view on the longitude and expansionary nature of Cessna jet portfolio is still the same in terms of timing for that kind of entry into service and expansion of the offering?.

Well, we're always looking at the line but I think that the trend towards investing in some of the larger aircraft will absolutely continue. So our guys continue to work in the longitude program. There's number of things we're doing. I think you'll see we continue to be committed to growing the sort of a larger end of our fleet of jets..

Okay, got it. Thanks..

Sure..

(Operator Instructions). And your next question comes from the line of Robert Stallard from Royal Bank of Canada. Please go ahead..

Thanks so much. Good morning. .

Good morning, Rob..

On the first question, I was wondering if you could comment on used aircraft activity in Textron Aviation and what sort of trend you saw there in the second quarter. .

Used activity continues to be good. We moved a number of aircraft in the quarter. I'd say the used market in general has been pretty solid. In terms of valuations, I wouldn't say we’ve seen a significant pick up although we’ve seen some of the reports, have seen a little bit of strengthening in some of the pricing, some of the lighter end.

And I think in general that’s what we’re seeing. So it's stable and most importantly the market is active, our aircraft do turnover, which is good..

Okay. Second aviation question, this might be tough. But you mentioned stability a couple of times in the business jet market and like.

But is it reasonable to start expecting some stability in the backlog as well?.

Well, I mean obviously the two are going to be correlated rather, they're still selling that goes on in the quarter for the quarter and so you can see increased levels like we've seen in this quarter of selling that doesn't have a positive impact to the backlog. But that's the result of still having a bit of spot market.

There is still more selling than we’d like to see obviously for a quarter in a quarter, we have some models out that's we've said before and pushed out where availability is out there the next quarter but there are still aircraft that are available for sale in the third quarter.

So I think as long as we have an environment that we'll kind of make it hard to see a lot of growth in backlog and we've been fighting our way through that now for five years..

And just a final one, industrial margin was a very solid in the quarter.

How do you expect this to trend for the rest of the year?.

The second quarter is always our strongest just because of the cyclical nature of the different businesses and how they contribute.

But I think what we’ve seen in the recent past and we expect to continue to see is that if you look on a year-over-year basis, we're going to continue to see some expansion in those margins and part of that's driven by volume, part of that's driven by new products and some better pricing.

So I think across the board, we feel pretty good about where those businesses are. So second quarter is usually a peak margin rate for the year, but I certainly expect on a year-over-year basis we’ll continue to see margin expansion each quarter..

Great. Thanks so much..

Scott Donnelly:.

Sure..

Your next question comes from the line of Jonathan Rice from Nomura. Please go ahead..

Hey Scott just one quick follow up on sales activity in the second half. So I think on the Sovereigns in particular I think you said that the 1Q the Sovereigns has booked about one quarter out.

Is that still the case there and how confident are you filling any empty slots for that particular aircraft (inaudible) particularly you got close to the Latitude launch date?.

Well we still see there are still some slots on Sovereign pluses that are available in the year. We have got I would say a pretty robust set of customer leads and through this year we have been in that mode and those deals have been closing.

So the Sovereigns plus has been performing really well, it has had great receptivity from customers and I would say again it’s in this market environment which has been sort of stable the demand for the Sovereign plus has been pretty good. So lots of customer interest, lots of demo flights and lots of deals that have been closing.

So I think we feel pretty good about it. The Sovereign plus versus Latitude, I mean certainly the Latitude has a larger cross section to the cabin, but it is a 6 seat aircraft as opposed to the Sovereigns which is the double club and the Sovereigns also gives you that coast to coast range.

So we still have customers that need that range capability and need that pay load capability and so I think the Sovereign plus remains a very strong platform even with Latitude into the market place..

Okay, great.

And then just to confirm one thing I think I heard APG you were talking about some data point suggesting that the used market pricing had taken another turn down but it sounds like from your comments today that the actual pricing in the used market is relatively stable, is that right?.

Yes it really does won around by model. So I think the last set of books for the first time people are talking about some positive price on some of the CJ3s for instance and things like that. But you are always -- we still continue to see some price degradations on some of the aircraft and quick part of that is just, the aircraft get old right.

So you are always going to see a certain amount of price decline. But I would say net of overall what we're seeing in terms of our transactions and sort of a book reflected in the industry is that it's been pretty stable and are in good progress..

Okay, great. Thanks..

Sure..

And you have follow up questions from Cai von Rumohr from Cowen. Please go ahead..

Yes, just one question. I mean it looks like in the quarter you kind of beat expectations from a profit line in all of your businesses. It sounds like tone of business is pretty good and you didn't raise your guidance.

Is that just being conservative or is there something we should be more worried about in the second half?.

Cai, I think that we are feeling good about our operations and how things are going.

As I said earlier I think when I look at the Aviation business as well as Bell on the commercial side, there is still a lot of sales activity to go in both of those businesses, that's kind of where we've been for some time with Cessna and I think with King Airs and we feeling good about the prospects and the customer activity and order closure rates and things like that.

But there is still a lot of work to be done. Similarly on the Bell side, I think operating performance, actions the team has been taking have been good, but even at Bell on the order side, we still have aircraft to sell.

And well that market has been pretty strong, we are seeing a little bit slower closure activity, there is a lot of bid activity, but there is not -- just from where we would like to be right now on the year the number of deals that have closed to ensure those third and fourth quarter sales has been slower coming than we would have expected.

So the year is always a bit back ended, great loaded and it’s going to be the same this year. But I think operationally we feel very good about where things are.

I would be a little conservative on upside just given the nature of how much selling activity still has to happen in the Aviation and Bell segments to close up the year where we’d like to be..

Thank you..

Your next question is a follow-up from Jason Gursky from Citi. Please go ahead..

Hi guys, it’s Jon Raviv again. Thanks for taking the follow-up.

Scott, just on that point in terms of Bell closing activity being a bit slower than expected, just wondering if you guys at all have any color to that why you think that might be the case?.

We don’t know. I think it’s kind of a sense that we’re getting across the whole industry. If you look at the reported numbers or what not, there is again still a fair bit of activity. I think part of it is some uncertainties and in some parts of the world.

I guess we have some opportunities pending in places like Russia where there has been a lot of change in their economic outlook over the last six months. And I think some of those kind of orders are kind of pending until people understand where that’s going.

There is still a fair bit of uncertainty in Latin America, there is, it’s just -- I think there is clearly demand out there but I think a lot of people are going through their processes and getting the bid packages, they see their needs, but they’re a little slow pulling the trigger right now..

Are you seeing any impact in terms of closure activity due to heightened competition with there being more players in particular segments in [aftermarket]?.

I think this is an industry wide, I mean everything that we’re kind of hearing is there is nothing unique going on at Bell, I think it’s just the industry as we serve and just kind of what’s going on in those sectors. But again deals are -- these are all competitive deals, and so the guys are putting up bid packages.

It’d be a different story if we were losing deals. It's -- I don't see any trend or significant difference in terms of a share issue there, competitive deals and bids are submitted and people are sort of just delaying making the awards..

Great, thanks so much..

Sure..

And your next question is a follow-up from George Shapiro from Shapiro Research. Please go ahead..

Yes, Scott.

I was wondering if you might comment on what percentage of deliveries at Cessna you still need to sell for the second half of the year and how that compares to where you were at this point last year?.

Sorry George, I don't know. I mean obviously we don't publish that number. I don't think there is a huge dynamic. I mean as I said, the back end of this year compared to the back end of last year has a lot more new product in it, particularly the third quarter.

So we're -- I went back to the numbers I would say we're probably in somewhat better position just because we have a lot more new product here in the third quarter. And as you’ll recall, we didn't have Sovereigns and the M2s until the fourth quarter last year.

So at least for the third quarter we're certainly in a better position than we were a year ago..

Could you comment on how many TEN deliveries you might expect or the ballpark for the year?.

No we wouldn't, we did three -- so I mean in the second quarter as we just finished the certification but we've kind of talked in general terms in the past George I think the TEN is probably sort of 6 to 10 aircraft a year kind of market the way we see it..

Okay. Thanks again..

Sure..

Alright. I believe that completes calls in queue. So thank you ladies and gentlemen for joining us. Have a good day..

Ladies and gentlemen that does conclude your conference for today. The conference will be available for replay today after 10 am Eastern Time and will be available until October 16th at midnight. You may access the replay system at anytime by dialing 1800-475-6701 and entering the access code of 307-262.

International participants, please dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844 with the access code of 307-262. That does conclude the conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..