Doug Wilburne - Vice President, Investor Relations Scott Donnelly - Chairman and CEO Frank Connor - Chief Financial Officer.

Sam Pearlstein - Wells Fargo Robert Stallard - Royal Bank of Canada Jason Gursky - Citi Cai von Rumohr - Cowen Noah Poponak - Goldman Sachs Sheila Kahyaoglu - Jefferies Julian Mitchell - Credit Suisse Joseph Nadol - JP Morgan Myles Walton - Deutsche Bank George Shapiro - Shapiro Research Ron Epstein - Bank of America Merrill Lynch Pete Skibitski - Drexel Hamilton.

Ladies and gentlemen, thank you for standing by and welcome to the Textron Fourth Quarter Earnings Call. During today’s call, all phone participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, today’s conference is being recorded.

I’d now like to turn the conference over to Doug Wilburne, Vice President of Investor Relations. Please go ahead..

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

On the call today, we have Scott Donnelly, Textron’s Chairman and CEO and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Textron’s revenues in the quarter were $4.1 billion, up $591 million from last year’s fourth quarter.

The Beechcraft acquisition completed at the end of the first quarter contributed $556 million to the increase. Income from continuing operations was $0.76 per share compared to $0.60 in the fourth quarter of 2013.

Textron Aviation operating results included an $8 million reduction to segment profit from fair value but the fair value step-up adjustments to acquire Beechcraft inventories sold during the quarter.

Plus there was an additional $13 million charge in the quarter related to Beechcraft restructuring costs which were recorded on a separate line for acquisition and restructuring cost. Together these items reduced EPS by about $0.05 per share.

Manufacturing cash flow before pension contributions was $449 million dollars compared to $774 million in last year’s fourth quarter bringing full-year cash inflow to $753 million compared to $256 million last year. With that I’ll turn the call over to Scott..

Thanks, Doug, and good morning, everybody. Revenues were up 16.8% in the quarter reflecting the success of our strategy of investing in new products and complementary acquisitions.

For example, at Industrial, we saw an 11.5% increase in revenues reflected across all of our business as well as the impact of the technologies, Dixie Chopper and HD Electric acquisitions. Most recently, in our specialized vehicles group, we purchased Douglas Equipment, a European-based aviation ground support business.

Douglas Equipment are largely North American truck business with an international footprint, expands our truck portfolio to better serve the aviation ground support market.

On the new product front, the Tools & Test, we introduced a number of new products during the quarter, including a new line of Mini fiberTOOLS for working on fiber optic communications facilities, and a new 6-ton Pistol Grip intelligent electric utility crimping tool.

Contracts, we continue to win significant new automotive systems contracts around the world which we expect will support growth over the next several years. Operating performance was also a bright spot in this Industrial in the quarter, contributing to a full-year margin expansion of 40 basis points. We expect continued margin expansion in 2015.

Moving to systems, revenues were up in the quarter as we began deliveries of the TCDL Shadow V2 systems. We also made good progress on our Canadian TAPV program having incorporated the necessary design changes and have started initial reliability testing of the vehicle.

We believe we’re on track to proceed full program testing in the second quarter with initial deliveries still planned for late this year. At TRU Simulation and Training, we signed a number of air transport simulator agreements in the quarter and announced plans for a new Cessna in Beechcraft aircraft maintenance training facility in Wichita.

In our Bell segment, revenues were down as we delivered seven V-22s compared to 13 in last year’s fourth quarter, reflecting a start of lower deliveries called for in the multiyear program. We also delivered seven H1s, up one unit from last year’s fourth quarter. On the commercial side, we delivered 57 aircrafts, down from 75 a year ago.

Despite lower Bell volumes, fourth quarter margins were up 70 basis points from last year reflecting good cost performance. While we’ve seen a slowdown in the commercial helicopter market, our commercial win rate continues to improve around the world.

For example, we continued to expand our presence in China as evidenced by our success in the Zhuhai, China Airshow in November where we signed customer letters of intent for 61 new helicopters.

We continue to make progress on development of our 525 Relentless program as we’re well into our safety flight testing on the aircraft rudder system in [indiscernible]. Results of those tests have been encouraging and we expect the first flight later this spring.

Development of our 505 Jet Ranger X program is also proceeding well as we conducted a successful first flight in November. These two new platforms are expected to provide differentiated appeal with customers at both ends of our product spectrum and should create significant growth opportunities for years to come.

On the military side of Bell, the V-22 reached 250,000 flight hours during the quarter. The aircraft is performing very well for our customers, achieving outstanding mission success and deployments to Afghanistan, the Persian Gulf, the Mediterranean, Africa and the Asia-Pacific region.

The Osprey continues to demonstrate a wide range of mission capabilities and is attracting attention from customers around the world. Most recently, Japan has indicated that it has provided for the first five of its 17-unit requirement in their 2015 budget. We’re currently working with the U.S.

government to negotiate a contract and delivery plan for this aircraft. Moving to Textron Aviation, in the quarter we delivered 55 jets, down from 62 last year. For the full-year, we delivered 159 jets, up from last year’s 139 jets. We also delivered 41 King Airs in the quarter bringing post-acquisition deliveries to 113.

The integration of Beechcraft continues to grow extremely well which is evident in our cost productivity as Textron Aviation achieved full-year margins of 5.1%, about 200 basis points higher than the mid-point of our initial guidance.

We’ve been actively working with our new Hawker customers this past year, ensuring that they understand our commitment to support the aircraft.

During the quarter, we also made progress internationally as we opened a new larger combined Hawker, Beechcraft and Cessna service center, our flagship European maintenance location at the Paris Le Bourget airport. In addition, we delivered the first two XLS aircraft to our Chinese joint venture at Zhuhai.

Development of our new Latitude continues to go well as we now accumulated 500 test flights generating 12,000 test hours. Customer response to Latitude continues to be positive following its debut at NBAA.

Customers in the North America are currently flying demo flights and they’re impressed with the spacious stand-up cabin and $2,700 [indiscernible] range that Latitude offers. We expect Latitude deliveries will begin in the second half of this year.

On the market front, new jet customer interest and inquiry activity has been noticeably better than a year ago. We’re also encouraged that available used aircraft continues to come down, which is resulting in used aircraft moving fairly quickly and the stabilization of residual values, especially for used aircraft with low hours.

On balance, we believe our best path forward at this point is to remain conservative with respect to increasing production and to continue in our path for new product developments. To summarize, we believe we ended the year with strong EPS and cash flow performance.

And throughout the year, we took actions that should position our businesses for continued growth over the next several years. Textron systems began deliveries of the TCDL V2 system retrofit program and made a good progress in getting the Canadian TAPV program back on track.

We advanced our Ship to Shore program and began initial production activity to support first delivery plan for 2017. We also signed additional international contracts Sensor-Fuzed Weapons that we expect will support production at current levels for 2016.

And we’re gaining traction with some of our new product platforms such as the unmanned naval mine detection system for which we won an initial U.S. Navy contract on October.

At Industrial, our double-digit top line growth this year reflects our continuing investment in new products such as the new electric Bad Boy Recoil iS hunting vehicle and specialized vehicles and the DataScout 10G Ethernet Network Analyzer at Tools & Test.

Industrial growth was also the result of ongoing acquisitions which demonstrates our ability to leverage these businesses for growth and long-term shareholder value.

At Bell, we continued to improve our win rate in the commercial helicopter markets based on attractiveness of our new and upgraded products, our industry-leading aftermarket support and our expanding sales business around the world.

We’re also winning on the military side as we were included among the finalist to proceed with our V-280 platform for the U.S. DOD future vertical program. We also made good progress with our cost structure as we compared to the ramp-down in military production of V-22. Looking to 2015, Bell top line will down overall.

But we expect commercial to grow based on what we’re seeing in the customer pipeline and market opportunities for the year. We expect Bell to return to overall top line growth in 2016 and ‘17 with the introduction of the new 505 and 525 models.

Textron Aviation, we brought the Hawker, Beechcraft and Cessna brands under one roof allowing us to offer a much wider array of products and services to our customers significantly improving cost productivity. Looking to 2015, we anticipate moderate growth driven by our strategy and the Beech acquisition.

To finish with Textron’s 2015 financial guidance, we’re projecting revenues of about $14.4 billion with EPS from continuing operations in the range of $2.30 to $2.50. Manufacturing cash flow before pension contributions is expected to be in the range of $550 million to $650 million. With that, I’ll turn the call to Frank..

Thank you, Scott, and good morning everyone. Segment profit in the quarter was $398 million, up $91 million from the fourth quarter of 2013 on a $590 million increase in revenues. Let’s look at how each of the segments contributed, starting with Textron Aviation.

At Textron Aviation, revenues were up $597 million from this period last year, reflecting a $556 million impact from the Beechcraft acquisition, higher volumes and favorable mix. The segment had a profit of $130 million compared to $33 million at the Cessna segment a year ago.

This reflected improved performance including the impact of the Beechcraft acquisition and favorable volume mix and pricing. Backlog in the segment ended the quarter at $1.4 billion, approximately flat with the end of third quarter. Moving to Bell, revenues were down $304 million, reflecting lower V-22 and commercial deliveries.

Segment profit decreased $32 million from the fourth quarter in 2013, primarily reflecting the lower volumes, partially offset by favorable performance. At Textron Systems, revenues were up $212 million, reflecting higher unmanned systems volumes and the impact of acquisitions partially offset by lower Marine and Land system volumes.

Segment profit was up $10 million, reflecting the higher volumes. Industrial revenues increased $89 million due to higher overall volumes and the impact of acquisitions, partially offset by unfavorable impact from foreign exchange. Segment profit increased $13 million, reflecting favorable performance and the impact of higher volumes.

Finance segment revenues decreased $4 million and profit increased $3 million. Non-accrual accounts ended the quarter at $81 million, down $21 million from the end of the third quarter while 60 day delinquencies were $57 million, down $13 million in the quarter.

Moving below the segment profit line, corporate expenses were $58 million and our tax rate was 25.8%. The fourth quarter tax rate benefitted from the U.S. R&D tax credit law passed late in the quarter as well as increased profits in the international jurisdictions with lower tax rates.

Interest expense was $40 million, up from $27 million a year ago, primarily reflecting debt cost related to the Beechcraft acquisition financing. During the quarter, we issued $350 million in notes and an effective rate of 3.9% and implemented an early redemption of $350 million of the existing 6.2% notes that were coming due in March of this year.

We also repurchased 545,000 of our shares at an overall cost of about $21 million. For the full-year, we repurchased about 8.9 million shares at an overall cost of about $340 million.

At the end of the year, with $3.1 billion in total company net debt, with gross manufacturing debt of $2.8 billion, resulting in a year-end manufacturing debt to EBITDA multiple of about 2x.

The work we’ve been doing over the past several years to strengthen our businesses and our balance sheet was recognized earlier this month by S&P with a credit rating upgrade to mid triple-B which is consistent with our targeted rating.

Turning now to our 2015 guidance, beginning with our segments on Slide 9, at Textron Aviation, we’re expecting about 9% revenue growth, bringing revenues to about $5 billion, reflecting our new product strategy and the additional two-and-half months of revenue from the Beechcraft acquisition.

Segment margins are expected to be in range of 6.5% to 7.5%, about 200 basis points higher than 2014 at the midpoint. This includes 13 million in the remaining Beechcraft fair value step-up adjustments for 2015.

At Bell, we expect overall revenues of about $4 billion, reflecting an approximate $600 million decline in military revenues, partially offset by higher commercial revenues with expected margins in the range of 11% to 12%.

At systems, we’re estimating revenues of about $1.7 billion, approximately 5% higher than last year, primarily due to growth at Marine and Land and TRU Simulation and Training. Segment margins are expected to be in the range of 8.5% to 9.5%.

At Industrial, we’re expecting solid growth in each of our businesses resulting in 8% segment revenue growth to about $3.6 billion with estimated margins in the range of 8.5% to 9%. At Finance, we are forecasting segment profit in the range of $10 million to $15 million.

Turning to Slide 10, we are estimating 2015 pension cost will be about $150 million, up from $128 million for 2014. This reflects a U.S. plan discount rate of 4.25%, 75 basis points lower than last year, the new mortality tables and the impact of the Beechcraft acquisition.

However, we estimate that the P&L impact is relatively neutral on a year-over-year basis. Turning to Slide 11, R&D is expected to be approximately $600 million, up from $556 million in 2014 representing approximately 4.2% sales.

We’re estimating CapEx will be about $475 million, up from last year’s capital expenditure of $429 million reflecting our investment in new products and geographic expansion. Moving below the segment line and looking at Slide 12, we’re projecting about $175 million for corporate expense.

2015 interest expense is estimated at $135 million reflecting the favorable rate from our fourth quarter refinancing activity and lower interest cost related to the Beechcraft acquisition financings. We’re assuming a tax rate of about 30% and a flat share count of about 280 million shares reflecting share repurchase to offset dilution.

That concludes our prepared remarks. So, operator, we can open the line for questions..

[Operator Instructions] Our first question comes from Sam Pearlstein with Wells Fargo. Please go ahead..

Good morning..

Good morning, Sam..

Can you talk about - I guess oil prices is just something - you talked about commercial helicopter growth, so I guess first piece is how is that affecting in Bell and then secondly, if you can talk a little bit about how that’s impacting Caltech since I would presume you’re going to get lower commodity cost but also have a little more FX situation there..

So Sam, in terms of Bell, it’s sort of at the margins. As you know, we probably are less than 10% of our commercial helicopters in the oil and gas market. Frankly, that’s a number we’d like to see higher.

That’s part of the rationality of the investment in the 525 because I do think over time that will continue to be a large market segment that we would like to participate in a bigger way. But at this point, it’s a fairly small piece.

Most of our aircraft are in service in that market or still flying to a lot of the Gulf of Mexico rigs and things like that. So I think there’s probably some softness in the exploration world but in terms of our customers operating the aircraft under contract of the existing operating rigs, we haven’t seen really material change in that.

In terms of what it means from a commodity cost standpoint, most of the contracts that we have in the automotive world, we largely pass through increases and decreases on commodity, so I don’t expect it to be a big swinger one way or the other..

Thanks. And then just if I could follow up, Bell in Aviation, if I look relative to what you said, revenues would look like back in October versus what they were now, seemed like a shift.

Did any of that shift to 2015 or can you talk a little bit about what happened on the top line with those?.

So if you look at Bell, certainly the commercial market was softer than we expected earlier in the year and so that accounts for the bulk of the lower revenues at Bell. As I said earlier, I do expect to see some pick-up.

There’s not a specific thing in this story [ph] that carry over from quarter to quarter but there certainly are a number of opportunities in the marketplace that we feel we’re likely to win that would help us see a slight uptake in commercial activity in 2015 versus 2014.

And then on the systems front, the big impact really for us on the year was the TAPV program which moved from 2014 to ‘15. And so we’ll start deliveries of those systems in the latter part of this year..

Thank you..

Then we’ll go to Robert Stallard with Royal Bank of Canada. Please go ahead..

Thanks very much. Good morning..

Good morning..

Scott, before, you said it looks like the business jet environment has turned a corner.

Looking forward, how long will it probably require for you to see some decent order intake before you’d start contemplating rate increases?.

Rob, we - obviously, this is something we kind of look at on a month-to-month basis. At this point, clearly, we - if the order rate did increase and things did get appreciatively stronger, we could make some adjustments that would increase our production rates in the latter part of the year.

Still, at this point, but that’s really something we look at on a month-to-month basis based on realized orders. So it’s certainly better as we said, the amount of activity.

And the first quarter is never early in the year necessarily a strong time in terms of orders but the reality is a lot of the customer conversations and demos and activity that we saw in the latter part of last year led to good orders.

It seems to be continuing into the first part of this year, so we definitely feel good about where it is versus a year ago but we’ll probably delay here in terms of making any commitments to increase any kind of production rates until we see more of those orders actually fall into the backlog..

Thanks. And as a follow-up, one of your competitors decided to pause development of one of their models.

Do you see this as specific to the model they’re working on or reflective of the broader market?.

Well, Rob, I think it’s the fact that this is a very competitive segment of the market and if you’ve got to make calls in terms of your prioritization, it doesn’t surprise me that that’s the one that you would prioritize out..

Great. Thanks..

Then we’ll go to Jason Gursky with Citi. Please go ahead..

Good morning, everyone..

Good morning..

Scott, I was wondering if you could just talk about the portfolio, broadly speaking, and your view on the outlook for the need to add or subtract from the portfolio and your view on the acquisition outlook and pipeline going forward?.

Sure. Look, that’s a very dynamic thing, right? I mean we’re not - we sort of keep an eye out across all the businesses and look for opportunities that we think are deals that we can do, that we can make highly accretive and bring a lot of value and good leverage into the company.

So clearly, if you look back at 2014, the Beechcraft deal was obviously a sizable deal. There’s not a lot of those kind of deals that are out there but that’s one that we looked at and said we think we can acquire that, integrate it and make it be good for the customers and good for our shareholders.

And I think that that worked, obviously, in a smaller way in terms of the magnitude of the size of the deals. Over the last couple of years, the technologies of the world and the Sherman + Reilly’s and the acquisitions of our simulator businesses, I think these are deals that have been good deals.

And they’re performing at or above our expectations and I think are bringing good value to the overall company. So we’ll kind of keep an eye out on all fronts. And we don’t feel like we’re under any pressure to have to go do any deal.

I mean most of our focus on a day-to-day basis with our businesses is very organically focused and around developing new products. But if something comes along that looks like it makes sense, we’ll always take a look..

Great. Thanks..

We’ll go to Cai von Rumohr with Cowen. Please go ahead..

Yes. Thanks so much. So maybe you mentioned that you expect Latitude deliveries in the second half. My recollection is you were expecting them before mid-year. Has that slipped at all? And maybe also give us an update on your larger plane, the Longitude..

Sure. So, Cai, I think we’ve talked about certification that could happen here in the second quarter where I think we’re still on track for that. The program is going very well. There’ve been no issues, technical or otherwise. The aircraft is flying great. We’re working our way through the test programs. The search schedule seems to be going very well.

But getting all the Ts crossed and the Is dotted and when that happens in the quarter, I think at this point, we’d say that means that likely if you get a second quarter cert, you’re probably going to have third quarter deliveries. So if things go really well, could we pull an aircraft or two into the quarter? That’s, I guess, possible.

But at this point, our experience on getting through the final cert is - just getting through the paperwork process is not always easy, so we’ll keep working hard. But the program is in great shape. It’s going as we expected and we’re really pleased with it. So in terms of Longitude, that program is ramping up pretty significantly.

Teams are actively working. We think we know what the configuration of the aircraft is based on a lot of work with customers and where we are. So you’ll see that really started ramping up in the latter part of last year and through all this year..

Okay.

And could you give us any more color on new products in the aviation sector? Like when is Longitude going to come and do you have any other introductions we might see in the next year?.

I think that we’re prepared to announce it this time. I do think, Cai, that you will see a debut of the Longitude sometime in the not too distant future..

Got it, okay. Thank you very much..

Sure..

Let’s go to Noah Poponak with Goldman Sachs. Please go ahead..

Hi, good morning, everyone..

Good morning..

Good morning..

Just going back to the topic of the polls [ph] you’re keeping on Cessna production and the overall health of the business [share market].

Can you update us on whether or not lead times have extended for your customers since your October update or how far sold out you are and then what that number needs to be? I think in the past, you said, you wouldn’t let a customer wait nine months just trying to see how close we are to getting to that point..

Oh no, it’s a tough question you’re asking. It really does vary model by model. You know what I mean..

Yes..

We have somewhere - again we had customers that - some would have liked probably a fourth quarter delivery that is moved out in the first part of this year because we did get that sold out point on some of those aircraft. But generally speaking, as I said, look, we’d like to be in that six to nine months.

Clearly, that’s not where the business is right now. But some models are - some are fairly strong in the future quarters. And others you still have availability that’s within the quarter.

Obviously when you talk about new products like the Latitude, there’s order book on that but that’s dated obviously by getting some certification in the first delivery. So it’s --.

Okay..

I’d still - as I said, I’d love to see every model sitting in that six month or so timeframe. And they’re not. But I think the momentum in that direction certainly has improved over the past six months..

But it sounds like that hasn’t really - I mean I know it’s a pretty short period of time but it sounds like that hasn’t really extended from your third quarter update..

It has on a couple of models..

Okay..

But there are still some models that are available for sale within the quarter..

And do you have a projection for how many Latitudes you’ll deliver this year?.

We don’t..

Okay.

And can I ask you that same question on Bell commercial units?.

So we’re not putting a specific number out on the Bell commercial units. No, but I would say it would be sort of up modestly from the deliveries in 2014..

Okay..

It’s pretty much across the product line in terms different models..

Okay.

And is anything improved there from an end market perspective or did you just get a little bit easier in comparison? Or has anything changed there?.

No, no, it’s okay. It’s a market that honestly, we don’t really know what has driven a lot of the slowdown. But people have been a little slower to commit capital. But the deals are still being talked about, right. So it’s not like we had back in the business yet days where things really just kind of came to an absolute screeching halt.

So we’re certainly disappointed with the rate of order intake and sales in 2014. Opportunities are out there and discussions are happening. And I think there are still deals that are going to be done. And a lot of those I think for whatever reason, just appeared to have been delayed from ‘14.

And I certainly don’t think all of them are going to come through. But I think they’ll - our expectation certainly is there will be more activity in ‘15 than we saw in ‘14..

Okay. Thanks very much..

Sure..

We’ll go to Sheila Kahyaoglu with Jefferies. Please go ahead..

Hi, good morning. Thanks.

In terms of Textron aviation margins into 2015, just given your underlying margin rate was about 8% in the second half, how do we think about mix in price and R&D heading into next year?.

Well, I think, Sheila, we think about price next year as probably being very slightly improved from ‘14. Mix will probably be fairly similar. I mean we already shifted in ‘14 to sort of higher ASP, larger aircraft which we saw versus ‘13. In terms of margin, we’re expecting obviously to see good conversion on leverage.

Don’t forget we have almost a full first quarter of the Beech acquisition which was not in 2014. So there’s almost a quarter of worth for the Beech acquisition that doesn’t bring with that kind of increased leverage in terms of volume. But to back that out, overall, I think we feel pretty good about where the margins are going.

And we’ll probably see mid-20s conversion on the stuff that’s really true; volume growth in 2015 versus ‘14..

Got it. And then just on cash flow looking into ‘15 again. What are the working capital assumptions on that 550 to 650 guidance? And I guess, what are you assuming happens to inventories at Bell and Cessna? Then just a quick follow up on that, the capital allocation question asked before.

I think you had a small bolt-on in the interiors - for an interiors business in the aviation last week.

Can you talk about how you’re thinking about for ‘15 the allocation of buybacks versus additional deals?.

Okay. In terms of Bell, I mean we are - we’re still going to see some pressure around a buildup of 505 and 525 as we get into the latter part of the year. So that will pressure somewhat some of our working capital on specifically at Bell.

In terms of the bolt-on deal, we had a - it was a UTX business that’s been doing all the interiors for our aircrafts for some time. It’s basically, almost entirely, our shop. I mean it really - they did a little bit of work for Bombardier.

But most of the work was for Cessna and we thought we could try better productivity and better integration, frankly, with our manufacturing lines if it was something that we picked up. And it’s nice that they were interested in disposing out.

So I think we came to good terms that were good for both companies and it gives us a little more control over what’s the very important part of the customer experience in terms of the interiors of the aircraft. So it’s a relatively small deal.

But I think a good deal for us, both financially as well as just making it better integrated with our overall manufacturing operations for our aircraft. In terms of the capital allocation, Sheila, we’re continue to kind of focus on committing as a minimum stock buyback to prevent dilution of employee program and so we’re committed to do that.

And as you know, we’ll always keep an eye out for acquisition activity. And from a stock buyback standpoint, if we think there’s optimistic points in time to the course of the year to do additional buybacks, then we’ll certainly do that if we think it makes sense..

Great, thanks..

Sure..

We’ll go to Julian Mitchell with Credit Suisse, please go ahead..

Thank you. Just a question on the balance sheet and the target leverage. I mean, I think, Frank, you had said that the rating you now have from the agency is what you’re looking for.

Where do you feel the kind of optimal leverage is? And I guess, second, back to Scott, when you talked about looking opportunistically on buyback or M&A, again what size of capacity do you think you have over the balance of this year to use that leverage?.

Yes. So from a leverage standpoint as I indicated, we’re around the area that we’re comfortable at. We think about it as 2x to 2.5x that EBITDA against manufacturing debt levels. And that’s where we’ve gotten into. So kind of we’ll - they paid down a little bit more of the debt associated with the Beechcraft acquisitions here.

But we’re still pretty comfortable with our overall debt levels. And I think in terms of acquisition capacity, it really obviously depends on the transaction. I think we demonstrated kind of that we had capacity with the Beechcraft acquisition obviously to do something that was meaningful for the corporation to do with all debt.

And kind of bring it in, drive the synergies out of it, and deleverage relatively quickly some of that debt to our performance. So it will very be deal-specific. But we don’t feel like we are constrained relative to the types of things that we think about as being potentially available out there in the marketplace.

And we would obviously finance anything appropriately to maintain the type of leverage levels that we’re talking about in targeted rating categories..

Thanks. And then for Scott just on Bell, the guidance for 2015. I think your guidance implies of the midpoint, the sort mid-high 20s, decremental margin. Maybe you have a little bit of color on how the fixed cost base at Bell, where you are of the reductions there.

And also the impact of the ERP rollout is on the margins in ‘15 and maybe further out please..

So I think if you look at the cost activities, we’ve taken some pretty major restructuring over the last year and a half or so to align the business with where we expect to be particularly driven by the known volume around B22. I think we’re largely there. We’re always going to continue to look at cost and further cost reduction programs.

So I think in terms of what we set out to do knowing what was going on with B22, we’re there. Now obviously, we’re going to continue to watch the commercial market. And any further softness or impact or not meeting expectations around commercial would lead us to do more on cost reduction.

So I think we’ve demonstrated that we can do what we need to do the structural cost of the business appropriately. And if volume further adjusts, then we’ll further adjust cost..

And just on the ERP, what’s the effect on margins year-on-year is this year?.

So the ERP, the impact at this point is probably largely behind us. We did have a headwind, and obviously in 2014, as a result, a lot of the inventory that was built and cost that was inventoried through that process. So at this stage in the game, most of that is largely in line [ph]. The system is working.

It continues to improve and I - it was a painful process but I think we ended up in a better place. So at this point, from an accounting standpoint, most of those headwinds associated with that really played itself out through 2014. So that helps us a bit as we head into 2015..

Right. Thank you very much..

Sure..

Our next question comes from Joe Nadol with JP Morgan. Please go ahead..

Thanks. Good morning. Starting on Bell, the margin was quite strong and the quarter is better than it’s been for a couple of years. Is that - kind of the ERP kind of wearing off? I would have thought that the mix in Q4 with V-22 coming down would hurt you a little bit but just looking sequentially, you had a good quarter..

Well, I mean, it did, Joe. And clearly, the cross-reduction activity is working. We did start to see less of a drag, I suppose, of the ERP activity now.

We did have somewhat prior deliveries of V-22s than we expect to see on a quarter-by-quarter basis going forward because we still had a little bit left of the original multiyear and then the last deliveries on the multiyear two.

In general, I think what you saw was just strong performance by the business largely driven by the cost activities that they’ve taken over the last couple of years..

Okay. And then on the commercial front, just a push on that one more time because it does seem at odds with - in terms of the outlook for growth ops with what - that we’ve seen from you guys, what we’re hearing from you and also some of your competitors.

Is this fleet bids that are out in the marketplace that give you some confidence? Is it one-off or twosies and threesies kind of small business orders? Is it U.S., is it international? Where are you seeing a pick-up in activity?.

It’s sort of all of the above, Joe. I mean, obviously the fleet deals can move the needle on these things when you get a quantity buy. But it really is across the board. There’s cases of two or three 412s here, two or three 412s there which are meaningful opportunities for us..

Okay. And then, just finally, on the aviation margins front, a real bounce-back here, obviously. And you talked about some of the - we know some of the positives coming into 2015. You obviously beat your guidance in 2014 by a pretty significant amount.

So if I were to pose it this way, what’s going to prevent you from beating it by a couple of hundred basis points again in 2015? What are the pressures you’re seeing? What would you say?.

Well, look, largely, the reason we had such an outperform on our - versus our guidance this year was that a lot of the synergies that we expected to get in the Beechcraft deal happened. And they happened quicker than we would have had in our plans. So we realized an awful lot of that into this year.

So there’s clearly some knock-on benefit of that as we go into 2015. And as we’ve said, there’s other projects and programs this coming year, although, we tend to put the cost and the benefit sort of wash [ph] in 2015. But I think the team just - they beat because they got to the synergy levels, to that run rate faster than what was in the plan..

Okay. All right, thank you..

Sure, Joseph..

We’ll go to Jeff Sprague with Vertical Research. Please go ahead. Mr. Sprague, your line is open. Check your mute button. We’ll move on to Myles Walton with Deutsche Bank. Please go ahead..

Thanks. Good morning. I was wondering, with respect to R&D in the slides, you pointed out - this might be more of a correction for Bell - or sorry, Beechcraft, the $556 million full-year R&D and I think if you go back last year, you expected to do about $490 million.

Is the delta there Beechcraft or is it broader than that?.

No, it’s largely driven by the - the original guidance didn’t have the Beechcraft deal in there, so it’s largely driven by Beechcraft incrementals..

Okay.

And the other clarification, I guess to Joe’s question, maybe when you close out the multiyear on the V-22 in the quarter, did you have a significant positive EAC [ph] that helped the margins at Bell?.

We did have an EAC that reflected part of the wind-down of the multiyear. So --.

But it puts [indiscernible] trend over the last couple of quarters?.

I think if you look at the total EAC adjustments in the quarter, and obviously you’ll see the data for the total business, that wasn’t inconsistent really with a typical quarter for us..

And then the last one.

Within Cessna, the mature programs versus new programs, XLS, is that softness there mostly attributable to the coming of the Latitude? And what are you broadly seeing between mature and new programs in 2015 in terms of delivery mix?.

So I would say fairly balanced. I mean, obviously the Latitude will give us a little bit of an uptake on the new product front. XLS is not particularly soft. I think that’s a market, if you look at those two aircrafts, you’ve got a significant range difference with a Latitude of 2,700 versus an XLS at around, I want to say, 2,000 to 2,100.

I’m just going to go off memory here. And clearly a very different price point. So it’s - cabin size, range, all those things that generally drive differentiation between aircraft, there’s a pretty big spread between an XLS and a Latitude in terms of its performance and cabin size, and as a result, correlation in price.

So we really don’t see the Latitude as eating into much of the XLS market segment..

All right, thanks..

Sure..

Our next question is from George Shapiro with Shapiro Research. Please go ahead..

Yes. I wonder if you might break out - you said the book-to-bill at aviation was about 1. Scott, I was wondering if you could break out what it would have been if we took out the defense piece of Beech as well as the turboprop so we kind of just looked at the jet business..

George, we’re - the book to - all the backlog will be reported just as a single number. But to your point, there’s going to be volatility, obviously, from quarter to quarter depending on what’s going on in the market. And we had T-6 orders in the quarter for instance with Mexico which you saw but we also had T-6 sell [ph] in the quarter.

So we’re not going to break that number out. It’s just going to be a single backlog number for the aviation segment..

Okay. And then if I looked at the incremental margin and tried to make some estimates for what it would be just to Cessna by itself, Scott, it’s probably around 50%. And if I look at your guidance for ‘15 between the high and the low, the incremental ranges from 21 to 33. So to your point, the midpoint is in the mid 20s.

Can you walk through kind of the drivers for the 21 to 33 next year and what doesn’t recur in this quarter with the - what looks like 50%? And I recognize part of it is I’m taking out Beech and Beech is in your numbers for next year..

Yes, George, I want to make sure I follow along. When we look at leverage on kind of incremental, which is how we generally look at it, we’ve been kind of sitting on that - it was actually - it was pretty high from Q2 to Q3, it was a little lower from Q3 to Q4.

And we always have, again, that volatility, we have more cost around SG&A in Q4 with the NBAAs, and again, a lot of ramp on the R&D side particularly on Longitude, obviously continue flight testing on Latitude.

So we kind of look at this on a total year-over-year basis, so if you look at our guidance for next year and you backed out the incrementals of the first quarter of Beechcraft, which is additive, I would say, as opposed to leverage, we still think and we’ve always said that we’re going to probably sit somewhere in that mid-20s of leverage on the volume.

And it’s pretty much across the whole product line. It’s not particularly mix-sensitive. Our gross margins are pretty good across the whole line of products. So I think the midpoint of where we are looks at about a 25% leverage on that incremental volume on a year-over-year basis..

Okay, thanks very much..

Okay..

Let’s go to Ron Epstein with Bank of America. Please go ahead..

Hey, Scott. Good morning, guys. Maybe changing gears just a little bit. Scott, there’s been a bunch of press lately - not a bunch, but some press lately about potential Scorpion deals with the UAE, maybe even Nigeria. I was wondering if you can give us any color, broadly speaking, on what’s going on with that program and international interest..

So there is still significant international interest. We have conversations ongoing with several customers. There’s starting to be some reasonable RFI and RFPs sort of formal activity of countries that are looking at replacing the exact kinds of aircraft that we anticipated this aircraft would address in terms of the market.

So we feel pretty good about that part of the uptake obviously in R&D as we go into 2015 as we’ve had a very successful series of flight test programs through 2014, some good customer demos and sort of debuted the aircraft at Farnborough and Riyadh.

We certainly expect that stuff to continue in 2015 and we’ll be at a point now where we expect to be responding formally to some customers’ RFPs. We are proceeding with the manufacturer of the first conforming aircraft so that we’re ready to enter into certification testing.

And so that’s why you see a little bit - part of the increase in R&D from an overall company standpoint reflects our commitment to move forward on the program..

Okay, great. And then maybe just one more broad one on the biz jet market. Given some of the troubles that your competitor to the north has had, you’ve seen the Lear 85 get paused, whatever that means, so that’s, I guess, out of the market for a while.

Have you seen much irrational competition given that there’s some discussion that Bombardier needs to generate cash?.

Well, look, I mean our sales force will always tell you it’s always the other guy that’s being irrational. Of course, I mean this is just the nature of selling but yes, we think we’ve seen some top [ph] pricing in some places. But frankly, over the last year or so, I would say there’s been kind of a stabilization.

So each of the products that’s out there in the marketplace has kind of achieved a price point and I think that’s been pretty stable over the last year or so. We’d like to see higher, obviously, but it’s a competitive marketplace..

Okay, great. Thank you..

Sure..

And our final question will come from Pete Skibitski with Drexel Hamilton. Please go ahead..

Good morning, guys. Scott, I just want to follow up on the Citation XLS again one more time. I mean deliveries went down pretty sharply this year especially the fourth quarter.

Did that surprise you, I guess, is my question? And just directionally into 2015, are we at kind of a new lower level now or maybe is China going to help pick that up?.

Well, I mean we saw the first couple of XLSs into China obviously. I do think overall our year in ‘14 was skewed towards the new products like the new Sovereign Plus being out there, the X-Plus being out there and so I think that had clearly some influence to the market.

But I would expect XLS Plus - again, the demand we see would - it should be pretty stable..

Okay. And then just a last one.

Could you give a sense of what sense the aftermarket grew in 2014 and 2015 expectations?.

Our aftermarket businesses are growing around mid single-digits and I would expect that that’s where they’ll continue to be..

Okay, thank you..

Sure..

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