Textron Inc. (TXT) Q3 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by and welcome to the Textron Earnings 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 this conference is being recorded. And the recording will be available as of 11:00 AM today until January the 28th at midnight. And you may access the AT&T playback service by dialing 1-320-365-3844 with the access code of 896298. Again the number is area code 320-365-3844 and the access code of 896298. I will like to turn the conference over to our host, Mr. Doug Wilburne, Vice President of Investor Relations. Please go ahead, sir.

Thanks Alex, and good morning, everyone. Joining me today are Lewis Campbell, Textron's Chief Executive Officer; and Ted French, Textron's Chief Financial Officer. Before we begin, I'd 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 fillings and also in today's press release. Finally, you can also find a slide deck containing key data items from today's call in the Investor Relations section of your website. And we will be specifically referring to a couple of these charts today during our discussion. So moving to our results, revenues in the quarter were $3.5 billion up 13.6% from a year ago. Earnings per share from continuing operations were $0.85 per share compared to our guidance of $0.76 to $0.86 adjusted for the move of Fluid & Power to discontinued operations. By the way operations at Fluid & Power generated about $0.05 of EPS on the disc ops line which is not visible due to other offsetting items. Slide 4, in the key data schedule shows the major elements that are contained on the discontinued operations line. Free cash flow through the first nine months was $344 million compared to $442 million in 2007. Finally, we retired 8.1 million shares in the quarter at a cost of $342 million. With that I'll turn the call over to Lewis.

Thank you, Doug and good morning, everyone. These are unprecedented times in the U.S. financial markets and around the world. As a result, we are taking immediate actions in three areas; a downsizing of TFC, measures related to our funding needs, and steps to accelerate cost productivity across the enterprise. I'll start with TFC. First, we'll be exiting our asset based lending and structured capital segments plus several additional product lines through an orderly liquidation over the next two to three years as market conditions allow. These assets represent about $2 billion amounts receivable within TFC, $11.4 billion portfolio and we estimate that these assets can be reduced by about $500 million by the end of 2009. Second, we are limiting new overall originations in our distribution finance, golf and resort portfolios consistent with maintaining franchise value and our commitment to serving existing credit worthy customers. They should contribute another $1 billion in asset reductions next year. They can... then these two actions should result in over 10% reduction in managed receivables in 2009. As a result of our decision to downsize we expect to write-off if not all most of the goodwill of TFC. As well as take a restructuring charge of headcount reductions and consolidations in the fourth quarter. Going forward we will continue to carefully evaluate the appropriate range of lending activities in light of the strategic fit and continuing developments in the capital markets and all in a matter that maximizes value of the shareholders and in the current or future financial market scenarios. We are talking about TFC let me comment a bit on credit performance. Credit stats continued to soften in the third quarter particularly in September. Given the historic events in the past several weeks it's apparent that we're likely to experience some more difficult credit environment in this cycle. However, we believe our credit losses in this tougher setting will be manageable and Ted will share much more of those details in just a minute. Now let me address capital funding, first let me assure you that throughout these recent volatile times we have maintained daily access to funding from the commercial paper market as well as other sources. However, given the possibility of continued volatility, we are taking additional steps to provide predictability in our funding outlook. Our first action, actually taken in September was to suspend all share buyback activity which will remain in place until after financial markets stabilize. The suspension includes the remainder of the repurchase we announced in July as well as repurchases we had planned with the proceeds from our pending sale of Fluid & Power which incidentally is scheduled to close in November. With respect to our commercial paper program it's important to note that it is fully supported by $3 billion in credit and committed credit lines within... and they are well within the excess of our current outstanding. So we have plenty of credit line back up for our CP. These commitments extend to 2012. The point of reference, we stress tested our plan under the unlikely scenario that; one, CP markets close and remain closed for A2/P2 issuers over the next 12 months and term capital markets are closed as well. Under this circumstance we believe we have sufficient capacity under the bank lines to cover all term maturities for the next 12 months. Now we surely don't predict this outcome but preparing this is extremely valuable in these volatile markets. Nonetheless, to provide additional reliability we're exploring a number of other options to reduce our use of commercial paper. Moving now to our accelerated cost improvement plan, in addition to restructuring at TFC actions to reduce overhead and improve operating efficiencies are under way across the enterprise primarily at our industrial segment. We expect a total cost of restructuring activities including those of TFC will be approximately $25 million and we estimate they will yield approximately $40 million in annualized savings. At industrial the impact of the economic environment including our difficulty in getting price recovery of commodity cost was apparent in the third quarter segment results. Now we've been actively modifying customer pricing agreements at Caltex to better insulate ourselves from commodities inflation risk going forward, and we expect to see benefits from these protections next year. In the mean time, demand of the segment remained pretty good in the quarter, with overall organic growth of about 6%. This reflected strong non-NAFTA growth of Caltex and strong double-digit growth at E-Z-GO and Jacobsen. However, with further deterioration in world economies, there was a fall off in demand in September in the segment. And we expect slowing will continue from here especially at Greenlee, which has begun to see a significantly slower commercial construction environment. Now moving to our aircraft and defense businesses, the defense industry is relatively less affected by general economic trends. So the government lines of business at defense and intelligence at Bell helicopter provided more predictable growth outlook. For example, we received a $242 million in funding from the army for 17 Shadow systems and $313 million for 434 armor security vehicles. These orders fill our production plans for both products well into 2010. And we're operating at very high levels with these programs in terms of delivery, schedule, quality and cost, good for both our customers and our shareholders. We continue to develop new products here that will be valuable to our U.S. and allied customers. For example, we recently demonstrated new technologies for command and control of unmanned vehicles compliant with NATO standards which will allow interoperability among allied assets. At Bell, we received good news on the H1 program during the quarter. After utility version was approved for full rate production and the attack model was extended for limited production pending next year's operating review. As a result, we recently signed a LOT-5 contract for the H1 for 11 utility and 5 attack units to be delivered in 2010 and 2011. The V22 program continuous to perform well and six of the 13 units delivered so far this year were delivered early. Finally, on the ARH we've been working closely with the army and defense department. We're working hard to bring the current view and to be a successful conclusion and we expect a decision soon. Moving to the commercial side of the Bell global demand is currently well on excess of industry capacity. To that point year-to-date we've received 235 new orders including 64, for our new 429 model. With strong demand from both commercial and military markets, we continue to make steady progress with expanding overall capacity. This is not yet reflecting in our current revenues as much of this activity is readying for the significant ramp up of our three major military programs as well as our commercial output. Staying with... aircraft and turning to Cessna. They posted another outstanding quarter delivering 124 jets an all time quarterly high, as we continue to ramp toward our annual target rate next year, of about 535 jets. In the aftermarket arena, our investment in service centers continue to pay dividends in the quarter, as parts and service revenues and profits were up 9%. Our first four XLS plus models rollout the production line, and are now in final preparations for our initial deliveries this quarter. We also made good progress with development on our new CJ4 during the quarter, as we accumulated 114 flight hours on our prototype article. The CJ4 will enter into service in 2010. Finally, we reached an important market milestone in the quarter as we surpassed 1000 citations operating in Europe, underscoring the global nature of demand that has emerged over the past five plus years. So lots of accomplishments and success in the quarter for a world-class company. Now I understand many of you attended NBAA last week where you heard how recent economic developments might impact the business and industry. Market indicators such as used aircraft sales and jet utilization weakened appreciably during the quarter especially in September. In this environment we actually booked 47 jet orders last quarter which was less than what we anticipated. So the order downturn has arrived more quickly than what we were expecting at the events of the past several weeks have put a big chill on the market. The last down cycle which began in 2001 provided us with critical experience in managing in a down environment. We're fortunate this time to have bad experience but more importantly to have a very large and robust backlog of over 1,500 jets which includes many customers who are interested in taking deliveries earlier if they can to develop a very specific and dynamic plan to maintain delivery continuity. Our Cessna team is contacting customers in the order book now, so we can be prepared early in this cycle in the case we need to move up deliveries. So we remain comfortable with next year's production plan at this point but beyond that frankly we are taking a wait and see attitude with respect to how demand develops from here. On the other hand with our backlog, we don't need a lot of net orders to sustain our production in 2010 and 2011. Beyond that we continue to have a faith on a healthy long-term systemic global demand and we have a very robust new product pipeline over the next 10 years as well. In the meantime, we are carefully monitoring the situation and will make sensible adjustments at appropriate time if necessary. To wrap up, the credit and financial markets have changed precipitously and as a result we are taking strong measures as we have outlined this morning to address specific challenges and prepare for a slower economy ahead. You can be sure that we're committed to implement these actions as expeditiously [ph] as possible as well as take future steps necessary to navigate these most challenging times. With that I will turn it over to Ted.

Thanks Lewis, good morning everyone. Today, I want to start with a discussion of the factors that pressured TFC in the quarter relative to our guidance. We generated operating profits at TFC of $18 million which was $12 million less than our forecast of about $30 million. The three primary drivers were as follows. First, coming into the quarter spreads between prime and LIBOR rates were already abnormally compressed. As we now know those spreads continue to narrow in fact they're virtually non-existent as we speak. That led to a $5 million impairment related to our distribution finance securitization facility. Second, even though we were projecting abnormally high borrowing rates, they went up even further and that cost us about $2 million. And third, as the consumer economy deteriorated, our loan loss provision cost about $5 million more than what we had planned for the quarter. Now let's talk about TFC results going forward. Looking at the fourth quarter, we're assuming the credit performance continues to weaken as well as a continuation of the current dislocation in the relationship among prime, LIBOR and Fed fund rates. On this basis, we're projecting a range of possible outcomes from a pre-tax profit of $5 million to a loss of $20 million, depending on how these two major factors play out. This may seem like a wide range for TFC, but in the current environment forecasting accurately has become much more difficult. Looking forward to 2009, the goodwill charge and operating results in the fourth quarter will likely result in a capital contribution to TFC between a $170 million and $200 million in the first quarter of next year to maintain certain requirements specified under our committed credit facilities and support agreement. With that let's continue with our forecast and discussion by examining the factors that are going to affect 2009 at TFC. To facilitate this discussion I'd ask you to please refer to slide12 in our key data schedules that we have put up on the website. This schedule summarizes a few very important points that address the resiliency of asset values in most of our portfolio. Historically, TFC has experienced low charge offs relative to delinquency rates because of high recoveries on defaulted loans. For example, in our distribution finance portfolio recoveries have been high because we have three avenues for recovery. The underlying hard collateral to finished goods inventory, the guarantees of the dealers and the repurchase agreements with manufacturers. In the case of aviation finance we've had extraordinary control over recoveries because of our intimate presence in the aviation markets. More over the aviation portfolio currently has a loan-to-value ratio of about 70%. So there is significant collateral cushion from which to recover. In our golf portfolio high recoveries reflect the significant level of owner equity in the assets typically 25% of our assessed value as well as deep pocket owners plus the intrinsic value in the underlying real estate in the event of a default. Finally, our resort portfolio has shown steady performance through every cycle over the past 20 years. For the largest portion of this business we have three layers of loss protection. Excess collateral related no approval excess spread and the advance rate being limited to 90% of pool value developer repurchase obligations and finally the underlying real estate itself. With that as background, please take a look at slide 13. We are rolling out two possible 2009 scenarios which range from TFC breaking even to a loss of $125 million. Neither of these scenarios represents our forecast for next year per se, rather we are presenting this analysis to you as a way to understand how different economic scenarios might impact TFC performance next year. Those scenarios reflect our downsizing plan. The breakeven scenario assumes that the charge-off rate goes to 1.5% compared to the current year-to-date rate of 0.81% and our previous peak of 1.25% reached during the 2001 to 2003 period. At these levels reserves would in next year at 2.25%, compared to our current level of about 1.6% and the last peak of 1.77%. Looking at the financing side, the breakeven scenario assumes the current prime LIBOR spread improves from where it is now to the August levels of about 250 basis points, but still higher than the normal level which has historically been a very consistent 285 basis points. And this scenario also reflects the borrowing spread over LIBOR returning to about a 100 basis points compared to the current average of about 250, but still much higher than our historic norm. Now, moving to the right side of the chart, you can examine for yourself the assumptions there under the loss scenario and how they compare. We believe, these scenarios are reasonable possibilities, but given the tremendous uncertainty in the economy and financing markets, we're going to be monitoring developments very, very carefully and continuing to react as appropriate. With that I want to move now to our normal analysis of what drove our third quarter results on a year-over-year basis. Earnings per share from continuing ops were down $0.03 from a year ago. Volume and mix provided a positive $0.10. Higher pricing of roughly 3.3% added $0.27 a share while inflation of about 3.2% cost us $0.22. Performance contributed a positive $0.03, acquisitions a positive $0.02 and miscellaneous items about $0.04. Head-wins from engineering, research, development and depreciation cost $0.08 and Textron Financial was lower by a dime. There were two one-time items that benefited last year's third quarter by $0.09. The first was $0.04 from a recovery in the ARH program and a second $0.05 related to an insurance settlement. So let's move now to our segment discussion and I'll start with Cessna. Revenues at Cessna increased a $150 million due to higher volume and pricing and the benefit from last year's acquisition. The higher volume reflects increased jet and caravan deliveries, partially offset by lower used aircraft sales. We delivered 124 jets in the third quarter and that compared to a 103 last year. Cessna segment profit increased $16 million due to the impact from higher volume and pricing in excess of inflation. These were partially offset by higher engineering and product development expense, higher overhead cost and a modest used jet valuation adjustment. Cessna backlog at the end of the third quarter was $15.6 billion, up $3 billion from the end of last year reflecting 484 Citation Jet orders taken year-to-date but down about $400 million sequentially from the prior quarter. Bell segment revenues increased $52 million in the third quarter and segment profits were up $5 million. Revenues and segment profits in the government business were down $44 million and $11 million respectively and that decrease in revenues is due to lower V22 volume partially offset by higher H1 program revenue and higher spares and service volume. Segment profit decreased due to the non-recurrence of the 2007 ARH cost recovery and the lower volume. Revenues and segment profit in the commercial business were up $96 million and $16 million respectively. The increase in revenues is due to higher helicopter volume, higher pricing and revenues from newly acquired businesses. The increase in segment profit reflects the higher volume and sale and favorable sales mix and higher pricing in excess of inflation partially offset by some unfavorable cost performance. Bell's backlog ended the quarter at $5.3 billion up a $1.5 billion from the end of last year. Defense and intelligence segment revenues were up $177 million in the third quarter primarily due to the acquisition of AAI partially offset by lower volumes. Segment profit increased $31 million, reflecting the AAI acquisition and favorable cost performance largely related to the ASV program. Third quarter ending backlog D&I was $2.6 billion compared to $2.4 million at the beginning of the year. Revenues in our industrial segment increased $74 million due to higher volume, favorable foreign exchange and the beneficial impact of an acquisition and some higher pricing. Segment profits were down $17 million due to inflation in excess of pricing and unfavorable sales mix, partially offset by improved cost performance. For Textron Financial, revenues were down $30 million due to lower market interest rates, partially offset by the benefits of higher volume and interest rate floors. Segment profit was down $36 million due to an increase in the provision for loan losses and higher borrowing cost partially offset by the benefit of interest rate floors. The increase in the provision for loan losses was primarily attributable to the distribution finance portfolio as general U.S. economic conditions have continued to impact borrowers. The increased borrowing cost are driven by a widening in the spread between LIBOR and the target Fed funds rate and to a lesser extent from increased borrowing spreads on issuances of debt in comparison with '07. However, these increases were substantially offset by increased receivable pricing as a result of the floors. With respect to credit quality the 60 day plus delinquency percentage increased to 1.06% of finance receivables from 0.61% at the end of the second quarter. Our non-performing assets of 2.67% was up from the second quarter level of 2.31%. Corporate expenses of $38 million was lower than expected primarily due to lower stock-based compensation expense which had no material impact on EPS due to the offset in the tax line related to our hedges. Correspondingly, the higher tax rate had no material impact on EPS relative to guidance as the higher rate reflects the non-taxability of hedge losses. Excluding the hedge impact, our effective tax rate in the quarter was 33%. Now for our fourth quarter earnings outlook. Earnings from continuing operations and before restructuring and goodwill impairment charges are expected to be between $0.80 and $0.90 a share. Our projected free cash flow provided by continuing operations forecast remains at $700 million to $750 million. To summarize, while we're disappointed that we've had to moderate our expectations, we're taking all necessary steps to maximize performance in this environment. Doug will provide modeling information now for our fourth quarter.

Thank you, Ted. At Cessna, we're expecting fourth quarter revenue to be approximately $1.7 billion with margins of about 16.5%. This reflects about a 140 jet deliveries for the quarter and relatively low used aircraft revenues. At Bell, we expect fourth quarter revenue of around $750 million with margins close to 8% reflecting an unfavorable mix of commercial deliveries. At D&I we're expecting revenues to be about $525 million with margins of about 12.5%. Industrial revenue is expected to be approximately $700 million with low single-digit margins and Ted has already covered finance, so that concludes our prepared remarks. As we move to open up the lines we ask that participants, please limit themselves to one question with an optional follow-up. So Alex we're now ready to open the lines. Question And Answer

Thank you, sir. And the first question comes from the line of Ronald Epstein with Merrill Lynch. Please go ahead.

Hello.

Good morning.

Hi, good morning guys, how are you?

Hi, Ron, good.

Good. So when you guys were scrubbing the backlog at Cessna, I mean have you seen any evidence that of any customers wanting to push out, wanting to differ and how're you going through that process?

Well Ron, it's Lewis. One of the unusual things about this environment ramp is we just haven't seen too much of that yet. Cancellations are not even know where are they... we've had a few customers who come and ask for different financing in terms of the fourth quarter. But basically we just haven't seen much movement as you might have expected by your questions. So things are pretty steady at the moment.

Okay. And then just one follow on to that I mean what impact do you think that what's going on in the capital markets will have on the financing of business jet?

It's a little early to tell Ron. We've had a few customers really in the month of September during this kind of high turmoil period of time, come to us and say their financing is falling through. But I mean it's less than a handful and I have asked if, we would look at their credit from a TFC standpoint to step in from whatever finance that they had previously arranged typically with a local bank or regional bank. But too early to tell, I mean very clearly if things continued to be as tight as they are, we may see more customers come in and look for alternate financing. And if they're credit worthy, we're happy to stand in and do that.

Great. Thank you, guy.

Yes.

Next question comes from Heidi Wood, Morgan Stanley. Please go ahead. Heidi R. Wood - Morgan Stanley & Co.: Hi. I'm going to take Ron's question and ask it a little bit differently. But Lewis, you've acknowledged seeing the softness in the used business jet market and it's probable that we'll see within the next three months to five months a possible risk of a decline in pricing on used. And so customers are increasingly going to be confronted with being able to see getting used plans earlier and cheaper than some of the new planes that they have placed orders for and presumably they have wait for. So give us a little bit of color about your '09 delivery assumptions on... and how many of these slots in 2009 or at risk of deferral. They may not cancel but they may ask to push out?

Well, like as I said in the earlier response to Ron, we are not seeing any number that I can even put my finger on I mean let's presume I am not even aware of anybody asking to push back and we review our numbers with Jack Pelton and his gang all the time. So, specifically on '09 we have not seen much... any push back of any consequence. Heidi R. Wood - Morgan Stanley & Co.: So, Lewis you think you should wait to see it, or do you think you should anticipate it and maybe enhance the scarcity value of your new planes in anticipation of what's going to happen because your customers are still used to seeing their planes at a profit when they have gone in to see what they were marketed at, so they thought that a profit put over the next couple of months. They may start to see that those prices are coming down and that may cause them to feel differently.

Well, I can't really argue with the logic of your point so, please don't take my answer in the wrong way here, but let me put some statistics out there. First of all we're not seeing a dramatic reduction in used prices. They used market for Cessna is available for sale is a little bit of ahead of 13%. The average used availability over a long period of time has averaged between eight plus percent and 19 plus percent. And coincidently, the average over... let's say the last 10 years probably is close to 13%, I think it's 12.9%. So far we haven't seen a rapid deterioration in used. And then next point about 70% of all used aircraft are no longer in production. So that does bode well for staying in newer aircraft that are more fuel efficient and have more features which I think is a plus. The other point I would make relative to Cessna is and we have talked about this before but I want to make a point that one of Cessna's strength is we continue to upgrade our products in fairly rapid succession year-after-year-after-year. I looked at the chart this morning, there is only one model for sale right now that has not been refreshed or launched since 1996 that was a Citation 10 came out at '96. Everything else is 2004 or younger. And over the next two, three, four, five, six... eight and half... nine years we will be upgrading at least one product every single year. So therefore, I believe that Cessna unlike others has a very high probability of maintaining our volume levels because we have new products for sale and of course those are things that attract our customers.

I think maybe one follow on Heidi relative to being proactive the Cessna team is out proactively talking to everyone in the order book for '09 deliveries right now to try to get a sense as early as possible. If anyone is going to come forward and ask us to push something out because we do have other customers who are continually expressing an interest and being pulled forward and the challenge of course is getting those to all balance out requires some advance planning. So the sales teams at Cessna is out right now doing just that trying to understand if they have someone that might slip so that they can work earlier rather than later on trying to pull someone forward for that aircraft. Heidi R. Wood - Morgan Stanley & Co.: All right great thanks very much. Just one quick follow-up though I didn't get the impression again from your answer to Ron's question, so again give me clarity if you can about do you have specific insight into the financing requirements per customer so that you know what's they are fine for the 2009 plan?

We're out inquiring right now, we've had people come to us but many of our customers financed with a variety of other sources particularly our domestic customers who've historically had lots of other bank alternatives. But we are out talking to them right now to try to understand if they may have issues.

Because, when someone places an order we not only we have to put down a non-refundable deposit, but also we require an understanding of where they're going to get their financing. And knowing that then that database is really valuable as we can then look across the entire spectrum of customers, and then have some understanding which customers might have the most difficulty. We also know their net worth et cetera. So, we have pretty good understanding about this. Heidi R. Wood - Morgan Stanley & Co.: Great. Thanks very much, gentlemen.

Yes.

Next question comes from the line of David Strauss with UBS. Please go ahead.

Good morning, thanks.

Good morning.

The draw down the downsizing of TFC that you're talking about happening through 2009. What are you assuming there for kind of just the natural run-off the receipt of receivables versus actually selling part of the portfolio?

Well, most of it is, in fact all of it is predicated upon a run-off scenario, although once this is out there publicly our experience the last time that we took a piece of TFC out, was that people will come forward they're interested in potentially buying some pieces. But right now, it is a natural run-off driven contract termination driven. So it's actually interesting the pieces that we are exiting, will actually run-off a little bit slower the areas that we are slowing down will actually make the largest contribution to '09's reduction where as businesses like ABL will actually take a little bit longer than that start to run down.

Okay. And Ted could you give a little more color around the idea that commercial paper market completely closes up that you'll be able to cover all your maturities. What are you assuming there for kind of the underlying portfolio quality going forward in that... under that scenario?

Well we're really looking at all of our existing CP requirements and our term debt maturity profile, as it runs out over the next number of quarters. And we have a whole range of both public and private sources to replace all of that term debt as it rolls off. Number one of which is the free cash flow that our business generates, over that period of time that we'll first and foremost go to ensure liquidity. Obviously, the next most attractive is our program of de-assetting both TFC and then also asset sale such as Fluid & Power. We've a variety of securitization of vehicles that are in place today and we're working on extending. We've in the very recent days, been able to establish some bio-lateral term loans with various counterparties. And then obviously, we're looking at as market conditions permit other term debt replacements. So essentially, looking to term out and reduce the exposure on the CP side. And it might be a nuance, it wasn't quiet obvious but lot of the assets that we're downsizing at TFC are specifically those assets which are short funded assets such as the ABL and parts of the distribution finance business. We have far less challenge with our businesses like aviation finance which are long funded assets.

Okay. And one quick last one your commercial paper balance outstanding as of the end of the third quarter?

Combine Textron and TFC is just over $2 billion with about maybe it's a bit lower than that today but and with back stocks of $3 billion.

Okay great. Thanks.

We are well back stocked.

Thank you.

Next question comes from the line of Cai von Rumohr with Cowen & Company. Please go ahead. Cai von Rumohr - Cowen & Co., LLC: Yes, thank you and thank you for providing some of the detail in terms of your loan-to-asset ratio is very helpful.

Thanks Cai. Cai von Rumohr - Cowen & Co., LLC: Ted can you tell us kind of what is the expected run-off versus... natural run-off of receivables or what can you get at TFC in the fourth quarter near term and what are your near term refinancing requirements and also I think at June you had about $2.6 billion of securitizations. When do you kind of those securitizations run-off in terms of creating additional obligations for you?

I think the first one of those securitizations that we have to re-up is sometime next May, is in next May so we got a better time on that. We do have some term debt maturing about $460 million between TFC and Textron, the largest piece of that is at Textron not at TFC. Cai von Rumohr - Cowen & Co., LLC: That's in the fourth quarter?

In Q4 yes. Cai von Rumohr - Cowen & Co., LLC: Okay.

They are not very much in Q1 and then it builds up across the course of the year. So we the BS setting is going to start picking up more aggressively probably early in the first quarter. We have to do this very carefully, we will notify people of our intention in areas where we're leaving. Obviously, it's easy when you are not picking up new business remember a lot of this business that we're tightening down on has been growing like gangbusters. So we're not only going to grow, we're going to turn around and go the other way, so that will create a lot of relief. But in a number of areas it's very important that we don't go too fast and create a liquidity problem for our customers. We need to create an ability for our customers to move to other sources and create funding continuity for them. So we've developed a pretty aggressive plan, but we're going to implement it very, very carefully to ensure that we don't create problems for ourselves on the credit side as we go to take these asset levels down. Cai von Rumohr - Cowen & Co., LLC: Okay. Just a quick follow-up. You said that kind of start in the first quarter, but I think your asset to TFC were up about a $125 million in the quarter. Do you expect them to come down to kind of provide some help in meeting those near term debt maturities? And could you follow-up, you said some people may come forward to express interest, what's the chance of maybe kind of selling off at a discount some of those businesses you might exit?

Okay. First of all, most of the run-off you have seen just recently is seasonal growth in the distributional... in the distribution finance business. Our actions to start taking assets out have... are already a month plus old. So I'd say it starts in force in the first quarter, but we're already taking steps to stop filling the bad tub up if you will. But the drainage gets a little more aggressive as we get into Q1, Q2 timeframe. So we're going at that I think in a very measured paced and intelligent way that says, let's take the pressure off as quickly as we can. But let's be smart about it and not create problems on the credit side by rushing too fast in it. And I think, our plans are still evolving, obviously the last month has been quite a lot of changing environment and we've had to react to that changing environment. But I think we have a good plan in place and we're looking for more alternatives. I suspect that we may have assets that are attractive to people in here or there among the portfolio. And it's really hard to predict but I wouldn't be surprised if we're able to sell a piece here or there. That's what happened last time as you know--

Right.

We announced we're going to get out and all of a sudden people started knocking on our doors. The environment is a little tougher right now so they may not be as many. Cai von Rumohr - Cowen & Co., LLC: Thank you very much.

Next question comes from the line of Nicole Parent with Credit Suisse. Please go ahead. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Good morning.

Good morning, Nicole. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Ted, I guess could give us some color on the funding requirements at TFC, they are required apparent to make the capital contribution in the first quarter and how we're going to expect that to play out?

Yes, Nicole, there is a fixed charge coverage requirement at TFC, that requires us to maintain under our support agreement a fixed charge coverage ratio at TFC and the way it works there is a cure, which says if we ever go below a certain level we have one quarter to make a contribution to restore that fixed charge coverage ratio and the charge for the goodwill write-off during the quarter, the fourth quarter and some restructuring charges we expect to take during the fourth quarter, will require us to make the payment in the first quarter under that support agreement. In order to maintain... restore that fixed charge coverage. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Okay can you tell us what that surge level is?

Pardon me. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Can you tell us what that surge level is?

Its 1.25. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Okay.

1.25 times coverage. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Okay.

And Nicole that doesn't really affect our cash flow, it just moves money from one entity to the other.

Yes, the net effect of that is no incremental debt required essentially we'll move some CP from TFC to Textron going under this covered ratio is not an event of default. Under our agreements we just have to make this make up payment and effectively we'll end up moving a little CP from TFC back up to Textron which frankly isn't all that bad an outcome in the current environment. We can borrow typically a little cheaper at the Textron level. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Okay. And I guess with respect to the TFC sub-segment I mean it's partly irrelevant going forward but I guess in the context of the quarter could you give us some idea, the contribution of the $19 million of net income that you actually generated?

Yes, $18 million was the-- Nicole M. Parent - Credit Suisse Securities (USA) LLC: Sorry $18 million.

Let's say we had a loss at DFG, we broke even at golf and every other business unit was profitable. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Okay.And just one last one, when we think about portfolio moves and then you think about the funding requirements. How do you think about the portfolio as it exists on a go forward basis? You are obviously making move with the finance business. Are there any other plans or do you contemplate selling anything else that you have right now due to the market environment, does the market environment conclude that?

Well we don't ever talk about things we might sell specifically in advance. But as we said we're always evaluating everything in our portfolio to try to determine what the best value for our shareholders would be. And we've certainly Fluid & Power falls into that category. Let's say business that has essentially tripled its EBITDA in the last three years as one of its best backlogs ever in a good market. So now it was the ideal to time to sell that business and we've taken that step. But we'll always look at everything. Nicole M. Parent - Credit Suisse Securities (USA) LLC: Okay. Thank you.

And our next question comes from Shannon O'Callaghan with Barclays Capital. Please go ahead.

Good morning, guys.

Good morning, Shannon.

So I mean is your understanding that the support agreement would prevent you from selling all of TFC and if that's not the case why didn't you pursue a more bolder strategy like that rather than to wind down?

Well, I understand that sentiment, but we clearly don't think that would be in our shareholders' best interest. We looked at all alternatives obviously, and really any concept to selling, spinning or giving away TFC is going to result in our shareholders, effectively getting a fire sale prices, there are restrictions under the support agreement and certain other loan covenants that don't make that an attractive alternative.

But you could do it, I mean if you were willing to accept that, what you think is an unfair haircut if you want to go forward with it, your understanding is that you could do so under the support agreement?

No, we have restrictions that require bank lines to be renegotiated in certain circumstances and we have covenant restrictions that will require us to ensure that TFC maintain equal or higher ratings, to the ratings that we have today and those are unattractive alternatives.

Okay. But if the buyer had, could you get those ratings higher, I mean it's not, I mean is there a literally, absolutely no way under any circumstances this can happen, is it that restrictive or is it just that you think it's unattractive to do so?

There are we could under the events that a buyer of the business could ensure a higher credit rate, equal or higher credit rating do that if we choose to. We do not think that is the best of you... best way forward for our shareholders.

Okay. And second question around the fixed charge coverage ratio, I mean to maintain the 1.25 you are talking about the goodwill and the restructuring. Now looking at your scenario analysis in '09, obviously if it lost another $125 million you try and inject some more capital to maintain that ratio, what's the current position at the parent in terms of your discussions with rating agencies, in terms of how much you can...how much leverage you can take on the parent if you wanted to put some more capital in?

Well we have had discussions yesterday with all the rating agencies and they are... understand what our plans are and are evaluating it then we will wait to hear from them in due course. But there is lot of, certainly there is a lot of flexibility from a financing covenant standpoint at the Textron level to be able to continue to inject capital. Obviously, there is some limit to that from a rating standpoint.

Okay.

We think we're in good shape right now but we will have to see how things develop.

Well and the other point there the run-rate beside that is the fact that we intend to reduce the total amount of CP as well as the total amount taken together of our term financing for next year to those series of options that I referred to, so that works against ever bumping up against over leverage at the parent.

Okay. Thanks a lot guys.

Yes.

Next question comes from the line of Jeff Sprague with Citi. Please go ahead.

Thank you, good morning.

Hi, Jeff.

Couple of things, first, I don't quite have my arms around actually how much through cash and liquidity you think gets released by the $1.5 million kind to draw down of receivables obviously that requires calculations on recovery and charge-offs and everything and relative to the leverage ratio in the assets affected, I mean can you give us the sense of how much cash would actually be released in that process?

Well it's even more complicated than that Jeff unfortunately because it depends on how some of our securitization vehicles get structured on a go forward basis which will happen as we move into 2009. But we've actually tested our liquidity position through that period of time with an assumption that some of those securitizations will actually run down. We are going to try not to let that be the case. With some of them running down, some of that de-assetting at TFC will at least for a period of time and really through '09, go into those securitization vehicles to pay down the obligations that are inside those. So it's not clear, our model does not assume that all of the asset reduction is available back to us in the form of cash. If we can get the securitization vehicles structured in a way, we are hopeful that we will be able to then a larger piece of that could be available. But when we said we think we are okay for the next 12 months, in that stress test scenario, that stress test also assumed that some cash would have to be diverted into securitizations.

Okay. And along the lines where Shannon was going with some of his questions, so it's not palatable due to the full exit maybe anytime soon unless a high rated acquirer comes in. But how do you actually navigate, I mean the fact remains funding cost are all out of way right. So if we are starting from a clean sheet of paper you probably say you wouldn't want to be in any of these businesses today. So that requires you to go back to the market and get price to try to kind of protect the profitability of the go forward business. Has that process begun to happen, what kind of natural demand disruption might come from that really credit availability be tight so maybe you can't pass it through, but just what are your initiatives?

We have tried, it's a hard one to get your hands around, we have tried to understand the price elasticity curve if you will to understand that that could be a way to the asset. If you look at clearly where we are today, I wouldn't say all of the business, because the long funded businesses are still doing okay. But clearly the short funded businesses, the business model does not work if LIBOR equals prime, and that's where we are at this moment. We look at that and say that's an untenable situation that has to correct itself, but how soon does it correct itself and how long do we have to suffer through a period where essentially you're above LIBOR and a lender at prime and the two numbers are the same number. We think that will correct itself, we are out aggressively though, pricing, our portfolio in general and most specifically working to move our customer base towards a more LIBOR Index set of lending. Now that's not a fast fix because we've got some customers where we can do that. We've come up with a notion we call the Textron Financial base rate, which is essentially LIBOR plus a spread and then we're pricing Textron Financial base rate plus a margin to customers. But we have a lot customers that have contractual arrangements that we're going to have to work our way through. But we are out there trying to push the price through and we do think that we will be a part of the asset reduction strategy then that customers will walk away at the higher pricing and that's fine. But our expectation that's why we put in those scenarios that funding box at the bottom because that really is between our two scenarios presented half the difference almost is being driven by that funding market environment. But we do think that LIBOR and prime have to separate. Its just a question of how fast and how far those are going to go and that's going to help bring the model back in. But we'll continually evaluate whether or not we believe that by a line of business, we have a business model that will work.

And just finally one off one on Cessna. Are all these order numbers we've got today net orders?

Yes they are.

Right, yes.

Thank you.

But very little cancellation in there.

Right okay, thanks.

Next question comes from the line of Robert Stallard with Macquarie. Please go ahead. Robert Stallard - Macquarie Capital (USA) Inc: Good morning.

Morning. Robert Stallard - Macquarie Capital (USA) Inc: Lewis, just a follow-up and I hope the final question on Textron Financial. Given your experience so far with this credit crunch, has it really called into question these strategic rational for having Textron Financial as part of the Group?

Well sure, as with any other business that has elements of that but suddenly changed dramatically from the underlying assumptions that we put the business together under. I go back to just repeating somewhat what Ted just talked about and that is any business at Textron including the sub-segments for inside TFC continually have to pass through intrinsic value test, they have to pass through a long-term business liability test and they are regularly evaluated to see if it make sense to have any of our companies or pieces of our companies who retained inside of Textron. You may recall that nine-by-nine box where we talked about business health and attractiveness of the industry and what percentage of our strategic business units fall where on that grid. And we actually break apart all of our businesses as appropriate including TFC to look at the different components of TFC as the market conditions change. I think we're seeing a very abnormal economic situation now certainly as measured by historic standards. And so we're right now closely evaluating what positions we would take, should things continue if they get better, where how does that change our model. And you can be sure we going to move quickly as soon as we understand what we need to do and we can do it. Robert Stallard - Macquarie Capital (USA) Inc: And this is a follow-up I am actually looking at Cessna. Could you let us know how large the international customers on that was part of the backlog, and how you are getting comfortable on that some of these new international customers and whether they will have to pay for that jets?

Yes, I can give you a just a second, I just have to find it. It's a big number; it's good number, we have got so many charts here let me see here we go international orders and deliveries. On the order side 68% are international and on the delivery side this year through the end of the quarter 57% are international. And if you look inside that and say where are they, Europe is by far the biggest there, half of the international order backlog and then Asia-Pacific is little more than 10%, Middle East and Africa is little less than 10%, Latin America is about 27%. So its pretty doing good mix. And of course, remember every time we find out somebody no matter where in the world, we find out some they have to come forward with that non-refundable deposit and also supply us with financing, bank financing or whatever financing sources they have so we can get convinced they are not speculating or and also get convinced that they can or make good on their order. So I think it's a very good backlog right now. Robert Stallard - Macquarie Capital (USA) Inc: Great,thank you.

Yes.

Next question comes from the line of Rich Safran with Goldman Sachs. Please go ahead. Richard T. Safran - Goldman Sachs & Co.: Thanks. Good morning.

Good morning Richard T. Safran - Goldman Sachs & Co.: Just, you may have made some remarks about this, with respect to future write-downs, recognizing what you said in the release about capital contributions is appropriate. Am I correct that you would expect any potential capital infusion to come out of free cash flow and or do you actually... did you make a remark that you might think that you might have to raise debt?

No, we would be making capital contributions into TFC at least for the foreseeable future out of our free cash flow. Richard T. Safran - Goldman Sachs & Co.: And you do not, by this point of time you don't foresee having to raise debt in order to meet anything there?

Not at this point in time. We'll have to see how things develop. Richard T. Safran - Goldman Sachs & Co.: Okay. And just back on to your commercial, your answer on that commercial paper balance of approximately $2 billion, could you just also give us a possible what the average maturity is and what the cost is right now?

The average maturity is about 10 days. Cost is, it depends anywhere from 4.5 to 6.5 and we have had some wild days in the heat of the last few weeks. We are seeing numbers over 6. We have also seen days in between those where it get down to 4. Richard T. Safran - Goldman Sachs & Co.: Okay. And--

It's a wild time out there. Richard T. Safran - Goldman Sachs & Co.: Yes, sure it sure is. And just switching topics just completely there is a potential MRAP like competition coming up in 2009 and I just wanted to know if you are planning on being a part entering that competition?

Yes we are. Richard T. Safran - Goldman Sachs & Co.: Okay. Thanks very much.

Yes.

Our next question comes from the line of Brian Jacoby with Goldman Sachs. Please go ahead.

Hi, guys, thank you for taking my question. I guess just with respect to the portfolio at TFC you haven't really taken any write-downs at it now in and there is lot other finance companies out there that have really gone rack pretty hard and guys have done a good job managing through this, through this down turn. But I guess the question is over the course of the next several quarters clearly there could be some write-downs because as you look to either sell or as the cycle plays out I mean your portfolio might not be worth where you are carrying it now. And so its kind of begs the questions yes there is maybe a need for more capital and so I guess to Rich's question I mean it almost sounds like you are going to have to borrow money and maybe doing it through the parent company which the credit default swaps trade a lot better on the parent and there is industrial assets behind in cash flow that maybe might make sense to do that at some point. And that's something you're going to watch the market and if that opportunity presents itself, maybe you could do that?

Well that's a lot of questions. First of all, we believe that we have a very strong portfolio and a great recovery process and the reason that we don't mark our portfolio to markets. So we're not pricing assets like you see some financial institutions under a scenario that assumes you would fire sale those assets. Our expectation is that we will go out and exercise our recovery processes. And we do recognize charge-offs and additional loan loss provision when we make a determination that we're not going to be able to get full recovery of interest in principle. And clearly we've been doing that, those numbers have been going up. We expect those numbers to continue to go up as you saw in the scenario analysis that we are looking at. Within reason, let me take this in two steps. The goodwill write-off which is causing the initial requirement for additional capital infusion entity is obviously really a non-cash event. It's a non-cash write-off in TFC, but under the support agreement requires us to make a cash contribution, all of that is doing is having the effect of moving commercial paper requirements out of TFC to the parent, which as you know it is not an all bad thing to have happened up to a certain level. To the extent that we do have higher levels of loan losses as we modeled into couple of scenarios that we shared with you today. Obviously, those are more cash oriented events. And at this stage depending on what range they are in, they're fundable out of the general cash flow of our industrial businesses. If they got to some extraordinarily higher level then obviously they could at some point in time require us to fund them. And we would likely have excess capital down in TFC as a result of these contributions. So a lot of that funding probably would be at the parent. But in our overall objective through all of these actions that we're taking is to reduce our reliance on commercial paper and potentially replace that with more term related debt.

Just one other quick comment, but I mean in the 10-K you guys provide a nice amortization of the assets and liabilities to the extent, fourth quarter you could give us something like that as you wind down some in, that will be really helpful that might answer a lot of the questions.

That will be in the 10-Q.

Okay.

There will be a much, much expanded, liquidity disclosures in both the Textron Financial and Textron 10-Qs which you will have soon.

And then the last thing is just, drawing on the revolver if need be, is it fair to assume that's probably the last resort you want to do, I don't think rating agencies seem like draw down on revolver. Is that, is it fair to assume that that's probably the least attractive option for you guys, or is that not the case.

No, we are working hard and so far have been successful, and operating in the CP market, our paper is rolling fine. We would mention fine but expensive. But we have been able to successfully utilize the CP market, those backup lines are therefore one reason only, and that is the CP market becomes unavailable and we would have to do something different.

Okay. Thanks again for taking my question.

Alex, I think we have time for one more call.

Okay. Sir your final question comes from the line of Steve Tusa with JPMorgan. Please go ahead sir.

Hi, good morning.

Hi, Steve.

Just a question on the Textron TFC where you guys give us a slide that showed the liquidity profile back in May, and it showed a receivable receipts matched up against your liability payments in... I'm not a finance analyst so may be I'm not looking to this the right way. But I'm just curious, how much of your receivable receipts are coming over the next I guess year and a half, why not take a little bit more of... is there is something contractual here? That's the reason as to why you can't take a more aggressive approach towards, maybe not selling these businesses but to just kind of winding them down and paying off the debt given this is a solid cash business as opposed to what everybody is speaking out about which is stuff that's it's mark-to-market it's not very cash related?

The answer some what varies by business Steve but yet there are certain businesses like ABL where we have contractual relationships with a customer for a period of time. There are... they are expiring, revolving loan structures and we can't walk in, they want and tell that customer that we're pulling that line unless that customer has in some way defaulted breach to covenant et cetera in which case we would be quick to do so. So what we'll be doing in that business for example, is notifying the customers of our strategic intentions relative to this business that we don't intend to renew as contracts come to expiration. And then if a customer has any transitional issues please come talk to us because we also want to make sure that we don't flow a customer under the bus in a way that really comes to back to hurt us. So we're working all that carefully in other businesses like distribution finance. We have a variety of different structures there. In some instances we can stop funding a particular dealer but in other instances, these are very tightly constructed programs with manufacturers and we do have certain commitments for certain periods of time with those guys. And we're going to honor all the commitments obviously that we have made to any of our customers and that's really what controls the pacing. And in some instances you still have to recognize even where we can do something contractually, it may not be smart to do it because that customer needs to find funding somewhere else or you need to help them work their way through the situation.

Right, how often are these contracts renewed in, is it five year term, 10 year term, one year term?

Typically two to three year times of terms and so there are contracts rolling off every quarter.

Great okay. And the other question is on Cessna, I'm going to get some other to stop asking you, why you're being so conservative which is I guess the flavor of the last three years calls but looks like the environment has obviously changed. Still though you think with the backlog business like that your incrementals would be able to hold up and they were a little bit disappointing this quarter and I don't know what your fourth quarter guidance implies but I think it's a flat margin on up delivery. So I'm just curious as to what's really going on and then I have a very quick follow-up to that?

Well we are seeing some impacts of this weakening economy in Cessna and it's not on new jet deliveries. But we're seeing a slowing growth rate in the aftermarket business, we're clearly seeing a reduction in volume in the single engine piston caravan side of the business, we did see relief for the first time, we're a little bit of used valuation kit in Q2 but a little bit bigger number in Q3. So we have baked into our numbers that are in our used inventories are starting to grow on book at Cessna and values are down a little bit. We have a much better process now than last times, so we think those will be a much more limited but we are seeing some of the used valuation impacts. And frankly, at Cessna, in the last quarter we've seen some productivity issues that I think really relate to the restrain of stepping up to these larger volumes. So we have some... a little bit of cost performance weakness in there as well. So we do think that the real driver of the business is jet deliveries and jet deliveries will be driven by the backlog. But around the periphery of the business there are some impacts from the current economic environment.

Got it. And then just one follow-up on the margins, Cessna is obviously very strong, this cycle and driven probably by pricing and you guys are doing the better job there. But Lewis when you kind of revaluate, how you guys mange the business, I guess toward the IVM [ph] methodology and you feel like that kind of corresponds to where the equity value is and how you create value for shareholders. Is there any reevaluation of that given what's happened here and some of these businesses have had hiccups whether it's Bell which is... was in a phenomenal growth curve but just could not get the margins, industrial is obviously rolling back over here you never really got that business sum up to it's previous peak margin. And I am not sure IVM plays into TFC but obviously things are falling apart there pretty quickly. So any reevaluation of how you guys are looking at your portfolio on it and the methodology?

Well obviously with the situation we find ourselves into today's global economic crunch it really affects quite a bit of our portfolio. But let me say this you know if you really think about what's embedded inside of Textron currently even with the economic environment, a large portion of our company is well protected from appears to be so far well protected from the current fall off in the economy. Cessna okay margin is off a little bit but you have to admit it really held up well like some of that strain that we self imposed on ourselves to get the volumes up in the fourth quarter is necessary because we have to come out of January the 3rd and again when we start next year at the run-rate to make 535. So if we take Bell Systems in Cessna we're... that piece of portfolio is good. Now let's take TFC and industrial. Industrial of course is really getting hit by recessionary tendencies in different markets obviously. And we do continue to look at every one of our assets to evaluate when or if they should become a part of somebody else's portfolio. And the when is sometimes determined by the fact we know something about going forward that makes it more valuable in the future than it would be today. So I still am a big believer in intrinsic value, I thing it served us well, I think our earnings growth over a long period of time has been very predictable because of it. I don't feel good about where we are in several of our segments but you can be very, very sure we're going to push hard, get everything back in line with expectations as quickly as we can.

Great thanks a lot.

Yes.

All right thank you ladies and gentlemen.

Ladies and gentlemen that does conclude our conference for today. Thank you for you participation and using AT&T Executive Teleconference. You may now disconnect.