Ladies and gentlemen, I would like to thank you for standing by, and welcome to the Textron Fourth Quarter 2015 Earnings Teleconference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's call will be recorded. I would now like to turn the conference over to our VP of Investor Relations, Mr. Doug Wilburne. Please go ahead.

Thanks, Steve. Good morning, everyone. Before we begin, I would like to mention, we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Textron revenues in the quarter were $3.9 billion, down 4.2% from $4.1 billion in last year's fourth quarter. Income from continuing operations was $0.81 per share, up 6.6% from $0.76 in the fourth quarter of 2014. Manufacturing cash flow before pension contributions of $18 million was $534 million compared to $449 million in last year's fourth quarter. For the full year revenues were $13.4 billion, down 3.3% from a year ago. Income from continuing operations was $2.50 per share, up 16.3% from $2.15, last year. Manufacturing cash flow before pension contributions of $68 million was $631 million. With that, I will turn the call over to Scott.

Thanks, Doug. Good morning, everybody. Revenues were up at industrial, but at Systems, Bell and Aviation, which was due to overall decrease in revenue in the quarter. Despite the decline in revenues, we had good execution with margin improvements in aviation, systems and industrial and solid double-digit margins at Bell, with strong cash flow across all our business segments. At Bell, we shipped 56 commercial helicopters compared to 57 in last year's fourth quarter. Commercial revenues were down, reflecting lower aftermarket volume and a change in the mix of aircraft delivered. On the new product front, we are making good progress with our 525 Relentless program, we now have two aircraft in the flight test program and are preparing to bring third aircraft to the testing this spring. Successfully attained a top speed of 186 knots [ph] in the aircraft's maximum true airspeed target [ph] testing includes continued signal and [ph] testing as well as further development of a gross weight and center of gravity extremes. Aircraft will be head north to gather initial cold weather data next month. The team continues to progress through the development phase of the test program. We are preparing to enter the certification test phase in spring. We also plan to fly the 525 to Heli-Expo in Louisville, in March, so that our customers can see the actual aircraft for the first time. Overall, the aircraft continued to perform very well meeting or exceeding all of our performance expectations. Customer demand remained strong as we currently have about 80 letters of intent from around the world. We are targeting certification of first delivery of the 525 next year. Our 505 Jet Ranger X program was also making good progress with three test aircraft now in operation. We are targeting certification and entering the service…

Thank you, Scott. Good morning, everyone. Segment profit in the quarter was $378 million, down $20 million from the fourth quarter of 2014, [ph] $3 million decrease in revenue. Let's review how each of the segments performed starting with Textron Aviation. Revenues were down $32 million from this period last year, reflecting lower King Air and pre-owned aircraft volumes, partially offset by higher jet volume. Aviation had a profit of $138 million compared to $130 million a year ago. This increase primarily reflected improved performance, which included lower amortization of $8 million related to fair value step up adjustments, partially offset by the lower volumes. Backlog in the segment ended the quarter at $1.1 billion, down $308 million from the end of the third quarter. Moving to Bell, revenues were down $36 million, reflecting lower commercial aftermarket volume and a change in mix of commercial aircraft delivered in the quarter, partially offset by higher military deliveries. Segment profit decreased $22 million from the fourth quarter of 2014, primarily reflecting an unfavorable impact from the change in mix of commercial aircraft delivered in the quarter and lower commercial aftermarket volume, partially offset by improved performance. Backlog in this segment ended quarter at $5.2 billion, up $76 million from the end of the third quarter. At Textron Systems, revenues were down $158 million, primarily due to lower unmanned systems volume, partially offset by higher Marine and Land Systems volume. Segment profit was $9 million, reflecting the impact of the lower volumes. Industrial revenues increased $55 million, due to higher overall volumes and the impact of acquisitions, partially offset by a $50 million unfavorable impact from foreign exchange. Segment profit increased $6 million, primarily reflecting the impact of the higher volumes. Finance segment revenues decreased $2 million and profit decreased $3 million. Moving…

Our first question will come from line the line of Seth Seifman of JPMorgan. Please go ahead.

Thanks very much. Good morning. I wonder if you guys could touch a little bit more on the margin in aviation flattish sequentially and kind of fairly moderate growth plan for next year?

The sequential sort of flatness from Q3 to Q4 is larger driven by the fact that we had a fair bit of expense in the fourth quarter between R&D and a lot of cost associated with the ramp up of what we did from MBAA, which offset a fair bit of what we saw in some of the incremental volumes on sequential basis, nothing more [ph] within that. In terms of next year, the volume leverage probably is now the size you guys will expect. I think that is largely driven by the fact that we are going to see probably some lower margin on a lot of our incremental sales particularly that which is going into fractional business, so we have a fairly high number delivers next year that will go into NetJets, probably saw yesterday they have announced the official launch of that product into their customer base and typically sales into the fractional channel are at a lower margin than our typical all retail sales.

Great. Maybe just as a quick follow-up, for Bell, I think you talked about commercial being flattish and military. It sounds like maybe [ph] V-22 down and H-1 up. I wonder if you could talk about the levels, the level of decline on V-22 and is it just the bottom, then what gives you confidence on being flat in commercial.

If you looked at mix in the business as you go into next year, the military and commercial are or both probably relatively flat. I think, you know, we saw a big drop-down this year obviously, with V-22 reductions earlier in the year, will continue to probably down a little, V-22 probably up a little bit on the H-1 side of things. All-in-all, are expected to be relatively flattish. I think the same is true on the commercial side. The big adjustment that we really made this year was a reduction in that medium-sized helicopters that you are going to see probably about 12 or 12, and we expect that to be about flat on a year-over-year basis, so I do not think there is going to be a big mix shift within the business as we look at flattish revenues. I think it is going to be true on both, the military and commercial side.

Seth, on volumes of the V-22, it is consistent with the multiyear too, which call for a 100 units over five years. We have been delivering a little ahead of schedule. There were a few options exercised, so that is just consistent with that and then as we look forward to '18 and the Japanese deliveries, we should some recovery there.

Look, the V-22s were total expected. I mean, what we saw in the military side of the business in 2015 and what we expect in '16 is entirely consistent with what we have always talked about. I mean, the programs are record in terms of the units. There are absolutely no surprises there. The issue really was largely around the commercial side and particularly on the medium segment and those are for us. Bell 412. That is typically a very international product, and as you can imagine know between the pressure around oil and other commodities just in general international marketplace has been pretty soft. I think that is reflected overall in the Bell 412 margin so again we expect that the pretty flat as we go from '15 to '16.

Okay. Thank you.

Our next question will come from the line of Jason Gursky of Citi. Please go ahead.

Yes. Hi there. I just wanted to stick with Bell for just a moment here, and, Scott, maybe have you talk a little bit about the margin outlook a bit more detail and talk a little bit about some of the puts and takes that are going on this year. Then as a follow-up to that, as we head into the Heli-Expo show in early March, maybe just talk a little bit about things you are going to be looking for into that show and kind of expectations around it.

Sure. If I think on the margin rate where we have communicated you guys, we have been trying to hold that business in 11%, 12% rate. I think as we managed through knowing what was going to happen on the military programs, we adjust our cost base to make sure that we could hit that target. As you see in our segment level kind of color at this point, we think we are probably 100 basis points lower than that and that is a reflection of the fact that we are seeing a significant reduction in what we would have expected in terms of the value in the mid-size market as we go forward. Obviously, there are going to be some cost reductions that come associated with that as we lower the production rates and our role in the production rates on 412 side in particular, but to try to take out more cost from that and sustain the investments that we need to make in the 505 and 525 and V-280, that is going to us cost about 100 basis points and that is why you see that reflection of the drop. What we committed internal margin and how we dealt with - in fact, we are going to have is - ramp down on the military side and then further reductions that we made this year on the commercial side has sustained margins about where we want to be, but I think at this point, given where we take the forecast on 412s that is probably going to cost us about 100 basis points. As we going to Heli-Expo, look, it is going to be an interesting show to try to understand where customers are, what their expectations are going forward. 505, we continue to feel very good about. The level of customer demand in that area is great. 407s, as I said earlier, very strong and delivering on some big programs and we had continued strong interest. 429s are kind of flattish. The question is really going to be with a lot of our international customers, how they feel going forward. That will reflect 412 obviously and you know give us the feel of where things are going in terms of the 525. We are still a year-and-a-half away from or of making first on the aircraft, so there is still a fair bit of time here to understand what the market dynamics is going to look like.

Okay. That is great. Thank you very much.

Our next question will come from the line of Sam Pearlstein of Wells Fargo. Please go ahead.

Good morning. Can you talk a little about the manufacturing cash flow outlook into 2016? It just seems like you have got earnings up, pension looks flat. I know CapEx is up, depreciation is about the same. Can you just talk about what else might be going against you? Why you are not seeing a bigger pick up on the cash flow line?

I think if you looked - going into late next year, Sam, we are going to have a lot of inventory that we are accumulating in the build of the first lots of the 525s, and also the Longitude, so we will probably start deliveries of both of those aircraft obviously not until 2017, but we will have the priming the pump, if you will, and know those are two fairly high-dollar bid programs that will drive our working capital late in '16.

We also are playing for some higher tax chases in '16.

Okay. Then just in terms of the margin pickup at Systems next year. Is that all TAPV-related? Why is there such a big step up from '15 to '16?

Well, I mean, TAPV is certainly a big part of it. They will probably have that program going, but we expect we are going to see solid performance. If you looked at our UAS business has continued to perform well. I think the momentum is very good there. Similarly, our precision munitions business, you know, good contracts, good backlog of healthy business, so it is really across the whole segment and of course our Simulation Training business, which continues to perform and grow. Really, it is not just one item. I mean, certainly we getting TAPV is a big driver of the revenue increase. In terms of finally delivering on that, but in terms of overall margins, it is pretty solid performance across all of those the business segments.

Thank you.

Sure.

Next question will come from the line of Robert Stallard of Royal Bank of Canada. Please go ahead.

Hey, Scott. Good morning. Scott, there has been some signs of weakness in large cabin business jet in recent months. I was wondering if you could comment about what you are seeing in your market the, smaller and midsize end. If anything has weakened there.

It really hasn't Rob. I mean, we have seen not strong growth, but we have seen increased volumes in '15. We expect again to see some increased volumes as we go into 2016. Again, it is primarily driven by new product. I would say most legacy models will be sort of flattish, but growth of new things like Latitude coming out is really, what is driving growth in the business, I think we see the market as kind of about where we expected to be. It is performing well, particularly the U.S., but it is pretty soft internationally, so I think you know at this point, products that have longer dependency on international markets are tougher markets, so we have seen know that certainly in the mid-size helicopter market, we have seen a little bit on our King Air market, because that is typically more international but the business jet market itself, which is stronger and a little more U.S.-centric at this point is doing fine.

Then maybe switching gears, looking at the different side of your business, we got a decent FY'16 budget goals during December. It is early days, but how do you think that will flow through Textron?

I mean, I think it is good. Obviously, our key programs like V-22 and H-1 came through the process exactly where we would have expected them to be U.S. business and we just got another order on continuation of V2 program, so we are not really in a situation right now where there is a lot of big new start programs, but certainly all of our existing and important programs, be it in the aviation world or Ship-to-Shore connector or the UAS programs are all funded and in good shape.

Thanks so much.

We have a question from the line of Cai von Rumohr, Cowen & Company. Please go ahead.

Yes. Thank you very much. Did I hear you say there is another five to six months of customer testing for the TAPV; maybe give us an update of your schedule there.

Sure, Cai. Look, what happened is, we talked the fourth quarter about our expectation, we felt we could get some of the deliveries starting late next year as we had finalize our initial testing. We had a couple failures. It was a very small number, but we and the customer determined that, because it was steering-related, it could present a safety problem, so we decided we really needed to permanently resolve those things. We did that, we have completed our or internal testing, it looks great, but it does completely reset the clock on the customer test as well, so we have now started that. The vehicles are actually under test as we speak. It is going well, but it did reset the whole clock, so unfortunately what was a fairly minor changes and minor fix does reset the clock and that means we are probably looking at something where deliveries will probably in the second half of this year. Now we have built many, many of the vehicles, there is a lot of vehicles sitting there. They have been modified, you know, some minor change, so I think once delivery start, we will do very well, but it does reset the clock on the test.

Okay. Thank you.

It is not just testing. There is the testing process in and then the acceptance process, so that is why it takes a little bit longer than what you might expect.

Got it, so aviation, you had a 0.7 book-to-bill, particularly weak, maybe give us some color on why was it so weak and color on demand maybe by product with specific reference maybe to the King Airs.

Cai, I do not know that it was terribly different than what we have been sort of seeing cyclically with a lot of deliveries in Q4 on jets. You recall, last year fourth quarter we didn't have as much of drop-off, but that was also there was a pretty significant matter order that was in their which we talked about, so you know I do not think the color of the market and frankly know the position that we have today in terms of backlog is very different than what we have seen frankly for the last five or six years, so you know in terms of what we need to do in sales and conversion, for the orders and conversion of sales as we go into '16 is not is not really different than where we have been, so I think we feel pretty good about where we are. King Airs, we are a little bit softer in the quarter, frankly, thank I would have liked. They were up very modestly on the total year, but there is a lot of interest, there is a lot of customer discussions. Remember, we did transition from the old cockpit to the new call them fusion [ph] cockpit on that line of product here in the fourth quarter, so that also creates a little bit of a gap. I think as we have now gone through that production transition to the to the new model, we should be in pretty good shape for '16.

Last one, you are looking for flat R&D year-over-year. Could you give us a little bit of color in terms of which of your businesses the R&D might be trending up and where it might be flat to down?

Not really a material change on a year-over-year basis, Cai. You know, obviously, we ramped down now on Latitude, but we are ramping up clearly on Longitude, so work going on into the Hemispheres and the turboprop, Bell 505, should wrap up this year, but we are full in the 525 and getting ready for first flight on the 280s. The number is relatively flat, and I have to say if you look across all of our different segments, the R&D spending is about the same from '15 into '16. Thank you very much.

We have a question from the line of Julian Mitchell of Credit Suisse. Please go ahead.

Thank you. Yes. Good morning. Just a question on the Bell, firstly, if you could just sort of quantify how much the commercial aftermarket sales were down in Q4, and how that pace has changed versus, say, six months ago and how you see that playing out this year?

I do not if we give the exact number, but I mean it is down slightly on a run rate basis and I think frankly it reflects the fact that we are seeing utilization across most of the platforms down in sort of low mid single-digits and the aftermarket tends to follow that pretty well.

Understood. Then in terms of the margins for 2016 at Bell, should we think about it as you have a lot of pressure, particularly upfront in the first half just as the cost base right-sizes for the levels of commercial aftermarket and then it is about second half or would you think it is a fairly level-loaded year on margins?

…depending on how the 412 deliver more than anything else.

Yes. It is really dependent on mix and deliveries. It is not a question of can we kind of get to a different type of cost structure just because of the way things are accounted for and kind of mark our military programs in our inventory, so it is really a function as Scott said kind of at this point - lower production activities and the impact quarter-to-quarter will be dependent on delivery activity.

To help clarify that, last year's deliveries were units that had been produced in a higher rate and next year it is close to the inventory. It shows up next year, but that is the higher revenues on the commercial side offset that it puts spread on the margin.

Look, It is going to vary principally as a function of 412 deliveries. The military margin rates are pretty consistent through the years and that deliveries are pretty consistent through the years. It has been largely come down to the medium-sized, particular 412 delivers as we work our way through the year.

Very helpful. Then the last quick one just asset prices, I guess, your revenue as well have come in, in the past few months. Any change in view on the sort of relative merits or appeals of buyback versus M&A when you think about capital deployment this year?

I think our strategy is really the same. As we will always kind of keep an eye out for some M&A activity, I think Able is a great example. This is a business. It is a very healthy business. Helps to augment what we bring to customers in terms of our aftermarket capability, so those are deals we do. They are not huge deals, but that is the kind of a deal that we would do in terms of the market on stock buyback as you know we are still committed to at least offset dilution and opportunistically we will do more than that.

Great. Thank you.

You are welcome.

Our next question comes from the line of Noah Poponak of Goldman Sachs. Please go ahead.

Hi. Good morning, everyone.

Hi, Noah.

Scott, I guess just conceptually, how long can you run a business with $5 billion in revenue, but only 1 billion and backlog that question pertaining to aviation. I get it has become more of the turn business than a backlog business. I get there is components of that revenue number that do not have backlog. I mean, it seems like it is just a risky thing to do where if you keep this kind of neutral-ish environment, you are fine, but if you were to have a more sinister backdrop, you would have to maybe cut things more sharply than you would if you were already reset to where backlog is?

Look, Noah, I mean the market is what it is, I guess, I mean, we have been doing this for a long time, right? where we are kind of coming in with around those kind of backlog and our team is still in aircraft, so I think that we are in a position here where we even in a pretty flat market we have been able to continue to eke out some growth on the top-line in terms of - forget the deal, right? Just organically in terms of, we sold more King Airs this year than we sold last year. We sold more jet thoroughly this year than we sold last year and we continue to expand the margin rate. Look, if I could pick-up someone would give me another $1 billion or so of backlog, we take it but the fact of the matter is, that is not where the market has been and it has been this way for - we were talking this morning. It has been at least six years, right, we have been kind of operating in this mode and that is just the nature of this industry right now. It is not a big announce a plane and get billions of dollars of backlog. You go out and you sell them pretty much one plane at a time and that is working for us right, so our revenue keeps going up and our margins keep expanding and that we are keep doing.

Yes. That makes sense. I guess the question was just more around risk mitigation of - that has been working, but if you had a tougher global macro environment that 1.1 could move sub-1 billion pretty quickly and then you are steering at a more difficult situation, I guess, but I do not know.

Yes. Look, Noah, I mean, I appreciate the question. I understand. As I said, if I could drive a magic wand and make it a different market environment I would certainly do that. Look, where we spend most of our discretionary money is a new products, and look, the new products we have been working, right? If I was to go and say all right, guys, what if we took a different approach, what if we kind of hunker down and ride this things out, what if we did not do the Sovereign Plus or the Latitude or the M2, boy, I think without all that new product investment it would be tough to sustain a business that can grow revenues and expand margins.

Yes. I am definitely not advocating for that. My question is more should production be much lower on the legacy products?

Well, look, we have taken those numbers down quite a bit over the years and I think right now, you are not seeing order builds and stuff, right? I mean, we are not pumping out white tail. We are matched pretty well on our production today over the last few years frankly has been running to demand.

Yes. Okay.

We are not generating big surplus of aircraft and we just do not do that.

It makes sense. On the Latitude, on the new product topic, when you had a saw at Wichita, you could see in the facility some tail numbers and you could see some tail numbers in the 30s, so if I assumed that you made it to accumulative delivery number 30, call it the middle of this year, that would get you somewhere in the vicinity of 30 of Latitude deliveries for the year. Is that in the ballpark?

Yes.

Okay. Then so we should think about legacy or production excluding that roughly flat and then roughly that number for the Latitude?

That is correct.

Okay. Thank you.

Great.

Our next question comes from the line of George Shapiro of Shapiro Research. Please go head.

Yes, Scott. I just want to pursue a little bit more. I know you have touched on it, but I want it to touch on it a little more. The aviation guide for margin in 2016, I mean effectively you are assuming the margins really flat with '15 because you do not have any of the step up in '16 that you had in '15. I know you commented that a lot of it is because of deliveries to fractional, but still I mean to go from what you have been - the high incrementals you have been running to a relatively minimal incremental maybe 9% at least and your guidance seems pretty darn big shifts, so I was just wondering if you could comment a little bit more on it?

George, I mean, I think you are accurate in terms of your assessment of kind of how we get there and it certainly on the lower end of the conversion than we would normally like to see, again a big piece of it is expectations on lower margin in terms of the fractional, which is a big part of our growth frankly, right? If you look at that year-over-year incremental and then I know it just kind of walking through the map as well reading serial numbers of aircraft, but a lot of our incremental as we go from '15 to '16 is Latitudes and a big chunk of that is going into the fractional market, so I mean I think that is really where we are a big piece of year-over-year it is going to be fractional delivered which are at lower margin rates, still good business for us but at lower margin rates.

One of the things that I came away with from the investor conference in Wichita was the cost that you are taking out on the Latitude versus the Sovereign in Soviet, my expectation was that the Latitude margin would start out no worse than some of the average material programs that you had. I guess that is not correct I mean or maybe it is just overwhelmed by the fractional ownership?

Yes. It is the pricing on the fractional as oppose to the cost basis. I think we are where we wanted to be on the cost at a pretty good level. We are on the cost on the Latitudes. I mean, you are always going to have a little bit of inefficiencies in the ramp up of a new one, but it is not a material issue for us. It is doing really well. The cost is in a good place. It just really a question of pricing on fractionals.

Okay. Then just one other one, you commented I think to Cai's question earlier about the book-to-bill being low this quarter, but when I went back and looked at the book-to-bill in the fourth quarter of last year, it was actually around 1 versus the 0.7-plus that we saw this quarter, so is there any added color you could provide on that?

Sure, George. If you go back to fourth quarter last year, we did talked about the fact that we had a pretty significant international military order and those are lumpier than a normal flow, so that contributed a pretty good backlog into Q4 next year. If you took that out, the dynamic we have typically seen in Q4 is because of such a high delivery quarter has been that we see a much lower book-to-bill in Q4 as we have in recent time, so I do not think this year if you are to no back out the military deal in the fourth quarter it does not look very different on a year-over-year basis.

Okay. Thanks very much.

We have a question from the line of Sheila Kahyaoglu of Jeffries. Please go ahead.

Hi. Good morning, guys. Thanks for taking the question.

Hi, Sheila.

Just to harp on the aviation margin one last time. I guess is there any way you guys could see fractional impact is it over a 100 basis points, is it closer to 200 basis points to 300 basis points. Then could you remind us again what the net NetJets' order is? Is it still 25 firm and the option for a 100?

It was 25 firm. It was actually 150 options, so…

…25 options. It was out of 150 total...

Right, any way yes I think it is a few hundred basis points 200 basis points to 300 basis point, Sheila, when you think about the margin impact of sales in the fractional versus retail sales.

Okay. That is on the unit deliveries - the total EBIT?

Correct.

Then R&D within the segment in Aviation was pretty much flat, which is impressive considering you have a new program launch and would you say SG&A should be up year-over-year?

Up. Yes. It will be up modestly.

Yes. Not a lot when the R&D is relatively is hit with other one is if you look segment-to-segment it is relatively the same as you go from '15 to '16, so not a headwind for sure.

Okay. Then just one on Systems, is it a second half-weighted revenue cadence like as given that you have Ship-to-Shore in TAPV, I would think in the second half of the year?

Yes. Particularly driven by TAPV, Sheila, the Ship-to-Shore, the development program is relatively flat through the quarters, but the TAPV will certainly be a very heavy Q3, Q4.

Thank you.

We have a question from the line of Johnny Wright of Nomura. Please go ahead.

Hi, guys. Just one question on Industrials, it is kind of exciting pretty decent growth again this year. I was just wondering what are you anticipating from military markets in 2016 and anything else you want to call out with embedded in the guide…

Look, the auto markets continue to be pretty healthy, as I mentioned in the prepared comments, we saw growth again this year and all three regions in the North America, Europe and Asia and all the forecast yes we drive our guidance obviously in our model based on what is out there in terms of what all the OEMs are saying. Right now, they are all forecasting rolled again in 2016 and so we expect obviously to grow with that. We had some nice wins on new models, which is helping to drive our growth, so our growth has been in excess of what overall markets have done on the auto side and I expect that will be through again in 2016.

Okay. Great. That is all I have. Thank you.

Okay. Sure.

We have a question from the line of Jeffrey Sprague of Vertical Research. Please go ahead.

Hi. This is John Walsh on the line for Jeff. Good morning.

Yes. Good morning, John.

A lot of ground covered, I just had one quick question on pricing totally understand what is going with the fractional business. Could you kind of just comments on like-for-like pricing what you saw in the quarter and what you are expecting in the guidance?

It has been pretty flat, John. I mean some are rough a little bit, some are kind of flat, but all-in-all it is not materially different than a fairly stable price environment.

Okay. Great. Thank you very much.

Sure.

We have a question from the line of Pete Skibitski of Drexel Hamilton. Please go ahead.

Thanks guys. Just a couple of quick one on aviation, Scott, aviation aftermarket kind of last year and this year is it similar to the Bell commercial aftermarket trends and I was just wondering if you could talk aviation Citation pre-on your pricing and activity wise?

On the aftermarket on a comparable basis, we are pretty flat I mean we had some changes in how we recognized revenue in terms of some engine programs so we have talked about before this does not affect our profitability but just the revenues we are basically in between the customer and the engine sides so all-in-all I think it is relatively flat and we expect frankly on a comparable basis, so a slight uptick in aftermarket in 2016 from '15 and similarly on the use aircraft pricing it has been fairly stable.

Great. Thank you.

Sure.

We have a question from the line of Myles Walton of Deutsche Bank. Please go ahead.

Thanks. Good morning. Maybe, Frank, a quick question on the balance sheet and maybe Scott on capital deployment, so is the idea to refine the notes coming due or repay and start to reduce that further, it seems like you are getting to a point where point or you are comfortable, so Scott is that M&A aperture actually increasing as there is more excess free cash flow here? Thanks.

Yes. Well, from a balance sheet standpoint, we will probably refine what we kept coming due this coming year, so we are pretty comfortable now with our debt levels you know that the balance sheet has we have had good flexibility over the past couple of years, we think from and M&A standpoint so I do not think that there is a really change in the M&A aperture. We feel like we have been able to kind of do the things that we wanted to do and we will be able to continue to do that, but we will stop paying down debt at these levels.

Look our debt levels are getting developed where they should be from a ratio standpoint, but I would add the same color Frank did. We will do deals that we think makes sense. We have not felt in any way constrained. Clearly , we have access to the market if we need to do that if the right deal came along, but we are not going to do deals that we do not think make sense and we are certainly not going to run around and try to find stuff or force stuff that we do not think fits in the business for well just to deploy that way I think our M&A strategy is one where if we see opportunities it is a great fit we think we get good leverage it supports the balance of our business we will do.

I see that, but if you are starting to generate excess cash. It is not going back to paying down debt is all I am kind of getting at if you kind of think about the 600 million, 700 million pre pension you get a 100 repo and another sub-100 to dividend and so you are starting to have excess cash I am just curious if any apertures can get better or be you want to be more opportunistic maybe on the industrial sides if the rest of the world kind of constant kind of the rates in that sector?

Yes. Again, I do not think our cash on the balance sheet thing is particularly excessive yet. I mean, so that's and it is not like we are worry about [to] cash we will continue to be pretty aggressive that looking for opportunities across all our business on the acquisition side and as that will also be opportunistic around the share buyback in terms of deploying that capital hope we think it makes sense and based where the...

Okay. Thanks.

The last question in the queue at this time comes from the line of Ron Epstein of Bank of America. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning, Ron.

A couple of big picture questions for you. On Hemisphere, when you think about it. I know it is still early days, but with Gulfstream G450s coming off the line and my understanding is that they are selling in for not too much over $30 million. Is not that a really difficult place to try to put a new product? I mean with Gulfstream there with the Bombardier guys there with peso there it seems pretty crowded?

Look, I think, when we look at the Hemisphere and how we size the Hemisphere. Our intent is to be sort of just below where that market is because you are right I think you know the 450, 550 is the global 7,000, 8,000 there is 7x, 8x. It is not our intent to be competing with that guy, so if somebody is looking at G450, the Hemisphere is designed to be slotted sort of one tier below that echelon of aircraft. We think that is the market were there has been a lot of reinvestment by a lot of big iron guys, which is why we are going there not with the intent of going up and joining in that area, because I think you are right. I think it is a well-served market. In terms of current pricing, I have no idea. That market cycle is just mid-size cycle, so where pricing and demand is right now is a function of the market, but the intent that we have with Hemisphere is that slots just below before you get into those big iron guys.

Okay. Then I think - totally changing gear sort of just real quick, kind of a little bit out of mind immediate comfort zone, but Caltex have you guys seen any weakness in ISR for auto?

No. We have not.

Okay. Good.

It has been result.

Okay. That is good to know. Finally, I cannot you know not get on the phone with you guys and not ask you about the Scorpion, any update there?

The Scorpion, look, I think the good news is that one of the most critical issues for that program was always determining the path certification. I think the good news is through a lot of work last year, the air force has now opened up the ability go through an airworthiness process with the air force. They initiated that program and obviously we fully expect to participate in that, so we have the first aircraft that will be conforming test articles in production as we speak and are working with the air force to get under contract to have them conduct and ultimately provided airworthiness certification for the aircraft, so that is a big step forward for us.

Okay. That is great. Is there sense of any opportunity for it maybe an Air National Guard, anything like that?

I think, eventually there could be either - obviously, there is a lot going on budget wise it the U.S. Government, but we have always thought that while this is certainly intended more as international product for a lot of countries that can afford to fly the F-22s and F-35s of the world. We certainly think that capability aircraft might be one at that price point and that capability could be attractive for a lot of missions that could include U.S.

Okay. Great. Cool. Thanks, guys.

Sure. All right. Thank you ladies and gentlemen.