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

Thank you, Tani, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in our earnings release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Moving now to second quarter results, starting with Slide #3. Revenues in the quarter were $2.8 billion, down 6% from a year ago. Our income from continuing operations was $0.40 per share, which compares to $0.58 in the second quarter of 2012. Moving to cash flow. Second quarter manufacturing cash flow before pension contributions was a $362 million use of cash, and second quarter pension contributions were $17 million. With that, I'll turn the call over to Scott.

Thanks, Doug, and good morning, everybody. We saw solid revenue growth at Textron Systems in our Industrial businesses, as well as strong commercial orders of Bell. On the business jet front, demand continued to be soft. As we announced in April, we took cost, production and pricing actions appropriate for this market environment. Specifically, we re-lowered our light jet production line rates, reduced associated direct headcount, downsized our indirect workforce and reduced our jet discount allowance. As we expected, reduced discounting to entice customers into the market did result in lower sales volume, as we delivered 20 jets compared to 49 a year ago. However, we achieved positive new jet pricing on both a sequential and year-over-year basis, which was our intent. We still believe the overall market demand will eventually recover as global economic -- the global economies continues to expand. With respect to the rollout of our new M2, Sovereign and Ten product lines, we're making good progress with certification testing. The aircraft are performing extremely well, although minor delays in avionics software certification has slightly delayed initial delivery dates. We would now expect M2 and Sovereign to begin shipping in the fourth quarter this year, with the new Citation Ten early next year. This will reduce total expected 2013 shipments resulting in a new full year Cessna revenue outlook of just over $3 billion. Looking longer term with new products, we're making good progress on our Latitude and Longitude platforms planned for service entry in 2015 and '17. In fact, the first Latitude fuselage and nose sections were mated last week, and we're on track for flight test early next year. Market receptivity for this new model has been a very good, as we conducted a 19-city tour with our mock-up during the quarter. Finally, on Cessna,…

Thank you, Scott, and good morning, everyone. Segment profit in the quarter was $213 million, down $97 million from the second quarter of 2012, on a $880 million decrease in revenues. Let's look at how each of the segments contributed, starting with Cessna. Second quarter revenues at Cessna were down $203 million on a year-over-year basis, reflecting lower jet deliveries. The segment had a loss of $50 million, primarily due to lower volumes, along with the impact of $28 million in pretax severance costs. We would expect that expense savings would offset most of the $28 million by the end of the year. At Bell, revenues were down $31 million, primarily due to lower commercial helicopter volume. Segment profit decreased $17 million, reflecting the lower volume and an unfavorable mix in our commercial business. At Textron Systems, revenues were up $33 million, primarily due to higher volumes in our UAS and weapons and sensor product lines. Segment profit decreased $6 million, reflecting a larger mix of lower-margin service contracts. Industrial revenues increased $45 million, reflecting higher volumes across most of the businesses and an increase from acquisitions. Segment profit increased $18 million, primarily due to improved performance and the higher volumes. Moving to Finance. Revenue decreased $24 million from last year's second quarter, reflecting lower Finance receivables. The segment had a profit of $15 million. Credit performance continued to improve during the quarter, with non-accruals of $124 million and 60-day delinquencies of $65 million. Moving to corporate items, starting with cash flow. Looking at our cash flow reconciliation, which is at the bottom of the manufacturing group cash flow schedule, which is attached to our earnings release, we've had a year-to-date use of cash from operating activities before pension contributions of $787 million. As reflected on our June 29 balance…

[Operator Instructions] Our first question comes from the line of Noah Poponak with Goldman Sachs.

Scott or Frank, just to make sure I've got the production flow at Cessna about correct here. If I slide the Ten out and the Sovereign out, as you just indicated, versus my prior model, I show second half total deliveries down kind of 5% to 10% and full year '13 down something like 20% to 25% versus '12. Does that sound about right?

It's probably about the right order of magnitude.

Okay, good. And then can you just go back to the avionics delays that you mentioned are driving that? And maybe give us a little more detail on exactly what's going on there?

Sure, Noah. Look, we have, in both the M2, which is a Garmin 3000 cockpit, and the Ten and the Sovereign, which essentially have the same Garmin 5000 cockpit. We're trying to have one basic certified software build that really underlies all 3 of those platforms. The flight testing and the performance of the avionics equipment and whatnot, for the most part, has been quite good. The aircraft are performing extremely well, making great progress in all their flight testing. But our supplier has struggled going through this first -- our 25 cert and just getting everything all lined up and getting us a build of the software that will pass through all the final certification testings. We think we're there, frankly. I mean, it hasn't really impeded the flight test program. The aircraft have been continuing to run. We do have the initial builds of -- or the initial versions of the latest build that are in our own integration laboratories on the ground and look very good. The guys are very bullish that we think it has the things that it needs to have in it for the final cert, and so it's a matter of just taking those now and getting them into the actual aircraft. And then, frankly, going through the formal process and getting each of the aircraft through. And the only reason the Ten is pushing into next year is just the timelines to get the M2 through the certification process, get the Sovereign through it. It's probably going to push the Ten into beginning of next year. So it's relatively mild, modest in terms of its schedule impact, Noah. We're originally hoping to get the first couple of sales of M2s and Sovereigns late in the third quarter, and then we had always planned the Tens in the fourth quarter. And I just think with some of the, as I say, relatively minor delays in getting this final software build, it's pushed them out a couple of months, but that's enough to push it, all the deliveries of the M2s and the Sovereigns into Q4 and just realistically speaking as we focus on getting those through the process, so it'll push the Tens into the first of next year.

Next question comes from the line of Joe Nadol with JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Scott or Frank, just on the cash flow, heard what you said on the inventory build at both Bell and Cessna. I was wondering if you could give a little more detail on, I guess, what surprised you in the quarter? Or if it did at all, are you back on track? I know you haven't caught up at Bell for the ERP implementation, but are you back on track with where you originally would've thought you would've been? And then on Cessna, how are you going to make back the inventory build by the end of the year if some of these deliveries are getting pushed into 2014?

Well, I think Cessna is more or less to be expected. I mean, we know we're ramping up M2s. We're ramping up Sovereigns. We expected, as you know, to take down the light jet production volume, but obviously, we are finishing out the aircraft that were in the queue. So we certainly expected to see a significant inventory build at Cessna. We still believe that we will get the M2 and the Sovereign deliveries that we had in the plan for the year. It's just they'll all be fourth quarter instead of over the end of the third and into the fourth quarter. So the only ones that are really moving out in total are the Tens moving into next year. So for sure, there is some pressure there. On the other hand, we think there are opportunities, and we're certainly taking fewer trade-ins. So as we continue to work down our balance of used aircraft inventory, which we did again in the quarter, we think that helps to make up for some of that cash shortfall in terms of having the Citation Tens delayed into the first quarter of next year. So the Cessna situation, I think, is pretty well understood. There's not a lot of surprises there, and we'll work our way through that. At Bell, I would say, certainly to our plan, we're behind where we would like to be in terms of cash. As I said, in terms of how we're doing in this ERP system, particularly with respect to a lot of our parts shipments, be it into the spares or into our final assembly factories, the improvement in that area is kind of back to plan. But it did not catch up where we were behind in the first quarter. And so that's the work we still have to do. So we're -- the system is running. I mean, we can demonstrate that we can now ship the parts at levels at or above where we were before we put the system in. But we haven't yet achieved the level where we were able to burn down that backlog. But we certainly have expectations that'll happen through the course of the year. And that also results in getting things around progress billings and things like that, where you don't have as much in progress that has been accomplished, and therefore, you're behind on some government billings. But again, as we get that system recovering and get it stable and work our way through the rest of the year, we think we will recover that. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: So it's fair to say that we should see improvement certainly in Q3, particularly at Bell? And then a lot of the improvement at Cessna comes in Q4 because that's when all the new deliveries take place?

Yes, that's exactly right. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then over in Industrial, margins were quite good, the highest in, I think, a very, very long time. You attributed it to performance and to volume. How should we be thinking about the upside opportunity to what you've been putting up in the past is sort of the 8% level as we go forward? Or are we going to revert back to that level?

Well, as you know, our Industrial businesses are each cyclical in their own nature. So I think I wouldn't expect to see 9%, almost 10% margins in the last 2 quarters. But I certainly would expect to see margin expansion over what the margins have typically been in the third and the fourth quarter. So I think performance will stay strong. The strategy we have around there, both in terms of productivity and driving more sales and new products is working, and I think it'll continue to work. So certainly, there is the seasonality, but I would expect to continue to see margin expansion in the Industrial businesses. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just one more, Scott, could you comment on demand, in particular for midsized aircraft? Have you filled those initial Sovereign slots for the new version of the aircraft and maybe just address XLS demand?

So Sovereign demand, I mean, we are starting, obviously, to take orders for the new Sovereign. We just got the first production aircraft off the line only a few weeks ago. And that thing has been on a very, very steady and busy tour of flying around and doing demo flights. So we really didn't have the sales tool in place until here just very recently, but the aircraft is out there, flying a lot of customers. And I'd say we have a pretty strong list of customers that are interested in the new Sovereign. It's always been a very popular aircraft. People that have them, love them. And it's a very nice refresh to the aircraft. So as I said, we have started to take orders and put them into the backlog, but we've only really been out there able to show people the aircraft and demo fly it here in the last few weeks. So it's, I would say, it's building some pretty reasonable momentum in terms of the customer prospect list. XLS demand has been pretty steady through the quarter and no real change. In terms of the light jet market, as I said, there's -- the market is still very soft. And if you're not out there doing pretty aggressive discounting and trying to go to customers that are not ready to move yet, you're not going to see a whole lot of volume. That's exactly what we expected to see in the marketplace. So there's obviously some activity, but it's still pretty soft.

Our next question comes from the line of John Godwin [ph] with Morgan Stanley.

In the release, you described the Cessna production cuts as the right actions. I was just hoping you could elaborate on that a little bit. Of course, demand continues to be soft. So I was just curious, would continued softness in biz jet trends from here cause you to revisit production even further and potentially reduce it again? Or by right actions, do you mean that the data that you see and the conversations that you're having suggest that you've really hit the right level given where demand is?

Well, I mean, obviously this a very fluid situation, so I don't think we'll ever say, "Hey, we're done one way or the other." So in the case of the lights, we scaled back what we thought our target for the year would be around sales of those aircraft. And I would say, at least looking into what we are anticipating for the third and fourth quarter, we think we're in the right place. On the other hand, if you look at M2s, the market demand for that new product has stayed fairly strong, and we've actually gone in and tried to figure out how to add some additional slots into next year, because we're in a situation right now where we see some transactions happening and the M2 would be the right aircraft for the customer, but it's -- we don't have available slots for them. So we've had some adjustments, obviously, that we took down this year around some of the light models, comfortable with where we are right now. That doesn't mean we would change it up or down based on what we see demand changing in the marketplace. But I think what we took those down to, our view right now is that's probably the right number in terms of our current production role. And then, of course, we have the M2 where we're going to go try to find a way to insert some more available slots into 2014 because we think the demand is there.

Okay, that's very helpful. And I was hoping you'd talk a bit about what the sales force is telling you the customer response was to the production rates. Of course, you had some good comments on incremental pricing. Is that just sort of simple supply-demand rebalancing? Or is there any kind of new or renewed sense of urgency to transact that wasn't in the customer conversations before the cuts? Just any clarity or background there would be helpful.

Sure. I know I would categorize it as a supply-demand balancing. So the transactions that I felt that we were doing that we wanted to get away from doing, we're trying to go in and do some additional discounting to get a customer who's ultimately going to upgrade their aircraft and trying to pull them forward to get them to upgrade now. And so as we took that sort of aggressive discount out and didn't go try to pursue and try to get somebody to come into the market that didn't feel they were ready to come into the market, obviously, those transactions have gone away. So -- and -- customers are fine with that. When you have customers that say, "Hey, I'm okay where I am probably for another year or 2," then that's fine. They'll keep flying their current aircraft for another period of time.

Our next question comes from the line of Carter Copeland with Barclays.

Just a quick question on the Cessna margin in the quarter. If you exclude the severance costs that you called out last quarter, you're still decently negative. I wondered if there were any other cost action items there? Or maybe you could comment on any impact from used aircraft in the quarter? Any color there would be helpful.

Sure. So obviously, the vast majority of it was associated with the severance costs, which is the $27 million that we have in there. There were about $8 million of used aircraft residual write-downs. But other than that, it was just a very, very light delivery quarter. And so there's just not a lot of cost absorption on 20 jets.

Okay. And just as a clarification, when you say pricing improvement from the actions you took, is that sequential improvement versus last quarter or year-over-year?

Sequential and year-over-year actually.

Okay. And one final one. In Systems, you mentioned the definitization of the Saudi contract. Does that result in any material margin impact versus what you had under the undefinitized contract before?

No, it doesn't. We were -- where we ended up was roughly the pricing that we expected in terms of how we've been booking the deal. So I think the only real consequential outcome you'll see of that becoming a definitized contract is it'll all go into backlog as opposed to just what was under the undefinitized contract.

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

Scott, I'd like to follow up on your comment earlier that you mentioned about continued softness in light demand, of apparently, a pickup in demand for the mid-cam [ph]. Do think there are some of the sort of structural change here in terms of the business jet market that is preferring these larger jets?

Well, Robert, I think we just continue to have a view of the market that says the light market, the light to small mid-market is really a small to midsize business person, and they're more economically sensitive than large corporations and other corporate operators of aircraft that tend to have larger aircraft. So I think the confidence in the economy around that small to midsized business community has been a little more subdued. And so when you look at a large corporate operator, they get so many years in, they're going to roll that aircraft. I mean, they're very worried about reliability and availability and aircraft on ground, these sorts of things, and I think they're more inclined to accept a more difficult residual value environment and go ahead and roll the aircraft anyway. When you look at a light operator that historically, yes, they like to roll it at 5 years or 7 years, I think with residual values where they are right now, they're inclined to say they'll stick with it for another year or 2. So that's our general sense. A lot of people we see coming in right now are coming in. They're coming from the places they usually come from in terms of light jets, right? They're coming out of a turboprop or a light single and something like that. But you don't see as much activity of the people who are current CJ operators that are doing their upgrade. Eventually they will come, but I think a lot of it just has to do with where the residual values are. And the used aircraft market, certainly from a volume standpoint, the number of aircraft has been dropping and dropping, but it's still a fairly significant number. And I think the biggest challenge is that we haven't really seen, for sure, have not seen a price recovery in terms of used aircraft values. And I think those are the things that need to happen before you're going to see -- or a significant strengthening in the economy, where people feel better about what's going on, before you're going to see a lot of activity in the light market.

And the second question, I was wondering if you could comment on the demand environment in terms of geographical regions. If you're seeing any differences versus maybe what you said 3 months ago in U.S., Europe or Asia?

No, it's still very much U.S.-centric. There's a little bit of activity in Europe, very light activity, frankly, in Latin America, some in Asia, not very strong on the lights. A lot of demand in Asia on the Caravan. We're seeing a fairly strong demand for our turboprop business over there. But in terms of the jet market, it's very North American-centric.

Our next question comes from the line of Pete Skibitski with Drexel Hamilton.

Let me just ask, I guess, a couple of Bell questions, just for something different. On the SLS, Scott, I mean, some of your competitors sell helicopters in that range, 100 to 200 helicopters a year. Is that the kind of opportunity that you're thinking for that model?

It is. I mean, I think our principal competitor in this market right now, Peter, really is the guys that have moved in into the Robinson R66s. That's really the space that we're targeting. It's kind of that price point. I think we have -- it'll be a little different performance for us, but it's in roughly in that price point. And it's probably a 200-, 300-helicopter-a-year market.

Got it. Great. And then any progress on the 429 weight approvals from the FAA?

Not from the FAA. We continue to get more countries that are approving it based on the Canadian certification. So we see the market continue to grow internationally for it as it's approved. I think the situation with the FAA, Peter, is that, as you may have read, there's really an activity going on right now within the FAA to look at this whole issue of, is 7,000 pounds the right number to delineate between the current certification standards, whether it's a 27 or 29. And this has happened in the past, by the way, right, where as technology changes and what's available in the market changes and technologies change from particular, is it appropriate to have a specific weight that delineates the difference? If so, is it the right weight? And so really what's happening right now is there is a broader review of this issue going on in the FAA, and I suspect that where we'll end up will really be reflective of where the FAA wants to go in the future in terms of how they're going to delineate between Part 27 and 29 service.

Okay, okay. And then just broadly, on the Bell commercial helicopter, I guess, cycle, you mentioned timing during your, I think, your opening remarks. You don't sense that the commercial helicopter cycle is slowing at all? You just think you had a timing issue in the quarter? And overall, the commercial helicopter up-cycle is sort of still intact. Is that kind of your view?

It is. There's no change to our view. The quarter actually was quite strong in terms of order rate, so a lot of order activity. We were light a few helicopters versus a year ago, but that really just has to do with customer delivery timing. And there's no change in our view of what's going on in the market nor our expectations in terms of our deliveries for 2013.

Our next question comes from the line of Cai Von Rumohr with Cowen and Company.

So, Scott, you mentioned improvement in pricing at Cessna sequentially and year-over-year. And yet, if one looks at the used market, it looks like those prices continue to kind of soften. So do you feel you've kind of hit equilibrium here where basically the prices really have held and can get better from here? Or are you concerned that the weakness in the used market is going to catch up with you, and so you're going to have continuing pricing pressures in your business?

Well, Cai, I think that part of what's going on with the new aircraft pricing was also driving the residual value on the used aircraft. So it's actually a little bit the other way. And I guess, one thing I want to be clear about. I don't want to mislead anybody, all right. We got better pricing in the quarter with both sequentially and year-over-year, but we're hardly taking aircraft back to list pricing. These are still attractive prices for customers versus historical levels, okay? So there is still discounting going on. It's not like this has snapped back to all of a sudden, people are going to be selling at list price. So I do think that pricing will continue to reflect sort of the tone of what's going on in the market. It was just our view that coming out, particularly out of the first quarter, and I looked at what was going on from a pricing standpoint, was getting to the point where it didn't make any sense do these deals, okay? So I mean, we need to go back to a level of price that is still a fair, an attractive deal for our customers, but one which is also a reasonable deal for our company to be able to continue to invest in new products and, et cetera. So that correction, I think, was very important. And I'm glad that we made it, and I think it's appropriate that we make it. But these products are still very attractive in terms of how they're priced at this point, even going back modestly above where they were in 2012. So used aircraft pricing, Cai, absolutely, I think is still going to be a challenge. But I think that there -- it's more of an impact to the ability for somebody to trade in and what their residual value is, as opposed to how it should necessarily pressure new aircraft pricing.

Was there any change as you went through the quarter in terms of the tone of demand in any respect?

Not really.

Okay. And then you'd mentioned the avionics delay, and obviously, you already were planning most of the delivery of Sovereigns and M2s in the fourth quarter. But obviously, I assume some of those have slipped into next year. Approximately how many of those new plane deliveries that you'd expected this year slipped into next year?

As I said, I really still expect that we will get the M2 and Sovereign deliveries that we were expecting. They'll just be in the fourth quarter instead of getting some done in the beginning -- or the end of the third quarter. The only aircraft that I really view as moving into the next year as a result of these delays are the Tens.

Our next question comes from the line of Jason Gursky with Citi.

Frank, just a quick question for you. The corporate line in the income statement seems to bounce around from quarter to quarter. I was wondering if you could give us an update on the second half and your view, all else being equal at this point, stock price and all the other inputs that go there, what we should expect on the corporate line for the second half of the year?

Yes, I mean, the corporate line kind of, generally, if you look at kind of how we guided it, runs about kind of $35 million to $38 million on average. And it bounces around, as you say, because of that kind of share price activity and what that does in terms of just the stock-based compensation expense. And so if you kind of think $38-ish million type area per quarter, that's a normalized type of level for that expense.

Okay. And that's what's baked into your guidance then for the full year, this $38 million both in the third and fourth quarters each?

Yes, that type area, $37 million and $38 million.

Okay. And then, Scott, just a quick question on Cessna and the margins there. Can you just give us a little bit of color around your expectations on incremental margins, assuming we get some year-on-year growth going again there? What we ought to expect from incremental margins on a go-forward basis? So I think you've talked about a range in the past, and I was wondering if you could give us an update there.

Yes, we generally expect to see 20%, 25% incremental margin on volume growth at Cessnas.

Okay. And these most recent actions don't change that at all, the headcount reductions?

No, because it's largely trying to size based on what we anticipate volumes to be. I mean, those are the actions that we have to take if we're going to adjust the business accordingly in terms of what the revenues are going to look like.

Yes. Okay, great. And then last one, Scott, could you -- in the past, you've given us a little bit of your expectations around the biz jet market in China. I was wondering, generally speaking, you talked a little bit about your production actions, but can you talk a little bit about the market itself and the development of the biz jet market in China and where we are today?

Well, we still have expectations that we're going to see growth in the Chinese market in terms of -- and remember, I'm talking about our products, which are primarily aircraft that would be flown within China, not in and out of China, so it's a domestic aircraft. It is still, today, not an easy market from that standpoint, because it's not easy to fly internal just in terms of the air space management. But we have every indication and certainly see activities going on that would lead us to believe that, that's going to continue to liberalize. So there's a lot more liberalization of lower altitude airspace that's happening. We see this in selling Caravans. We see it in selling helicopters. A lot of this air space is going to become more open. But it's certainly our expectation that they'll start to open up and make it easier to fly within the country at the higher altitudes, which is really obviously the land of the jets. So our focus here right now is making sure we have a good sales team in place and start to do the market development activities, so that as we continue to sell into that market, we make sure that we're present and see every opportunity. And obviously, the XLS manufacturing in Zhouhai, which we expect to kick in and start deliveries next year, is specifically targeted at those opportunities.

Our next question comes from the line of Julian Mitchell with Crédit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: Yes, I had a question on the Bell margins. In the first half, they were down around 100 bps. Year-on-year, you had a sort of 40%, 45% decremental. If you're thinking about the second half, I mean, is there anything in terms of the phasing or the weighting of R&D for things like the 525, the V-280, that maybe changed that dynamic? Or R&D is fairly well, smooth through the year?

Fairly smooth, Julian. I mean, we're still on track for our original guidance between 13% and 14%. Julian Mitchell - Crédit Suisse AG, Research Division: Okay, got it. And then in Cessna, if we're thinking about, I understand the push outs and so on. I mean, excluding that, it sounds as if volume and pricing are tracking pretty much in line with where you would've thought back in April and May. I just wanted to check if that's the case? And more specifically, what's going on with Cessna aftermarket? I think that was up about 9% in Q1. Just what sort of trend did you have just now?

It's up again in this quarter in both parts and services. So guys are still flying the aircraft, utilizing the aircraft. And we're seeing, I'd say, reasonable growth on the service side of the business. And in terms of the volume of jet production, as I said, I think the numbers we're looking at right now in terms of the performance this quarter and our expectations here through the second half of the year, we feel like our plans in terms of production that we laid in are probably about where they need to be. So I'd say it's, at this point, we still have the same expectations that we had when we talked to you after the first quarter call. Julian Mitchell - Crédit Suisse AG, Research Division: Great. And then lastly, just if you could -- obviously, rates are moving around and so on, just a reminder on what the anticipated pension effect on earnings is for '13?

It's -- oh, for '13.

'13, it was... Julian Mitchell - Crédit Suisse AG, Research Division: Yes, if you're willing to talk about '14, that would be great, but I just -- any view on either.

I thought it was 1 30...

Well, no, for '14, the pension expense was $225-ish million area, which was a meaningful headwind to our 2012 level.

[indiscernible] expense budget [ph]. Julian Mitchell - Crédit Suisse AG, Research Division: Okay. And the expectation for the effect in '13?

That -- I'm sorry, so on '13, we had about $55 million of pension headwind, and total pension expense was about kind of $225 million. And in '14, we should no -- we would expect, it depends on rates and lots of things between now and then, but we would expect that we will no longer see a headwind. We should see a bit of a tailwind. And obviously, that'll depend on kind of discount rates and returns for the rest of the year and lots of other factors. But we, as we sit here today, we would not expect to continue to see a pension headwind as we move into '14.

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

Just cleaning up a few things. Used aircraft, that charge of $8 million or write-down of $8 million, is that on aircraft that are now no longer in-house? And can you give us some color on the size and dollars and/or units of your used aircraft inventory?

Those -- that $8 million is a charge against our current inventory based on the residual values. We obviously had some sales of aircraft in the quarter, Jeff. And I don't think there was an appreciable gain or loss on sale of those guys. So they're marked to roughly the right spot. I think there was a very modest gain this quarter. But we don't talk about the specific numbers of aircraft on the used side. We did sell -- we didn't sell quite as many as we did year-over-year, but actually dollar volume of the sales was actually a bit higher than it was year-over-year.

And net inventory went down slightly, Jeff.

Right. Net inventory -- yes.

Net inventory is down?

Right.

And then just kind of back to Cessna, so effectively, what you're telling us, right, is M2 was sold to your plan now through 2014. I mean, obviously, I don't know precisely what your plan is, but I'm hoping we can kind get kind of bigger than a breadbox type of thought process here. If I think about M2, obviously, clearly is going to hurt M1. I think you would agree with that. I don't know if you do. But if I think about M1 plus M2, are we looking at unit volumes equivalent, or maybe even better than kind of the 40-ish a year that we were seeing in 2011 and 2012?

Well, I think it's a fair way to look at it, Jeff. I mean, it's sort of an equivalent number. Mustang deliveries have been at a relatively low rate just because, again, we see a relatively small number of people coming into that market. But certainly, when you look at the total for the entry jet market, there's now 2 ways to participate in that with us, right? Either the Mustang or the M2. And so, yes, you got to think about kind of annualized roughly the same number of aircraft with a, I think, at least in the early years, a significant mix shift towards the M2.

And then kind of along the same lines, your confidence on clearing the WIP inventory in Cessna, obviously comes around moving the Sovs and the Tens that you're building. Can you give us some color on how you're sold on those relative to your production plan on whatever horizon you're comfortable talking about it, whether it's through Q4 or into 2014?

Well, I guess, just from color standpoint, I mean, the Tens are pretty sold. That's been out there for a while. We've been able to market and sell that aircraft. On the Sovereign, we still have a number of aircraft to go sell. But as I said earlier, we really have only had the first demonstrator aircraft to take out and start doing demos and flight tours here over the past month. So as I said, we have started to take orders. We have started to close deals, but we still have more aircraft to sell here for the 2013 plan. But we think we have a pretty reasonable level of interest in the customer community and a lot of people that are talking to us, a lot of people are doing demo flights. But that process is still fairly early.

Right. And then finally for me, just Bell commercial, can you give us kind of just the rough percentage delta. What you think full year volumes look like versus 2012?

I think we guided we would be up significantly, and I think that's how it's playing out.

Okay. So notwithstanding the little hiccup in Q2, the back half looks very strong?

Yes, I mean, the Q2 is just -- we line up with customer delivery dates. So unfortunately in Q2, there were a number of aircraft, particularly larger aircraft, that are heavily, more heavily weighted towards the third and fourth quarter.

And I'm sorry, just finally, one more. So just thinking about all this, actually the incrementals in Cessna with the charge and the used aircraft and everything aren't awful, actually. For as much as production is down, I would say, it's kind of admirable, although it's a tough market for you. But should we think of Cessna, I mean, Cessna should be breakeven or better in Q3? Is that a reasonable expectation?

Again, Jeff, it's so sensitive to the volumes of aircraft and without having any of the M2s or Sovereigns in Q3, I think that's going to make that a challenge. I mean, obviously, that's what we're trying to do. I think, look, the bottom line here is that the team out there, I think, is doing a heck of job in a pretty tough environment. They have driven a lot of cost productivity, and I think that's part of what you're seeing. I mean, we're not just saying, "Well, it's a bad market, so everything's going to a disaster." We can't possibly be happy about anything that has a red number associated with it. But the guys are simultaneously trying to drive as much productivity and go through the challenges of reducing and eliminating an awful lot of jobs to respond to what's going on in the market. At the same time, they're trying to invest a ton of money in developing a bunch of new products that will help us both this year or next year and into the future. So it's a tough balancing act. But I think those guys are doing a heck of a job, trying to do everything they can to manage costs and make sure that we do as well as we can in a tough market. And obviously, I think, position us so that when this thing does play itself through on this cycle, things will come out very well.

Our next question comes from the line of George Shapiro with Shapiro Research.

Just a follow up on a couple of numbers, Scott. You kind of said aftermarket sales of Cessna were up. Were they up in the 5% to 10% area like they were in the last quarter?

They were up 16%, but keep in mind that we had some M&A over the past year in the service center. So on an organic basis, it was high-single digit.

And the used plane sales that were in the quarter?

I'm sorry, George, what about the used aircraft in the quarter?

Okay. Could you just give us what the sales volume was?

I don't think we've given the specific numbers, George. As I said, we were down a couple in terms of units, but on a year-over-year basis, we were actually up in terms of the sales volume. So they were more expensive, larger aircraft.

Okay. And then, Scott, the CJ4 was particularly weak this quarter. I mean, you kind of been running double digits, and it dropped to 4. Is there any reason for it? Or is it just succumbing to the light weakness? And then would you expect that to rebound some in the third quarter?

Well, I think, George, it probably is a reflection a bit of this notion that people that already have CJs aren't going to do an upgrade at this time. And we see a lot of people that are going to the CJ4s that might be current CJ2 or 3 operators right now. So I think that's probably a little bit a good example of it. If you don't see a whole of upgrade activity going on, you're probably not going to see as many more people move into the 4s.

So what -- in third quarter deliveries, I mean, what's able to drive it significantly higher or maybe it's only a little bit higher than the 20 that we saw in the second quarter?

I'd have to say, George, it's probably just sort of the normal cyclicality of people buying aircraft. [indiscernible] we look at what's going on in the customer community and the number of deals, the number of prospects on every aircraft type. So it's -- we're not particularly guiding a specific number of aircraft in the third quarter. But I would -- looking at it right now, we'd certainly expect it to be higher than the 20 that we saw in the second quarter.

Okay. And then just a more general one, Scott, you had mentioned after the first quarter, you weren't going to cut price, and we clearly saw that in lower orders this quarter, although better quality orders. The fact that you didn't succumb to that temptation at the end of the quarter, does that change people's minds sufficiently, that we go into the third and the fourth quarter here, that they recognize that they're going to have to pay a better price if they want an airplane? I mean, can you talk about that mentality that's out there?

Well, George, it's a very good question and it's part of the theory, the case that we have, but we don't know the answer to that yet, right? I mean, without a doubt, some calls happened at the quarter saying, "Hey, are you ready to make a deeper discount to get a deal done?" And the answer to that question is, no. And so for sure, there's some deals that probably could have happened this quarter that didn't because we're not prepared to go with those price levels. As I said earlier with Cai, you guys, we're not going to go back to list pricing, all right? I mean, but these are still attractive prices and we're certainly hopeful that those customers who want to upgrade, have a reason they want to upgrade to a new aircraft, will consider coming in and paying a reasonable price. But we're not going to go do that kind of aggressive discounting at the last moment to try to get a deal across the goal line. So whether that's actually happens in practice versus just theory remains to be seen. But certainly, there were some people that were looking for bigger discounts to try to make a deal happen. And again, that goes back to price levels that don't make sense for us. So I think, I hope we're at the point now where the number that we can put on the table for that customer is a very fair and reasonable number. And it's a number that they'll be comfortable with, and ultimately, will trade in or buy the aircraft.

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

So just, I guess, the first one is sort of the high-level assessment EBIT margin guidance for the year. Is the full year anticipated to be still better than breakeven now?

That's certainly our objective. Again, it's going to be very volume-sensitive. But certainly our plan would be to get it above the breakeven line on the year.

Okay. And then Bell aftermarket in the first quarter had the ERP issues and was down. What was it like in the second quarter? And can you give us some perspective on the military aftermarket, in particular?

If you look at the total aftermarket, we were on what our original plan was for the quarter, okay. So the system, we have figured out how to operate with the new system. In some cases, with the system, around the system, sort of going through the usual things you go through on one of these big system implementations. But anyway, the operation is certainly back and while it's -- we have our share of challenges, we're able to deliver what we need to deliver. The only unfortunate part is, we did not eat into the miss that we had in the first quarter.

So what was the aftermarket sales in the quarter in terms of directionally up, down, how much?

On a year-over-year basis, it was...

It was up low-single digits.

Yes, it was up, but up modestly on a year-over-year basis.

Okay. And then last one, just confirming. So on the R&D expectation for the full year, I think, it was expected to be somewhere in the kind of $500 million, low $500 million range. That hasn't moved as a result of kind of the development timelines? Is that still the right place holder?

Yes, these issues on certification really don't have much of an impact on the R&D front at this stage of the game. Most of the R&D's invested. It's simply a timing on going through the final certification. If you look at Cessna, a lot of the R&D now has moved into the Latitude program. And as Doug said earlier, the Bell, Bell's on track and relatively level load in terms of its R&D investments, kind of driven by the 525 and now the SLS and V-280.

And only one other one, another manufacturer had similar issues with delays in avionics caused the avionics suppliers to forward advances to the manufacturer. Is that something you're pursuing as a result of the delay in certification?

No, it's not. Look, I think our supplier has been very genuine in their efforts to get this thing done. I think that there were some deals made with other customers because, frankly, they said, "Look, we've got more on our plate than we can handle. And we're going to go focus on getting this deal done for Cessna," because we were kind of first in the queue. And so I think we are the guy, I believe, that's getting the top priority and getting the energy put into it. And look, in the grand scheme of things, I don't like having a certification date slip out, but this is a relatively mild, modest slip. And I do believe these guys are dedicating the resource and everything they can to keep it on track. So, no, at this point, we're not in a position to try to go look for any kind of damages. I think they're in good faith doing everything they can to get us going.

Our next question comes from the line of Ron Epstein with Bank of America.

This is Kristine Liwag calling in for Ron this morning. I guess my question comes from about Systems margins. So margins were down about 200 basis points this quarter even though revenue was up 8.5%. I just wondering if you can walk through maybe the factors that drove the margin contraction in this quarter?

Well, I think the most significant element is that these fee-for-service contracts were basically booking at 0 profit, right? So we had taken a charge last year and basically did a total program or task order estimate to complete that took it from a loss contract and basically booked forward on a breakeven basis. And so obviously, there is dilution to our overall margin rates associated with that. So I think, if you looked at the margins in our other businesses, they're standing where we would expect them to be in the double-digit, above double-digit kind of margin rates, but we're seeing dilution from our UAS business principally.

Yes, the other place we saw a little bit of margin impact there from a volume-mix standpoint is in our armored security vehicle, where we're doing more reset volume relative to production volume than we had in some previous quarters. And so we saw some additional ASV volume that was reset volume with lower mix rather than production.

And last week, I heard from Defense Secretary Hagel that sequestration could cut investment [ph] account by 15% to 20% in fiscal year '14, so starting October 1. This cut is larger than what we've heard before. So are you seeing any sort of customer behavior changes? Or do you see further downside risk to your defense outlook for the rest of the year, particularly in the second half?

I'm sorry, for the rest of this year?

Yes. Because right -- fiscal year '14 would start on October 1.

Yes. No, I don't think we would expect that. And for us, like it's principally driven by the fact that we have a multiyear deal around V-22s. So we know what those unit volumes look like. Our other big deals with Cessna or at Bell, rather, are around H-1 and the unit volumes on the production side of that have been stable. Obviously, our Armored Security Vehicle businesses, our precision munition businesses are virtually all international businesses at this point, so they really have no exposure. The area that we're probably the most sensitive, with respect to sequestration issues, is around our unmanned air vehicle business and some of our intelligence software and geospatial analysis intel businesses, which are funded more on a year-to-year basis. And so when they change budgeting, those things can be affected year-to-year. And we've seen some pressure in those businesses, but not something that I would say is material. And we certainly don't have any reason to believe there'd be any material change to this calendar year with respect to the sequestration, further sequestration discussions.

Our last question comes from the line of Steve Levenson with Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Can you give us an update on the timetable for the 525, please?

Sure. 525 is progressing very nicely. We'll be flying that aircraft next year, which was our original plan in 2014. We're obviously in work with the FAA around certification dates. We have not announced a certification date yet for that aircraft. But I think we -- it's still our expectation that we'll be flying it next year. And we'll likely certify -- we haven't given a hard date to customers yet, but probably sometime out in 2015. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And last, what stage are you on partnering on the V-280? Or is it a little premature for that still?

We have a number of partners that are part of the V-280 program. And to be honest, I don't know how much we've publicly announced. So I got to be careful here that I don't announce something we haven't announced. But we have several partners. It's a very -- it's not a structure like we had with Boeing on the V-22, right, where it's a Bell-Boeing function. But we have a number of very strong partners that will have portions of the V-280 product. And those discussions are, frankly, pretty mature at this point, but we just haven't publicly announced them yet.

All right, thank you, ladies and -- go ahead. Thank you very much, ladies and gentlemen. Go ahead, Tani.

Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.