Textron Inc. (TXT) Q4 2007 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Textron's fourth earnings call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, this conference call is being recorded. Joining us today are Mr. Lewis Campbell, Chairman, President and CEO and Mr. Ted French, CFO, and Mr. Doug Wilburne, Vice President of Investor Relations. Now, I will turn the meeting over to Mr. Wilburne. Please go ahead.

Thanks, Lauri and good morning everyone. Before we begin, I would like to mention our discussion today will include remarks about future estimates and expectations. These forward-looking statements are subject to various risk factors, which are detailed in our annual SEC filings and also in today's press release. A calculation of 2008 ROIC, which we will be discussing today, is also attached to our press release and available on the website in the IR section. Finally, also you can find a slide deck on our website containing key data items that we are going to discuss on today's call. Finally, now moving to our results for the fourth quarter, revenues were $3.8 billion, up 18% from last year's fourth quarter. Earnings per share from continuing operations were $1.02, up 32% from $0.77 a year ago, and compared to our expectation of $0.82 to $0.92. Our EPS performance reflected good delivery execution at Cessna and Bell, which allowed for early delivery of seven jets and five helicopters, generating a $0.07 EPS benefit in the quarter. We also had an unanticipated Canadian tax benefit at TFC, which was worth about $0.02 per share, partially offset by a $0.01 of dilution related to our acquisition of AAI and Columbia Aircraft, all of which were not included in our guidance. On the cash front, full-year cash flow provided by continuing operations was $1.2 billion with free cash flow of $796 million. With that, I will turn the call over to Lewis.

Thank you, Doug Good morning, everyone. Our fourth quarter culminated a year of powerful performance at Textron on many fronts. Full-year revenues were up 15%, about 13% organically by the way. EPS from continuing ops was up 32%. Free cash flow was up 15%. And I think more importantly, each of our manufacturing segments showed year-over-year operating improvement resulting in a 160 basis point increase in overall manufacturing margins. And finally, return on invested capital improved 800 basis points reaching 24.8% in 2007. Now, last year's solid results are evidence of the continuing progress we are making in our journey to become the premier multi-industry company. We fortified and expanded our future growth potential through many transformational actions taken last year, basically in the following four categories, operational improvement, capital investment, strategic acquisitions, and new product developments. Let me say more, we continue to attack operational improvement primarily through the deployment, penetration, and maturation of Textron Six Sigma into the processes by which we manage and improve our businesses. Last year, we certified an additional 153 black belts and 1,429 green belts, which now brings our totals to 890 black belts and 4,200 green belts. Because leadership is so vital in a cultural initiative like this, we've mandated that every member of our global leadership team, which comprises the top 180 leaders from around the world, attain a green belt certification. Continuous systematic business improvement and operational execution are becoming the number one cultural identifier of Textron. Happily as we look at our end-market opportunities over the next five years, we see tremendous growth potential and we are committing the necessary capital to service this demand. Let me give you some examples. At Bell, we are investing for an unprecedented expansion of output and we've made a significant amount of progress with the leadership and organization capabilities there. The ongoing processes improvements across operations have begun to show the expected results with record gearbox production supporting continued V-22 production ramp-up. These improvements support our plan to increase V-22 deliveries to 17 ships this year, up from 14 in 2007, and we are well on our way to produce 36 ships in 2011, a tremendous expansion of output, given the capacity requirements of each V-22. The program is doing very well on all fronts. Most importantly, the Warfighter, the Marine Corp. aircraft, are demonstrating excellent operating performance as they fly the full range of [inaudible] missions in Iraq. We also made continuous progress with our H-1 program last year, delivering the first ten production units. However, with the conversion from remanufactured aircraft all to new, an important next step, we have encountered some cost and delivery issues for the new cabins from our supplier, we are still negotiating with the customer and our supplier, but we recorded a charge at Bell in the quarter to cover anticipated cost. In the mean time, the H-1 [inaudible] surely and we anticipate a successful outcome, and therefore we are optimistic that we will have a full rate production decision by year one on the H-1. Moving to ARH. We are currently working under an expanded development contract and we made tremendous progress on this program with our customer over the past nine months. Our revised initial production plan has been developed and we expect the signed agreement around mid-year. Based on this new understanding, during the quarter, we reduced the ARH reserve, which we had established earlier this year. Moving to commercial at Bell. Here we made excellent progress with capacity expansion and execution, as we delivered 181 units during the year, up 14% from 2006, which in turn was up 29% from 2005. To concentrate output on deliveries of our high demand aircraft, we made a decision in the fourth quarter to streamline our legacy commercial offerings and recorded a related charge. Moving to Systems. We delivered 576 ASVs for the year and that's up 21% from 2006. We expect 15% growth in armored vehicle revenues in 2008 due to significant growth in after-market services, upgrade requirements for existing units, and early foreign military demands. We recently received a contract from the army that covers the US production funding at the current delivery schedule of 48 per month through May of 2009, with anticipated supplements providing funding through the balance of '09. We are working with the DoD for out-year funding to bridge to military vehicles... the military's vehicle requirements until the new joint and light tabular vehicle production begins sometime next decade. Investing in capacity at Cessna also paid off this year, as we delivered 387 jets, a new record and up 26% from '06. We have additional CapEx requirements at Cessna over the next several years to accommodate ever-increasing output and new models. We also invested in a number of strategic acquisitions last year, each of which strengthened existing businesses and will contribute to future growth. For example, at Greenlee, we expanded our product offerings with the acquisition of Paladin Tools, a telecom test gear manufacturer. We added to Bell Helicopter’s support and service capabilities with addition of Cabair, a helicopter maintenance and service center located in Fort Lauderdale, Florida, and most recently, McTurbine, a provider of helicopter engine maintenance and repair services, which came as part of the AAI acquisition. And just last week, we brought in SkyBOOKS to provide helicopter operators with advanced electronic maintenance and operating log capabilities. At Cessna, as you know, we acquired Columbia Aircraft, an innovative high-performance propeller aircraft manufacturer. This acquisition accelerates our critical product extension strategy in this class of aircraft. And our addition of AAI to the precision engagement capability at Systems, significantly augments our ability to compete and win as a prime contractor for this important military strategy going forward. By the way, we are well into the AAI integration process, we're using Textron Six Sigma tools to ensure that the additional yields and synergies that we expect, both in the amount and timing, will be possible just as we expected when we bought into the combination. Finally, we are also making considerable investments in innovation and new product developments across our businesses. You know, we increased R&D spending by 11% last year, bringing many new products to market and we are planning another 24% increase this year. We launched our new professional hand tool line in the beginning of the year at Greenlee, and the introduction has been a resounding success. At Caltex, we played an integral role in developing a selective catalytic reduction system, an innovative OEM product, which reduces nitrogen oxide emissions to meet the most stringent environmental regulations. And in today's environmentally alert marketplace, we've just introduced the world's most energy-efficient golf car with many exciting new features that will be attractive to golf course operators and golfers alike. If the value of investing in new products needed any validation, our ending aircraft backlog of $16.4 billion, up 41% from a year ago should be convincing. On top of that, at Systems, we have a $2.4 billion backlog, plus we have $1 billions worth of Bell 429 customer purchase agreements not yet in backlog. So, if you add all that together, we have nearly $20 billion in existing customer orders at Cessna, Bell, and Systems. We expect the 429 will enter into the backlog after first production flight, expected around mid-year. We are targeting our first 429 delivery by the end of the year or early 2009, and have a production ramp plan that goes to 60 units annually by 2011. Demand for commercial helicopters remain strong as we booked 268 orders in '07, significantly higher than last year's deliveries of 181. And global demand for business yet also remains unprecedented. Cessna added another 164 orders in the fourth quarter, bringing the full year to 773 orders taken in 2007, an all-time record and up from 496 orders in 2006. Clearly, there are two major factors driving business jet orders. First, there's a global expansion of demand and the second is new models like our Sovereign, the CJ4, and the Mustang. Importantly, as I said before, the Mustang being a lower price point offering has opened an entirely new universe of potential jet orders. And while Mustang customers are adding to demand today, the even better news is many of these orders will eventually choose to upgrade to a larger citation driving future demand as well. And by the way, our launch of Mustang has been as near to perfect as any launch we've ever undertaken at Cessna. When we introduced the Mustang at the 2002 NBAA show, we said we would fully certify and begin deliveries in 2006, and further we would ramp to 150 units of production in 2009. We're doing exactly that and the market demand has materialized just as we expected it would. Which brings us to our final topic at Cessna and that is our announcement this morning that we're moving forward with our much-anticipated large cabin, intercontinental Citation jet. We believe this strategic step strengthens our position as the premier global business jet manufacturer. We're confident, we'll bring this aircraft to market on time, on budget, and on performance. More importantly, we've stayed in the marketplace, including current and potential competitive offerings and believe there will be significant demand for this new model well into the future. In fact, we've received a large number of advanced customer requests to be placed in the production queue. Each of these requests was accompanied by a $100,000 refundable deposit. With the official announcement, we'll be converting these indications of interest into binding contracts with non-refundable initial deposits of $1 million each. And we expect to have at least 70 firm orders for the LCC by the end of this year. In fact, we're expecting another banner year of new orders at Cessna all around. Based on our current customer activity, our marketing plans and assessment of the marketplace, we expect to book over 570 total jet orders this year, well above our delivery forecast of 470. Given that our delivery schedule is completely booked out well into 2009 and supported by the diversification of our order book, we expect continued uninterrupted growth of Cessna well into the next decade. Now, I'm sure there are many questions about the LCC at this point, I'm sure we can spend the rest of the call on that subject, but we need to maximize the marketing impact of our launch and we'll not be discussing further details about the new model until our press conference on February 6. The only exception is that Ted in just a few minutes will discuss how the LCC is expected to affect our financial results in 2008, which is obviously already fully reflected in our outlook. Now, let me change subjects for a minute. I want to make a few comments about our expected performance in the context of the current economic situation. We now know that US corporate profits contracted in the third quarter of 2007, primarily driven by the financial sector and economists expect continued softness through at least the first half of 2008. Obviously, this news and the likely fact that we're already in the US economic downturn, are weighing heavily on the stock market. But, I've to say that we're puzzled at Textron [inaudible] our shares have fallen compared to our peers in the market overall. We believe that a significant amount of our enterprise is relatively unaffected by the economy and that we're well positioned for this environment. First, only a small portion of Bell Helicopter and Textron Systems is driven by the economy. So, we expect growth at these businesses units will remain relatively uninterrupted. At Cessna, we've analyzed the 2001, 2002, 2003 that period… that jet downturn, which was the worst down cycle we've ever experienced, and we carefully modeled our next three years deliveries on the basis of annual percentage cancellations and percent reductions in new orders during that prior period to really understand specifically how a similar downturn could affect our 2008 to 2010 delivery outlook. Even subjected to the severe 2003 scenario, our delivery outlook for 2008 and 2009 remains unaffected and we would expect 2010 to be no worse than flat with 2009. Now, this is simply a function of the unprecedented backlog, which currently stands at 1,418 units in comparison to 811 units at the end of 2000. Yet, keep in mind we do not believe the extreme 2003 scenario will repeat in terms of cancellation rates or order intake because both our backlog and orders have been better diversified by customers, specifically we have less dependence on fractional and by market with a significantly higher international mix. Furthermore, the 2003 downturn was also magnified by the 9/11 disruption, that among other things, halted business jet travel in 2001, placing unique uncertainty into the marketplace. So, in summary, we continue to have confidence in our increasing deliveries in 2008, 2009 and 2010 even given the current economic uncertainty. As for Industrial, the biggest driver there is Kautex and the current downturn in US automobiles and slower global demand are already built into our outlook. Finally at TFC, we’re not involved in sub prime or other misunderstood or high-risk products and we expect our portfolio of credit performance to remain within normal historic ranges in the softer economic environment. In conclusion, we see another solid year and continued growth at Textron in 2008 and beyond. In fact, we see 8% to 12% annual revenue growth through the planning horizon. And reinforced by our transformation strategy, we believe that we will be able to convert this growth into expanding shareholder value for years to come. Now, I'll turn the call over to Ted. Ted?

Thank you Lewis, and good morning everyone. I want to start by reinforcing Lewis' optimism for growth. Obviously the US economy is now weaker and it is certainly more uncertain. However, we have good revenue visibility based on our solid growing backlogs, plus we continue to observe positive forward signals in the business jet marketplace. So, let me start by looking at an analysis of our fourth quarter results. Quarterly revenues increased 18%, while EPS from continuing ops was up 32%, representing another excellent conversion. Earnings per share were up $0.25 from a year ago. Volume and mix provided $0.14. Higher pricing of about 3.3% added $0.30 a share. And inflation of 3.2% cost us about $0.22. Performance was a positive $0.24. The combined headwinds of engineering, research and development, depreciation, and pension expense collectively cost $0.13, and miscellaneous items, including higher corporate expenses partially offset by favorable foreign exchange and a lower share count cost $0.04. Taxes cost $0.03, and Textron Financial was lower by $0.01. Now, let's review each of our business segments, and I will start with Cessna. Cessna's revenues and profits increased $329 million and $75 million respectively in the fourth quarter. Revenues increased due to higher volume, primarily related to Citation business jets and higher pricing. Profit increased due to the higher pricing along with the impact of higher volume and favorable warranty performance, partially offset by inflation and increased product development expense. Continued strength in orders gives us conviction in our outlook as we now have another record Cessna backlog at $12.6 billion, that's up $4.1 billion or 48% from a year-ago. Moving to Bell. Segment revenues increased $120 million for the quarter, while profit was up $36 million. Profit in the quarter was affected by the following three items, which Lewis referenced earlier. $30 million in charges for the H-1 program, $16 million of costs for product rationalization in our commercial business, and a $27 million profit benefit related to the ARH program, reflecting a reduction in the ARH reserve of about a third and recovery of some previously un-reimbursed development costs. Fourth quarter US Government revenues were up $81 million due to the addition of acquisition revenues and higher volume. The volume increase reflects higher H-1 and sensor fuzed weapon quantities, partially offset by lower ASVs, Helicopter after-market services, and V-22 deliveries. Profits in our US Government business were up $41 million due to favorable performance partially offset by inflation. The favorable performance primarily reflects lower H-1 charges year-over-year and the benefits recorded in the quarter for the ARH program. The favorable performance was partially offset by last year's reimbursement of cost related to Hurricane Katrina. Commercial revenues were up $39 million, while profits were down $5 million. Commercial revenues increased due to higher pricing and the benefit from acquisitions, partially offset by lower volume. Commercial profit decreased primarily due to the product rationalization cost, some inflation, and higher engineering, research and development expenses, and lower volume, partially offset by higher pricing. Bell Helicopters backlog was $3.8 billion at the end of the year, that's up 23% from $3.1 billion at the end of '06, benefiting from growth in both military and commercial orders. Textron Systems backlog was $2.4 billion, up from $1.3 billion last year reflecting both the acquisition of AAI and growth in orders. Now for Industrial. Revenues and profits increased $113 million and $21 million respectively. The revenue increase came from higher volume and favorable foreign exchange and higher pricing. Profits increased due to positive cost performance, higher pricing, and the impact of volume and mix, partially offset by inflation. Lastly, Finance revenues were flat with last years fourth quarter, reflecting an increase in securitization and other fee income, offset by a reduction in finance charges due the lower interest rate environment. Segment profit was lower by $4 million, as loss provisions went up, while net interest margin was down. The net interest margin decline was attributable to an increase in borrowings spreads, partially offset by the increase in securitization and other fee income. Portfolio quality continues to be absolutely excellent with a 60 day delinquency rate of 0.43%, non-performing assets of 1.34%, and net charge-offs of 45 basis points. For the year then, Textron Financial had record revenues and profits, while maintaining excellent credit quality. Looking to 2008, we expect continued strong credit quality based on the product lines we are in, the creditworthiness of our customers, and the structures of our loans. ITFC '08 profit outlook reflects some conservatism, primarily related to the recent narrowing of spreads between the prime rate upon which the majority of our customers’ loans are indexed and LIBOR upon which most our borrowing costs are indexed. Actually tough, over the last week or so, the spread has begun to return to more normal levels, but our guidance reflects narrower margins nonetheless based on an assumption that this anomaly persist at some level through most of the year. One final comment on fourth quarter results is that the tax rate was lower than we forecasted due to the Canadian tax benefit at TFC. In addition, the rate was lower due to higher compensation hedge income, which is not taxable, and results in a lower reported tax rate, but it's fully offset up in corporate spending, so it has no impact on earnings per share. Now for our '08 outlook. For the full year, we are forecasting earnings in a range of $3.75 to $3.95, and for the first quarter we are targeting EPS between $0.75 and $0.85. These amounts fully reflect the 24% increase in ER&D that Lewis mentioned, which equates to $108 million or about $0.29 a share. Cessna accounts for $0.17 of the increase, of which $0.09 is attributable to the LCC program. It also reflects $0.09 in dilution from the AAI acquisition and $0.06 in dilution from the Columbia acquisition as we invest to strengthen and grow this business. And finally our investments in new capacity will result in higher depreciation expense worth about $0.14 a share. Collectively these items represent about $0.58 in earnings headwinds. While these investments reduce the '08 earnings growth that we otherwise would have seen, we believe that each will contribute to future revenue growth and increase shareholder value. We are forecasting cash flow provided by continuing ops to come in at about $1.3 billion. With the need for additional investments and capacity, our capital program next year now looks to be about $550 million, which should result in free cash flow coming in somewhere between $700 million and $750 million. In closing, our outlook at Textron remains very positive. We are expecting strong growth again this year through the rest of this decade and beyond. We have a large military backlog and our products are critical to our armed forces. We also have a large aircraft backlog and it would take a major extended global downturn to interrupt the growth in deliveries that our customers have ordered and continue to order. We believe the real growth opportunities that lie before us, coupled with our ever improving ability to execute, will translate into increased shareholder value this year and for years to come. Now, I would like to... I ask Doug to come back on and provide some additional '08 data.

Thanks, Ted and we'll begin with full year. For 2008, we expect Bell segment revenues will be up about 20%, with margins up about 30 basis points at about 8.9%. The higher revenues reflect the full-year impact and growth at AAI. Revenues also reflect delivery of about 17 V-22s, 10 H-1s, and about 580 ASVs. We are targeting 160 commercial deliveries as we concentrate this year's capacity expansion on pre-assembly production for the large military ramp-up targets in 2010 and beyond. At Cessna, we're expecting revenues to be $5.9 billion, with margins of about 16.5%, reflecting LCC and Columbia Aircraft development costs. Industrial revenue is expected to be approximately flat at $3.4 billion, with margins of about 6%. Finance revenues are projected to come in at about $885 million, with segment profit flat with '07, reflecting lower interest margins, higher loss provisions, and slightly slower portfolio growth. At the corporate level, we are assuming share buybacks of 3 million to 4 million of shares to maintain a flat share account for which we're already ahead of schedule by the way given our recent share price performance. By the way, last year we repurchased 5.9 million shares at a cost of $295 million. We are expecting interest expense of about $141 million, reflecting higher debt levels as a result of last year's acquisitions. Corporate expenses will be about $243 million and we anticipate an ‘08 tax rate of about 32%. The tax rate presents an additional headwind of about $0.06 and it basically reflects the absence of a number of unique tax benefits in 2007, as well as higher '08 income. The additional income results in higher tax rate due to fixed tax credit items, which do not scale up. Let's move to the first quarter now. We expect Bell segment revenues will be about $1.1 billion, with margins of about 8%. First quarter revenues at Cessna should be about $1.35 billion, margins of about 16.25%, reflecting delivery of about 104 jets. Industrial segment revenue is expected to be about $850 million, with a margin expectation of about 5.5%. Finally, Finance revenues should be about $205 million, with profit between $50 million and $55 million. That concludes our prepared remarks. And before we go to questions, we would like to ask that each of you limit yourselves to one question with an optional follow-up to be fair. So, Laurie with that we are now ready to open the lines please. Question and Answer

[Operator Instructions]. And our first question from the line of Nicole Parent with Credit Suisse. Please go ahead.

Good morning.

Good morning Nicole.

I guess first, Lewis, your bullish outlook for Cessna is appreciated, could you give us a sense when you scrub the last recession? You have international demand that's un-presidented, could you give us a sense of how you assess the quality of that backlog and have you seen any cancellations at all or any kind of customer concerns about what is going on in the marketplace?

Okay. Nicole, I want to give you a really full answer on this one because we've really looked hard at this topic because we knew what we wanted to say on the call this morning, but we want to make darn sure and we have really scrubbed this data. So, let me give you some facts. Used aircraft, which is a pretty good precursor when it starts to go up but things are going to slow down some, still remains at low 10%, keep in mind, the late model aircraft, five years and younger, are just hard to get in the used aircraft market. So, a lot of those aircraft are quietly sitting there for the rest of their lives. We have not seen any observable deterioration in customer orders, we have very low… actually, I'd say almost unusually low cancellation versus normal years. So, that's not there. Net jet orders, which need to be understood in the context of where they are being sold and why, net jet orders and CitationShares are still very good. Net jet US orders primarily are for replacements, so that will continue and then they've really grown strong in Europe and really picking up steam there. I've mentioned order cancellations and then Jack and his team recently had a sales meeting kickoff in the west and the sales force is really bullish on what they see and the customers they have contacted. Another interesting fact, which I find to be kind of cool is, that back in 2000, before we saw 9/11 and the downturn that ended up being just awful through 2003, our backlog for the next three years is now 82% higher than what the backlog was we had for the three-year period. So, the three-year period '01, '02, '03, we had 693 jets on order for delivery. And for '07, '08, '09, we've 1,260 on order. So, [inaudible] look and you mentioned international versus domestic that's also a strong point. So, I would tell you if there is something coming at us, we can see it, and if it comes at us as hard as it did in '01, '02, '03, we firmly believe that we'll be able to meet the numbers that we talked about in the call here.

Great. That's helpful. Thanks. And one other follow-up for Ted. In the charts that you gave us to walk-through from '07 to '08, you said $0.34 of headwind, I think Doug referenced $0.06 of tax and you had $0.14 of capacity. Can you just talk a little bit about what the remaining variables are and how you might be able to offset them?

Let me see if I can find that here quickly. The headwind that’s on the chart is only depreciation and R&D, and so those other pieces are additional…

Pension is actually not a headwind, it's about $0.04 of favorable tailwind this year.

But, that’s half of what we thought it would be when we talked to you back in February at the Analyst Day.

That's true. Did not come in as strongly as we thought, but it's still $0.04 favorable nonetheless.

Thank you.

So, it's all either.... just $0.14 of depreciation, the balance is R&D.

Thank you. Our next question from the line of Cai von Rumohr with Cowen and Company. Please go ahead?

Hi, Cai.

Great quarter. Great quarter. While you gave us kind of the EPS impact of both LCC and Colombia, could you give us kind of... because they're both at Cessna and what we really kind of maybe want to look at is the total [inaudible] of R&D and kind of approximately what was it in 2007 and what do you expect it to be in 2008 for Cessna and kind of going forward what should we, kind of, expect for the R&D now that LCC is launched?

I got it right here. Let me make sure I understand, you wanted a total R&D change at Cessna?

Well, the total R&D at Cessna, '07 and '08, so we can kind of see… there are other things coming off because we know LCC and Colombia are moving up.

Yes, now there is other additions. Total Cessna R&D goes from a little over $270 million to $340 million. So, it's up about $68 million year-over-year. LCC is $53 million of the $68 million.

Okay. And just a general sense going forward now that you have kind of committed to LCC, how much is it in absolute terms this year and kind of what's about the profile going to be over the next couple of years? So, we know… give us some kind of sense as to what this is going to… might do.

In absolute terms, it's $53 million. It was $20 million last year, it's $53 million in '08. In '09… I've got it somewhere here but, can't put my finger on it. It goes higher in '09. We know that. It peaks at about $120 million in 2010.

Excellent. Thank you very much.

Yes.

Our next question from the line of Shannon O'Callaghan with Lehman Brothers. Please go ahead. Shannon O'Callaghan – Lehman Brothers: Good morning guys.

Hi, Shannon. Shannon O'Callaghan – Lehman Brothers: Can you just give a little more flavor, you mentioned the positive indicators and expecting 570 orders, can you give us a little flavor on what are the components that go behind that?

I can tell you some basic stuff. Of the 570, we got 70 LCC, and...

500 plus 70.

So, it’s 500 plus 70. I don't think… you might never hear us say this again, but I don't think we have ever given out that number before. So, whether it’s conservative or optimistic, you’ll have to think for yourself on that subject, but we normally end up at least meeting it not beating in any return out. We have a good mix of international customers, that's good, well over 50% of deliveries. We are not heavily depended on the fractional... is that number 15% approx?

Right.

So, that's fairly low. We have some other things on the horizon, and if they come true, we'll look really good. We really are having trouble meeting demand on some of our products over in Europe, because Europe has really heaten up and so we are wrestling with how we can move production around to be able to deliver a few more products here and there. So, it's just a really good balance of mix, there is nothing unusual in that book.

I think what's really misunderstood is the depth and strength of the backlog. We've taken this backlog and torn it apart and we've modeled a scenario where order intake rates fall as... and remember we've looked at every downturn in general aviation since the Second World War and this downturn post 9/11 is by fall the worst of all of those. So, we've taken this existing backlog and we've gone back and modeled the rate of order fall-off from that we saw in the 2001, 2002, 2003 frame, and it’s pretty radical by the way. Orders fell 68% in the first year, so down two-thirds, came back to being down about a third in the second year and got back to about even by the third year. So, we've modeled that in. We've modeled the rate of cancellations, which in that last downturn were 160 some out over three years. But, because our backlog is larger, we've modeled a number twice that big into it. And when you take that and take our production plans for 2008, 2009, and 2010, which grow every year, by the way, if that same event happens to us over that three-year period of time, we'll still end up with 20 months of backlog by the end of 2010. So, it's just very, very deep and I don't think that's well understood. Shannon O'Callaghan – Lehman Brothers: Okay, great. Thanks a lot. And just on the margin on Cessna, I know you have Columbia and the incremental LCC in there, still very strong margin in the quarter, 18.4%, other than maybe slightly higher Mustang mix or anything else you are anticipating in 2008 for Cessna that we should know about in terms of a margin headwind?

Just two things to put it into context. The LCC reduces Cessna's ‘08 margin by 90 basis points and Columbia reduces the margins by 70 basis points, which might be a little surprising to you, but we are adding almost a $100 million worth of revenue with Columbia and we actually will have mid-20s kind of expense next year because while we bought a business, we are also really buying and developing a product line. So, we are investing in '08 and '09 in Columbia in order to get that product offering where we want it to be, the cost structure where we want it to be, the production capability where we want it to be. So, that will be about two years of investment. So, those two things are worth about 160 basis points. So, Cessna's '08 margins would be well up in the north of 18% range, but for those two items. Shannon O'Callaghan – Lehman Brothers: Okay. [inaudible]. Thanks a lot.

Our next question from the line of Rob Stallard with Banc of America. Please go ahead.

Good morning.

Good morning.

Hi Rob.

Lewis, you gave a very strong view on the strength of… with the US economy being what it is. But, I was perhaps a little bit surprised by your confidence on industrial revenues heading into 2008 that they can stay flat; you mentioned the Kautex is tied to the automotive world. Can you give us a little bit more flavor of how you come to that forecast of flat revenues in '08?

For industrial?

Yes.

We understand the automotive market and we know which models we are on. So, it makes it a little bit easier for us to estimate the Kautex numbers because it's not just auto industry… it is. But it's not jus that, if you are on the wrong model even in an up year, you could be having down revenues yourselves. So, I'd say Kautex is probably pretty dug and well understood. Non-res construction so far is still supporting the Greenlee numbers, although that's not a huge contributor to our overall revenue forecast, but they are a contributor. You've got fluid and power with oil and gas very strong. We did a big field reduction of inventory at Jacobsen, so that really helps us going into '08. So, we are not trying… we don't have to bleed the field down. The new golf car, E-Z-GO should sell well in the market, and we don't really have a strong new golf course opening number out there in '08. So, we feel pretty good about that. What do I miss there?

We think we reflect the environment we are seeing.

It's hard to predict what the US economy is going to do and we try to do the best we could and kind of take it as a negative approach in industrial to make sure we didn't overstate ourselves.

Ted, you mentioned that charge-offs in Finance have been very good. Your forecast for '08, does that imply a more historical charge-off rate?

We had an abnormally low rate, very, very strong performance in 2007. So, we are expecting it to tick up a little bit in '08, but still be at a very good level. The real drivers around the finance business are that we are seeing a little bit slower growth rates in a number of our businesses, primarily in distribution and finance, which have been our fastest growing business, but has a lot of consumer durables. So, we are actually seeing some declines in manufactured housing in marine, growth, but little bit slower in most of the rest of businesses. So, it is still growing overall, but a little bit slower. The main impact on us has been this indices mismatch between prime and labor. It hasn't been credit losses, growth is a little bit slower, but we're still getting growth. It's really been this margin compression issue that cost us about $2.5 million in the third quarter, cost us $7.5 million last quarter... in the fourth quarter. It is going to cost us about $3 million in the first quarter and then we have about $1.5 million bad news baked into the plan for the balance of the year, quarter-by-quarter which things not gone… would stay like they did here in the last two or three days, it could be a little bit of upside to us. So, we've got a fairly conservative forecast out there based on what these rates were looking like when we put this plan together, and as of the last week, they are looking very positive again, but that's fooled us a little bit in the early fourth quarter well, so we will hold on and see what happens.

That’s great. Thanks Ted.

Just one other detail on that Rob, by the way. Lewis mentioning Greenlee and strong growth we've had in the past, we've had three years in a row of double-digit growth at Greenlee, and when we put our outlook together for next year, we dropped it down into a low-single digit, just to give you an idea of kind of granularity that we are looking at there. So, a flat year at industrial is certainly in the cards unless things get considerably worse than where we are now.

Yes, great.

Thank you and our next question from the line of David Bleustein with UBS. Please go ahead.

Good morning.

Hi, David.

Quick question. Of the 500, Lewis you mentioned, a bunch coming from international, is that similar to your shipment mix?

Yes, it is. Right, our delivery mix is about the same as order mix, correct.

Okay. [inaudible] for '08?

Yes, it's been climbing up. It has gone from, international was 30% back probably at the start of the decade, now it's well over 50%, in fact, the order intake I think is forecasted to be about 60%.

We did a little over 50% international both order and delivery this year and we think the order intake will be about 60% international for '08.

Okay. What years are these planes being booked for and are there any deliveries left at all for '08 and what does '09 look like?

There is nothing left for '08, there are a few models that are available in the last half of '09. So, most of what we are selling… actually, most of those that are available in '09 are already spoken for, they are just not technically signed up. They've got customers names on them. So, we are really booking 2010 right now. Basically, all products other than new models like the CJ4 are available in 2010.

Right now in '09, the only two models available are [inaudible] CJ1+ and the Encore+, and as Ted said, they are really spoken for, for the most part with an order under negotiation, and with respect to Mustang, we are out into 2010 now.

Terrific. And then the last question. If you have cancellations in your '08, '09 orders books, do you have customers looking to move forward?

Absolutely.

Dying to.

That's all I needed. Thank you.

And our next question from the line of Jeff Sprague with Citigroup. Please go ahead.

Thank you. Good morning.

Hi, Jeff.

Can you give me a sense of… the big picture on the LCC, how you think about the business case, whether you are looking at it on an internal rate of return or just kind of cash flow basis, but kind of the break-even volume case for the airplane?

I will start on that one. We treated this LCC no different than any other major capital investment we have to make or decided to make. So, we look at it on several different fronts. Intrinsic value is the primary one, IRR is right in there beside it. Return on invested capital, we risk adjusted based on pricing, volumes, etcetera. We even forecast to be conservative some type of downturn in the economy during the devolvement cycle. So, we don't have our head in sand there. And I think the amazing fact here is, I came to Textron in ’92 and except for a very small hiccup in the launch of the Citation 10, which was primarily due the fact we'd never done a total fly by wire aircraft, that was our first one. And come out of car business, I can tell you there are some phantom circuits that exist that you can't really wrestle to the ground until you build a few of those. And so other than the Citation 10, which was a minor, minor deal, operationing brought it up, we just haven't missed on any ship we've decided to do from when started on a piece of paper to when we delivered it to the customer, as I talked about the Mustang example. And I think that because we've done so many of them, we've done… I don't know how many new ships since we began making in jets in the early ‘70s. So, our cycles of learning on new aircraft is very high. And our understanding of the market is very high and our step-up capacity for customers is unusually high at somewhere between… well roughly two-thirds, I might say 70%, but certainly two-thirds. So, those factors allow you to be pretty accurate as it relates to what the pricing ought to be and in turn what kind of volume you should expect. And we know what the customers are doing, not many secrets in this business… sorry, not customers, but we know what the competitors are doing. And so based on all of those facts, our Board approved that for us yesterday, and we are ready to go.

Can you give us a sense on in terms of units, what the business case would be built upon?

We expect to sell, I’ll just say hundreds of units. I don't know that we really want to give that number out. We expect to sell hundreds of units over the course of a decade or so.

One other fact that we looked at just to make sure that our historical record would support any estimate and that is I don't think there has been a jet certainly in the ‘90s. since I came here, there has not been a jet that was launched that had a forecasted delivery quantity that hasn't far exceeded the delivery quantity or the profits. So, we think we launched on time. We have a track record of keeping our costs in line. We understand how to launch a ship successfully. So, we don't... if you try to produce too many upfront, you can get in trouble, but you've got to satisfy market demand and carefully balance. We've really created a nifty airplane, but we really have been... we are very shrewd about how we did it. I think Jack and his team have done just a wonderful job on this aircraft. We are going to really spend a lot of time on it on February 6 and you can be there on phone or in person, you will find out a lot about it.

Could you just clarify the R&D? I think the $20 million in '07 is the absolute, but the $53 million in '08 is the delta.

No.

No?

The $53 million is in absolute.

Okay, and then the $120 million in 2010 is an absolute.

Jeff, one of the things that we did was why we took our time on this was we wanted to make sure we knew what variance we want to produce and what it was we were designing. And you are probably remembering, because we were using an estimate that could be as much as $85 million.

Yes.

And that's why it's tempting to add the $20 million to the $53 million, but the $53 million is the absolute number.

Okay. I got it. Thank you.

And our next question from the line of Ronald Epstein with Merrill Lynch. Please go ahead.

Hi, good morning guys.

Hi, Ron.

Turning that table a little bit. Looking at Bell in a little more detail. The $30 million that you guys took on H-1, what was it up for?

Pardon me.

The $30 million charge on H-1, what's that related to?

That is related to the fact that we made a decision year plus ago with our customer that on the Yankee we would no longer try to re-man the cabin on that product and that we would build new cabins, and in fact build that entire helicopter as a new built helicopter. And we went outside to a source to procure those cabins and for a number of reasons I don't want to get into, the cost is higher than what was expected. We are having some discussions with the customer and with the supplier about how we are going to allocate all that additional cost among the three of us. Those discussions are not resolved, so we chose in the quarter to take a charge for the next eight upcoming lots where we would absorb potentially some of that cost in transition to getting into the new built helicopter.

Ted, on the H-1, when do you expect it to make money?

We expect it to start making money after the fifth lot, which… I don't have the delivery schedule here or maybe I do. About 2010 we would start delivering profitable units.

Okay. And then one more Bell question, if I can. Kind of looking through some of the DoD documents, it looks like the price of the aircraft per ship potentially has gone up a lot. Does that worry you guys because going from, I guess, about $5 million airplane to something close to $12 million or $13 million, it's creeping up towards the price of a Black Hawk, does that worry you guys or not? How should we think about that?

That’s gone up from $5.5 million to, call it round numbers, approaching $10 million.

Okay.

And we believe and the customer believes that is still the best economic deal out there.

Certainly, not something [inaudible], but it is what it is to get the performance that the customers wants to get.

Okay. And then just one last question. On the LCC, if you guys can answer this, from a CapEx perspective, you guys do to bricks and motor to build... it is a big cabin, right? So there should be a lot of tooling, you probably need space, or is that something you think about outsourcing?

We are doing this a little bit differently and that we are going to be buying more of the work outside than what we have traditionally done. So, we will limit that, but if you think about it, the total development program is about $780 million, CapEx is just a little over $100 million of that. So, it is mostly development cost.

Great. Thank you very much.

And our next question from the line of Steve Tusa with J.P. Morgan. Please go ahead.

Hi, good morning. Just a [inaudible] little bit with this Cessna margin here, if I look back at '07 and the previous few years, clearly incremental has been pretty good. Even if we strip out the incremental R&D, you are looking at a low 30% incremental margin on revenue growth in 2007 and if we do kind of the same analysis for this year, you are 13 points below that, so you are around 19%. So, that's kind of adjusting for the R&D issue, is the difference there… that big difference that we see in that number, I mean, is that really other investment and I don't know this… I don't even know what the name of this company is, you acquired Columbia again?

Yes.

So, that is the difference?

Columbia is 70 basis points, the LCC is 90 basis points, other growth and R&D beyond LCC, I don’t have that calculation, that's probably 15 more.

I am adjusting the entire R&D increase, so that you guys just give us the pure R&D number, it just seems like a pretty significant degradation in the core incremental margin of the business. I guess the question is, there is nothing unusual going on outside of these items you highlighted that… that number that much?

Depreciation expense will be the next big one. I mean, this is similar to situation we have at Bell. We went for several years where big steps up in volume were eating up available capacity and coming very, very inexpensively. And as we have now passed that point, we are having to put quite a bit more CapEx into this business in order to grow it, great return by the way, but that is driving our depreciation expense up quite considerably.

Okay. And just the follow-up on that, I mean, you talk about wanting to be a premier multi-industry company, when I look out at the guidance that a lot of these premier companies have given over the last month, even in the face of this environment you are looking at, certainly north of 10% EPS growth… 10% to 15%, 15% is kind of the bar and who knows if they get there. But, for now, they are saying that that is the right bar, some are putting up 20% EPS growth. You got 7% at the mid-point of the range, now I understand there is investment and all this other stuff, but all these other companies are also investing heavily in there business and doing acquisitions and things like that. Do you think that 7% mid-point of the range is enough to get you to premier status, because you guys have used that word quite a bit over the course of this conference call?

You have an interesting definition of premier. How many of them did 32% last year?

You guys are talking about a journey here, so it’s…

That’s exactly right, we are talking about a journey and we would have 14% growth, but for LCC and the two acquisitions and that’s the way life works. This is not a perfect linear progression, but we will work hard to get to a number that’s very strong, if we can make it in ’08, but we are making investments that we believe are increasing shareholder value, which is really an intrinsic value, which is our ultimate yardstick of what premier looks like.

Right, I just think the revenue growth you guys have put up over the last couple of year, you have never had or you very seldomly had an EPS growth rate that’s below your revenue growth rates. So, this year just seems a little bit unusual on that --?

We wouldn’t have but for those three items.

Right. Okay. Thanks a lot.

Let me make two more closing comments real quick. The year is not over yet, but we try give you the best guidance we can, but we don't quit here, 11 more months to run. I want to go back on the Citation 10 because I probably shortcut that answer just a little bit on flight control systems, remember that was the first step well… that is the only aircraft to save the Concorde, which is no longer flying, that flies at Mach 0.92 or higher, and so if you said technically what was going on there, it was more related to the fairly complicated flight control system than actually fly by wire although they are kind of intertwined there. So, I just want to clear that up.

Let me do one other thing too because I finally found my missing piece of paper and I know this is of interest to all of you. The LCC current development cost estimates right now for '08, $53 million, $0.14 of share, for ’09, $97 million, $0.26 a share, for 2010, $120 million, $0.32 a share, and that ought to be at about the peak rate and then it should flatten out, start to drift downward thereafter.

All right, operator, if we don't have any other calls in queue, this will conclude our call and we thank everybody for joining us today. Take care.

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