Textron Inc. (TXT) Q3 2011 Earnings Report, Transcript and Summary

Gentlemen, thank you very much for standing by, and welcome to today's Textron Third Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded, and information on accessing the replay of today's call will be given at the end of the conference. With that, I'd like to turn the conference over to our host today, Mr. Doug Wilburne, Vice President of Investor Relations. Please go ahead, sir.

Thank you, David, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Moving now to third quarter results. Revenues in the quarter were $2.8 billion, up 13.5% from a year ago, which yielded earnings per share from continuing operations of $0.45 compared to a net loss of $0.17 per share in the third quarter of 2010. Last year's result also included $0.30 per share in special charges. Third quarter manufacturing cash flow before pension contributions was $339 million compared to $174 million during last year's third quarter. This brings our year-to-date cash flow to $455 million, double last year's $226 million for the same period. With that, I'll turn the call over to Scott.

Thanks, Doug, and good morning, everybody. Let me start by saying we believe we had a solid quarter, with good execution, especially at Cessna and Bell. We had 15% top line growth in our Manufacturing segments, reflecting sales expansion across most all of our businesses. We're pleased with continued success in selling commercial aircraft in what has been an uncertain environment over the past 3 months. As a result, at Cessna, we delivered 47 jets in the quarter, up significantly from last year's 26. With the orders we recorded in the quarter, which is typically a slower order period, along with current customer activity, we remain on track to achieve our target of a slight increase in deliveries this year, barring no major economic disruptions. I'm also pleased with the progress we're making at Cessna with respect to execution. Scott Ernest has been on board for about 5 months now, and I think he and the Cessna team have established a good cadence to drive both operational and sales execution. We're excited about our 2 newest products, the M2 and the Latitude, which we introduced for this year's NBAA. The Citation M2 provides a very economical step up from Mustang with a larger fuselage, an aft lav and a full 12-foot cabin with increased seating. The M2 also features our new clarity cabin technology system, most modern cabin control, communications and connectivity system available on any aircraft in this class. Compared to the competition, the M2 has also a 37% climb seat advantage, will cruise 40 knots faster and provides an additional 100 nautical miles in range. The M2 is also an excellent value priced at $4.2 million and even more so when you consider Cessna's superior aftermarket support and residual value of retention. We're on an accelerated development cycle and expect entry into service in 2013. We also announced the all-new Latitude jet. This is priced between the midsized XLS and Sovereign models. And at $14.9 million, the Latitude is the largest Citation cabin with a spacious 72-foot height and a flat floor system. Combining the best comfort and performance, the Latitude will have a cruise speed of 440 knots and a 2,000-plus nautical mile range, making it a very compelling choice in the price range. Moving to Bell. Business execution across our programs continues to be excellent and that’s reflected in our strong margins this quarter. We delivered 9 V-22s, 7 H-1s and 26 commercial helicopters versus 7, 5 and 24 in the third quarter of 2010. Bell backlog at the end of the third quarter was $6.4 billion, down $588 million from the end of the second quarter of 2011, reflecting military deliveries during the quarter, as well as a $781 million reduction to backlog, primarily to correct an error made in the fourth quarter 2009, which recorded as backlog the full value of a V-22 contract rather than Bell's proportionate share. The commercial order environment of Bell is holding up fairly well, given the macro environment, so we also remain on track to post a slight increase in commercial deliveries at Bell this year. On the new product front, our 407GX earned FAA certification during the quarter. The 407GX is generating significant new customer interest and should contribute to continued growth in deliveries at Bell. We're also proud that Bell was ranked #1 in product support for the sixth consecutive year by AIN. Moving to systems. We continue to experience some program approval delays, so volumes were essentially flat in the quarter. It's important for us to demonstrate useful economical capabilities that will give traction in what is a very challenging budget environment. For example, we participated in a live demonstration for the U.S. Army of what is known as the Manned/Unmanned System Integration Capability System or MUSIC. MUSIC is a fully integrated ground control station managing a variety of manned and unmanned aircraft systems. AAI's universal ground control stations served as the centerpiece of the exercise, providing command and control of AAI Shadow Tactical Unmanned Aircraft Systems, as well as several other UAS brands. Making UAS history, we seamlessly handed off control of each UAS from one ground control station to another, demonstrating for the first time, revolutionary improvements in battlefield communication and information sharing. We also demonstrated AAI's one system remote video terminal and a cockpit solution that enabled a number of manned helicopters, including Bell Helicopter's Kiowa Warrior, to view and retransmit UAS video and data while in flight. Despite DoD budget uncertainty, we remain focused on new program development, new DoD opportunities and multiple FMS prospects. So if we move to our Finance segment. We continue to make good progress in liquidating our assets, as we reduced managed receivables by $277 million during the quarter. This brings managed receivables portfolio to $3.5 billion with the non-captive portion decreasing to $1.5 billion. In the Industrial businesses, volumes were up in our automotive and professional tool businesses. However, demand continues to be a challenge in the golf and turf areas. To wrap up the quarter. We continue to make progress liquidating our non-cap to Finance business. Systems top line is a little softer than we'd expected, primarily the result of uncertain DoD budgets, and we're actively working on a variety of new contract program opportunities. Bell's execution continues to be very favorable, and our commercial products are doing well in the marketplace. Our outlook for Industrial remains on track for the year. And at Cessna, I believe we're taking the right actions to improve execution and it’s showing up in both our operation and sales results. With that, I'll turn it over to Frank.

Thank you, Scott, and good morning, everyone. Segment profit in the quarter was $236 million, up $124 million from the third quarter of 2010. Let's look at how each of the segments contributed to this improvement, starting with Cessna. At Cessna, revenues were up $236 million on a year-over-year basis due to higher jet deliveries. We posted an operating profit of $33 million on the higher volume, which compared to a $31 million operating loss last year. Our improvement in operating profit also reflected favorable mix and performance. At Bell, revenues were up $69 million due to higher aircraft deliveries. Segment profit increased $36 million, reflecting strong program performance. At Textron Systems, revenue of $462 million was essentially even with the year ago, reflecting flat volumes. Segment profit was essentially unchanged as well. Industrial revenues increased $55 million, primarily due to the impact of foreign exchange and higher volumes. Segment profit remained even with last year. Finance segment revenues were down $27 million, reflecting our ongoing liquidation activities. Our operating loss improvement of $27 million reflected lower loan loss provisions and lower operating expenses, partially offset by lower interest margin on the reduced portfolio of finance receivables. During the quarter, we unwound 3 leverage leases, creating a tax benefit, which was not reflected in our Finance segment results but was reflected in the lower tax rate during the quarter. In terms of credit performance during the quarter, nonaccrual finance receivables decreased from $696 million to $606 million, and 60-day-plus delinquencies decreased from $302 million to $275 million. Charge-offs in the third quarter were $26 million compared with $38 million in the second quarter of 2011. Moving to corporate items. Corporate expenses were $13 million, down from $35 million last year, primarily due to the impact of our lower share price had on compensation expense. Interest expense was $37 million, up $5 million from last year, primarily the result of lower interest income on the TFC intercompany loan. On the cash flow front, we contributed $16 million into our pension plan during the quarter. We also reduced our TFC bank line by $100 million, ending the quarter with a remaining balance of $400 million, which we will repay later this week. With the repayment, we will permanently terminate the $1.75 billion TFC bank line. With our solid manufacturing cash flow and receivables liquidations, we reduced our consolidated net debt by another $500 million, ending the quarter at $3.9 billion. Let me conclude with some information concerning our tender offer for our 600 million in convertible notes. Including accrued interest, we paid $348 million to retire about 37 1/2% to the notes outstanding. This was financed from $500 million of new 5- and 10-year notes we issued at the end of September. As a result of the tender, the company will record a charge in the fourth quarter of about $0.08 per share. Dilution from the convert and its associated structure will be reduced by 37 1/2%, and we have updated the dilution worksheet on our website to reflect this change. All in, we expect the impact of the tender will reduce 2011 earnings by about $0.06 per share, which compares to our full tender estimate, which was $0.20 per share, a difference of $0.14. Therefore, rounding up, we now expect our full year EPS will be in the range of $1.05 to $1.15. We also continue to expect cash flow before pension contributions will be in the range of $800 million to $850 million. That concludes our prepared remarks, and we're ready to take your questions.

First, we'll hear from the line of Peter Skibitski with SunTrust.

On the Citation delivery, you're about 16 or so through the first 3 quarters of this year, above last year. So you're saying, basically, that for the fourth quarter, you basically pulled some aircraft from the fourth quarter into the third quarter, so you're just kind of still on track, or just up by single digits, I suppose, year-over-year?

Well, Peter, as we've been talking about, last year, I think the third quarter was very soft. And that was really a result of the fact that order intake was pretty slow in the second and third quarters, and so we consciously, this year, tried to work hard to sort of bring sales activities to conclusions and get a little more balance between the third and the fourth quarter. And so, I think that's what you’ve seen. So we had pretty strong deliveries, I think, in the third quarter. And we still think, based on that and then sort of the prospects and the level -- stuff in the order book, that we will still finish up slightly above where we are for the total year last year. But really, just with a more balanced third and fourth quarter than we had last year.

Okay. Got it. And then last question just on Cessna, margins are, obviously, significantly improved, even just looking sequentially. And I'm wondering if you can parse for us kind of where the improvement is coming from, and if it's volume, if it's mix. I know Mustang was a little bit light this quarter or if it’s just more so -- just underlying performance improvements. Could you kind of parse that for us?

Yes. I mean, it's a combination of all the above. So, obviously, volumes being stronger with good contribution margin products certainly helps. We did continue to have, as we have for most of the year, better mix in terms of the light to midsized versus the Mustangs in terms of unit deliveries. And we're continuing to see better execution, better performance, particularly cost activities around the CJ4 and things of that nature. So it's really been a combination of the volume and the mix. And I think we're continuing to execute better and drive cost productivity in some of the programs that were kind of putting a little bit of a squeeze on our margins.

Right. Is CJ4 up to kind of the mean margin rate at -- in the Citation line at this point, or not quite there yet?

Not quite there yet, but it's certainly on track to get there.

Next we'll hear from the line of Noah Poponak with Goldman Sachs.

Scott, you highlighted that Cessna orders are typically a little softer in the third quarter than the average for the year, but they are down noticeably sequentially. And we're getting pretty close to the end of the year with about 70% of a given year's – or of the current year's production in backlog. How can 2012 be flat to slightly up with that being the case?

Well, no. I think, first of all, there's a couple of dynamics going on. There still continues to be some cancellations, and these are primarily out-year aircraft, right? So deliveries out in the '13, '14 time frame, some '12, really, very little '11. But this is just -- and people come do -- for some of those long-term orders, we are still seeing some cancellations. I actually feel pretty good about where we finished in terms of actual order intake over the third quarter. It's usually is kind of a slower period, but our order intake rate stayed pretty constant from where we are in the second quarter, despite the fact that it's usually a fairly quiet period. We feel like we have pretty good prospect lists. We have started taking orders, obviously, into 2012 in terms of aircraft that are available for sale in the early 2012 time frame. So I think, Noah, the bottom line is this is going to remain a bit of a spot market, right? I mean, we are taking orders and converting them into sales inside the span of a quarter or 2. And I think that trend is probably going to continue. If you looked at the introductions of things like the M2 and the Latitude, which are getting great reviews from customers, and they are generating some orders, but we're not back in the world where people lined up to place orders for aircraft that are 2, 3, 4 years away. It's still going to be a spot market for a while. So I know the book-to-bill number, because -- particularly, because some of the cancellation activity doesn't look as strong as you guys have liked in the quarter. But I feel actually, we did better in the order rate than I would have expected that we would have through the third quarter, given everything going on around the world and the economies. I think the team is working very, very hard to chase down opportunities and close deals, and we're seeing that happen.

Okay. So, I mean, whether you're looking at book-to-bill or not, there is less than one year of production in the backlog. So inherent in the company's comments that '12 will be flattish is an expectation that orders will pick up pretty meaningfully early or in the middle of 2012. At what time or at what backlog level or whatever it is would you need to change that tone or make the call to take rates lower?

Well, it would all be based on what we see in terms of our prospect list and the order -- and the sort of the real-time order flow. No, we're really not building to a backlog, and we haven't really been for the last couple of years, right? I mean, most of the deliveries are results of order flows coming through the course of the year. So at this point, we're not changing our perspective on it being sort of flattish to slightly up from 2011, and that's based on what we see in terms of the prospect list. So it really -- that decision, in terms of where rates go one way or the other is much more of a -- sort of a dynamic call, as we work our way through month by month, working with the sales teams, looking at prospect lists, what's going on in the marketplace, is really what's driving that production rate. But like I said, right now, I'm actually feeling pretty good about it, considering all the stuff that's going on around the world that the third quarter order rates and prospect lists have stayed pretty solid.

Okay. And then just one on Bell. Surprised to see only two 429 units in the quarter. You guys are clearly tracking below the full year target that you had put out for that product. Can you give us an update on demand there, the ramp execution and profitability on that program?

The demand, I think, will still be there. There's a lot of stuff going on in the marketplace right now. There's a lot of proposals out. So I think that there's still a lot of great opportunity for that. We certainly will see a significant increase here in the fourth quarter in terms of 429 deliveries. And as you know, that at the point where that product is in its life cycle here is still early in production, does put some margin pressure on it. And that will be an issue for us in the fourth quarter, because we will see a significant uptick in the number of 429 deliveries.

Do you actually get close to the 55 to 60 that you've discussed before?

No, I don't think it'll be that high, no. It's probably going to be more like in the 30-or-so area.

Next we'll hear from Cai Von Rumohr with Cowen and Company.

So not to beat a dead horse, but on your orders, you mentioned cancellations. Were gross orders equal to deliveries?

No, they were not.

Okay. And then were there any kind of abnormal items, like were -- comment on the level of forfeiture gains or pretax losses. And was R&D up or down versus the second quarter? Any kind of other issues like that, that would account for this?

R&D was up a little bit in the quarter, Cai. And the net difference between stuff like the forfeiture deposits and used aircraft write-downs and whatnot is really kind of down now in the mid-single digit number. So it's not -- it's becoming sort of not material.

Got it. When you say up, up versus the second quarter? Obviously up year-over-year but comparable to the second quarter?

On the R&D front?

Yes.

Cai, I believe it was, but just modestly.

Got it. Okay. And then, the degree of success, the 37 1/2% you've got on the tender offer, I think really was less than we expected. Any sense as to why it was not more successful? And what's your strategy going forward to kind of deal with that issue?

Well, Cai, I mean, obviously, our intent in doing the tender was that we felt that given the equity levels and given the availability of what is still relatively low-cost term debt that it was the right move for the company to sort of trade out some of that what could be higher-cost convertible debt for normal term debt. And so that was the whole purpose, obviously, of doing the tender. There's no question that the expectations going into it that we were hopeful that we would get a number considerably larger than 37 1/2%. But in terms of why it didn't happen, I think the bottom line is a lot of investors out there said, "You know what, we like this instrument. We're getting a 4 1/2% coupon, and we've got an option on the stock." And where we are today versus expectations and where it could be in 2013 is sort of a bullish statement. So we'd like to remove that piece from our capital structure, but if you got an investor that thinks that's a good piece of paper, it's hard to get them to tender.

Okay. And the last one. You did particularly well margin-wise at Bell. Were there any EAC catch-ups or anything like that, that would be considered abnormal or was it just great performance?

I think it was just great performance. I mean, there is some EAC in there, but nothing materially different than sort of a normal quarter flow of comparable quarters EAC. So these guys are just doing a very nice job at converting on the higher volumes, managing costs. And obviously, that's translating into positive numbers for the business. And frankly, on the military side, it's been positive for our customers, because they're sharing in that benefit.

Next we'll hear from the line of David Strauss with UBS.

Scott, I think you’ve spoken before about your expectations for the Cessna -- for Cessna book-to-bill to be above one before the end of the year. Is that still the case? You expect the book-to-bill to be above one in the fourth quarter?

David, I always dream of getting back to book-to-bill of greater than one. I don't know if the fourth quarter's going to be it or not. I would be kind of surprised. I mean, obviously, we're going to have -- we still think we're going to have pretty strong deliveries in the fourth quarter. And so I think what we see is enough order flow to continue to make that happen for the fourth quarter and the kind of order flow that we expect to need as we continue to roll and to support the 2012 delivery rates. But I don't think that number's going get up above a 1:1.

Okay. Looking at your updated earnings guidance, it looks like if I adjust for the charge on the convert, it looks like you're implying the fourth quarter’s somewhere between $0.28 and $0.38. Is my math right? And if so, what are the kind of puts and takes as to why the fourth quarter will be lower than the third quarter?

Well, you're right. You've got $0.08 or so in there that's going to be a result of the charges on the conversion -- I'm sorry, on the convert tender. I think we're going to see some higher costs associated just down at the corporate expense level. We probably will have a little bit higher loss on the Finance business, as a result of a couple of deals that we think are going to close here in the quarter and some of the restructuring. So I think the manufacturing level, we'll probably see a little bit better performance in terms of [indiscernible] in the quarter, but that's going to be offset by sort of the Finance loss to convert tender and some higher corporate expense.

Okay. Last question. Any initial thoughts on pension in 2012, both from an expense standpoint and then from a contribution standpoint?

I'll let Frank take the pension.

Yes. So no, we're still working through the numbers. Obviously, with interest rates where they are, there's the potential for a discount rate change versus where we had previously been, but we don't work through all those items until the fourth quarter. Obviously, our 10-K gives the sensitivities around some of those changes, which again, for a discount rate change would be $25 million for 50 basis point change. So we may see some headwinds associated with assumptions. We may see some favorability associated with some actuarial work we're doing around -- kind of continue to do around our workforce and kind of the assumptions that are made on that side of things. So we do think -- overall, we expect to see some level of headwind, but we've got a lot of work to do before we have any ability to provide you with better guidance on it.

Next, we'll hear from Jason Gursky with Citi.

Two quick questions. What needs to happen in the fourth quarter at Cessna in order for you to get to the top end of your guidance range for the year? And then, the second question is if you could just walk us through the Industrial businesses and kind of talk about the outlooks for each of them for the fourth quarter and kind of what the trend line has been, particularly in automotive.

Sure. So obviously, Cessna, for us to finish at the top end needs to come through and meet the guidance that we've been giving you guys, which is deliveries for the total year 2011, up slightly from what we had in 2010. In terms of execution, I think the team is pretty well positioned to make that happen. There are still some sales that have to close for that to happen. So it's not, by any stretch, a done deal, but I think the prospect lists and the work the sales teams are doing around the world are going to, if not get there entirely, get pretty close to it. So it's -- I think, achievable at this point, but there is still work to be done there.

I'm sorry, the question was a little bit more directed on the margin rate for Cessna for the year.

On the margin rate?

Yes.

Well, I mean, the margin rate is largely going to follow that volume coming through.

So it's volume is the most important part?

Sure. I mean, we'll continue, as I said, to make the improvements in terms some of the cost positions and particularly in a couple of models like the CJ4, getting our profitability back up. But I think we're pretty well on track in that regard. So at this point, it's a matter of making sure we convert on a number of aircraft deliveries.

And then on the Industrial side?

On the Industrial side, I would say that particularly around the automotive business, the volumes continue to grow. Frankly, the margin rate in the auto side was probably a little lighter than I would like to see it. And that's primarily driven by -- the good news is there's a number of new platforms that were launched in the quarter, which gives us good volume going forward. There's also been a number of OEM moves around the world, where we also then have to move some of our capacity around the world to be there with them. And it wasn't a disaster, but there were a couple of operational misses in there that resulted in some of the volume coming through without the margin rates that we're accustomed to seeing in that business. Those are short-term issues, so I think as we get those production lines stabilized and those new platforms stabilized that we'll see the margin rates come with it. So at least, at this point, I think if you look at what the CSM data's telling you and the industry is that they're expecting at the OEM level, continued growth. I think we're very well positioned on a number of those new platforms. And so we will see that growth come through and come through with the kind of margins that we expect to see going forward. So bottom line, a little bit of softness in the quarter, but that was really just getting the execution on a couple of new ramp-ups going, and I think we'll be all right long term.

Next Robert Stallard from Royal Bank of Canada.

Scott, you mentioned about the general level of uncertainty that's out there in the broader economic world at the moment. I was wondering if you could maybe talk about how this had impacted your activity, maybe over this quarter. You mentioned how Cessna orders have held up pretty well. But has this had any impact on your ability to convert maybe at TFC? Are you seeing order rates in Industrial slowing down? Or if you’ve got any other broader comments, that would be helpful.

Well, I think, environmentally, we haven't really seen any deviation from what we expected to see, let's say, at TFC. So the liquidations continue to be of the magnitude that we expected. I would say that across our portfolio, whether it's TFC or the Industrial businesses, the golf markets around the world continue to be pretty soft, particularly the U.S. And so, we are continuing to see liquidation for instance in the golf portfolio, but not big numbers. And we continue to see a softness in the golf-related industrial products. So that's one industry that I would say, environmentally, is still pretty challenged. If you looked at Cessna, as I said, I think if you look at the amount of uncertainty around the economy today versus where we were a year ago, a year ago, when you had these kinds of issues, particular with respect to sovereign debt, it really had a major impact on what was going on with our customers and the order flow. This year, it has not had a significant impact. So we continue to see order flow despite a lot of those uncertainties. Western Europe would certainly be the one that has been the most challenged, I think, in terms of order activity. But the U.S., actually, has been kind of continuing at its pace. The Latin Americas and the Asia regions also seem to have a fairly strong level of customer activity that's going on. So I'd say, environmentally, the only real challenge I see across the portfolio is really in the golf and turf area. Most of it, other than that, has continued to flow. The Tool business, actually, is doing fairly well. As I said, the automotive business continues to be fairly strong. And most pieces of the portfolio don't seem to have been hit too hard. Obviously, in the defense side, from an environment standpoint, there's a lot of budget uncertainty out there. There's a lot of programs that are being delayed. The amount of time it takes to evaluate a contract – to issue a contract. We see a lot of slowdown in that area, and that's why you see sort of the flat top line in the systems business. And I would say, at this point in time, given all the uncertainties in Washington around the DoD budgets that we'll see that continue to be an issue here for some time.

And a couple of quick follow-ups on that. You mentioned that there's differences within the order flow at Cessna by region. I was just wondering where your overseas orders maybe ended the quarter. Because I know it's been over 50% at some point. So I wonder if that's still the trend. And then on the defense side as well, what sort of level of delay are we seeing in orders being awarded? Is it like 2 to 3 months more than you normally expect?

I think a lot of -- on the defense side, you really have to think almost in terms of quarter. So programs that we would have thought at the beginning of the year would be awarded in the third or fourth quarter this year are now out in the first and second quarter of next year.

So regional splits, sorry?

The regional splits, orders are very lumpy. But I mean, if we talked about deliveries, I mean, we're, obviously, particular with Europe in a little bit different place from where we were before, but it's really been more like a 70%-30% in terms of domestic versus international. And that can wander back maybe closer to 60-40 kind of range, but it's -- I think it's going to be in that range for a little while.

Next we'll go to the line of Jeffrey Sprague with Vertical Research.

I’d just like to dig into Bell a little bit more. The margins really do look extraordinary. And I guess if there is nothing unusual going on there, I’d just like to kind of understand better the components of the strength and how should we think about it going forward. You seem to imply in your Q4 remarks that overall manufacturing not dissimilar to Q3. I don't know if that applies to Bell specifically. But can you give us some sense how you get to 16%? We've got a couple of quarters in a row where Bell margins have been better, and the talk has been maybe they can't stay this high, and they seem to kind of keep going up.

Well, I think we had pretty favorable mix in the third quarter. Obviously, the military stuff continues to go along. We had some good commercial deliveries. As I think you know, Jeff, there's a fair bit of variation in each of these model types in terms of profitability. The aftermarket, obviously, is good, profitable part of the business. So I think if you look from the third quarter to the fourth quarter, the knot [ph] will be up, at Bell but also, obviously, on higher revenues. And I would say that I think the team's performance continues to be strong across all the platforms, but we will have more 429s. And that does put some pressure on the margins, but there's nothing unusual going on. I think the team is just doing an excellent job of executing on the increased volumes. And I think that is a trend that will continue.

Can you give us a sense then, just on a normalized basis, if you look out at your V-22 and your H-1 ramp, and you’ve got kind of a view on commercial, kind of a range of what you would say is the normalized margin of Bell?

Well, I don't think we'll talk about that just yet, Jeff. I mean, we'll, obviously, give you guys 2012 guidance and try to put some balance around that at that time, but we'll give you that in January.

And then, I guess -- I mean, Frank, you were asked on the pension question, and I understand you’ll snap a line on 12/31. But do you have a sense just kind of where things stand today, kind of at least put us in the ballpark of what we might expect next year?

Jeff, as I said, there's so many moving pieces to it. Obviously, the markets have been bouncing all over the place in terms of asset returns. We are doing the work, as I said, on the actuarial side, which we do on a regular basis, but we've got kind of an experienced set now in a more stabilized workforce environment that we are looking at. And so there's probably kind of a bit more of a positive impact there than when we've looked at this previously. And we just don't know kind of what those assumptions on discount rate and return might look like. I mean, you'll recall, as we sat here this time last year, we had a very low interest rate environment, and therefore, there was all kinds of concerns about what those assumptions were going to be. And then, at the year end, it was quite different. So obviously, we're in an environment where we expect rates to stay low and, therefore, some discount rate pressure reflected on the expenses, but there'll probably -- there'll be some offset to that. So there are numbers out there that you guys have around headwind that seem as kind of as reasonable a range as I could give you right now, kind of to think about, because there's just too many moving pieces to it.

Next we'll hear from the line of George Shapiro with Access 3:42.

42, LLC: I just wanted to pursue Cessna a little bit more. I mean, on a sequential basis, the incremental margins were closer to 50%. And the question I've got is how much of that was really due to what's clearly a favorable mix versus how much Scott Ernest is able to implement already?

Let's just run our numbers, George. I think it was marked in the mid-20s in terms of the sequentials, which is kind of what we would expect with the mix of aircraft, particularly with a stronger mix of the light mids versus the Mustangs. So as I said earlier, I think the -- that kind of leverage, given that kind of mix on the volume is appropriate. We have had some models where we've been at a lower level of profitably than we would like to do. And I think Scott and the whole team out there are continuing to be very, very focused at getting those models in-line, and we've seen progress steadily as we've gone through the year. So I think that the team is doing a nice job. I think they'll continue to do that, and they have, obviously, challenges in front of them to make that -- to drive that cost as we continue into the fourth quarter and obviously for 2012. And I think, just as importantly, the real drive and focus around the rhythm of sales, and putting more feet on the street and being a lot more aggressive about getting out there and capturing business. I mean, we're certainly seeing the benefits of that. But I think, the bottom line, George, is that leverage from sequential quarter-to-quarter is probably more in the mid-20s.

42, LLC: All right. I'll check my numbers then. I thought it was that way year-over-year but more sequentially.

Year-over-year it will be much larger, George, but sequentially, it was the low-20s.

Yes. That's probably right, George. Probably have it the other way. The year-over-year where you had a lot of issues on...

We went from a loss to making money so it's really kind of...

42, LLC: I may have said it backwards.

Yes. So the year-over-year is a little distorted just because of the nature of where we were and losing money, but the sequentials, you should see to be in the mid-20s.

42, LLC: Okay. And then just, Scott, sequentially, orders were actually down from the second quarter. I mean, was that kind of expected given the normally weak July and August? Or was that something that was -- because I was expecting it to be sequentially a little bit better.

Well, yes, I think that the order rate was actually fairly strong and pretty consistent with where we were in the second quarter, but we did have some out-year cancellations that influenced the backlog number, which is probably what's skewing the number for you, George.

42, LLC: Okay. Okay. So if I took out the cancellations, it would have been closer to what you saw on a gross basis in the second quarter?

Yes.

Next we'll go to Myles Walton with Deutsche Bank.

First, I want to follow up on George's question about the mid-20s incremental margins you saw in 3Q. Given the volume you expect to see into 4Q, any reason to think those incremental margins won't stay there? Any puts and takes on mix or R&D?

Well, let's just say, we still have work to do.

Okay. I mean, is there any mix or R&D issues? Or is it more this quarter, you had kind of great operating results, and you don't want to count on them until you see them persistently?

Well, look, I think we had very strong operating results. I think we have a lot of work to do to keep that going. We have a little bit of mix going on. As I say, I don't want to necessarily get into guiding quarter by quarter on margin rates here, but to try to sustain that level of leverage, we still have some work to do in the fourth quarter.

And then, Frank, I guess, a clarification on the pension side, I just wanted to understand your comment about demographics and the plan. Are you actually looking to maybe shift the amortization of gains and losses over the remaining life of the employees versus the service life? I mean, are we at that level of change to the assumptions, similar to what Goodrich or Rockwell Collins did last year?

No, what I was referring to is kind of has nothing to do with the accounting treatment of it. It has to do with just continuing to look at the profile of our employees in terms of when they're retiring, kind of the amount of attrition we have at various stage groups and continuing to update kind of how that experience set impacts all of the actuarial assumptions that go into all the pension calculations.

That's helpful. And then on Bell, lastly, back to the questions about outperforming your own expectations on a pretty consistent basis. When is the next repricing that you'd have to worry about? Is it not until the multiyear expiration in '13, '14 that would be a kind of material repricing event? Or is there anything near-term that could put downward pressure on some of your more established programs?

Well, I mean, there's a sharing that goes on in the existing V-22 contract, and so that will always put some downward pressure on it, because there's a share line. And then of course, on things like the H-1, there's an annual negotiation around that pricing.

So I guess I'm not going to get more out of the long-term expectations for Bell margins then.

Not at this time.

Next we'll go to the line of Julian Mitchell with Crédit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: I just had a question really on the Bell commercial orders outlook, someone like Eurocopter as recently as September was saying the U.S., for them, in terms of the commercial order sort of tempo in customer conversations was trending sort of pretty well. I just wondered what your thoughts were on the commercial orders outlook in Bell.

I feel pretty great about where Bell commercial is right now. I think our order intake rate has been good. We've been seeing wins from customers that we haven't done a lot of business with in many years. So I think, as you know, we really started almost 2 years ago, really trying to reestablish ourselves and put a lot of additional resource and focus into the commercial side of Bell Helicopter and that sales force, and we feel great about where that's going. Julian Mitchell - Crédit Suisse AG, Research Division: Okay. And then on the Industrial business, you've seen a number of sort of the automotive OEMs, the production outlook seems to be deteriorating, particularly in Europe. You said, obviously, near term, you’ve got a boost from new platforms. You’ve also been doing some reorganization globally. I just wondered if there was any effort in the auto piece of Industrial to do some kind of more fundamental cost takeout just on the assumption that production volumes may deteriorate even though, obviously, you get some tailwind from platforms being launched.

Well, we certainly look, as we go through our annual operating plans, we look at every platform we're on. We understand from the OEMs' perspective what those lines are going to look like. And obviously, we understand what can happen if you have a general slowdown in one region or more than one region for that matter in the automotive sector. So our ability to take out cost and size those operations appropriately for even what would be a significant downturn in volume is something that we're all too familiar with. So in the event that, that really plays out, we certainly have the playbook, if you will, on how to address that. But right now, at least the feedback we're getting from the OEMs on all of our platforms is still indicating that there'll be pretty stable steady growth. But absolutely, if that changes, we know what we need to do to take cost out of that business and continue to operate through a down cycle.

And Julian, as a point of history, for this past year, I think that we've been hearing a concern about slower volumes through the year, and that just has not materialized. Every quarter, the total outlook for the year has pretty much remained consistent with our original outlook for our business. Julian Mitchell - Crédit Suisse AG, Research Division: Sure. So the sort of the migration of capacity that you mentioned earlier, that's more to do with as you say, just lining up better with the OEM customers. It's not to do with some kind of general volume slowdown concern.

No, that's right. I mean, particularly, Julian, I mean, you see more growth in China. I mean that's becoming a -- obviously, it already is the biggest automotive market in the world. And as you see more and more of our customers increasing their capacity and production rates, we go there with them, right? I mean, we need to locate and have our production capabilities, more or less, adjacent to them. So we continue to see that trend. But we're seeing really relatively stable volumes, even in a lot of our Western European operations. So it's something that everybody worries about. And if you read the headlines, you’d think, “Geez, automotive is going to collapse,” and obviously, we watch it very, very closely, but it has not happened this year. It's been staying on track.

Next we'll hear from the line of Carter Copeland with Barclays.

This is Mayur, in for Carter. I just had a question on systems. Scott, I wonder if you can talk a little bit about the potential risk that you see to systems next year as part of the whole budgetary debate?

Well, I think as I said earlier, I believe we're going to continue to see a slow pace of new programs and contract awards. It's not that nothing's happening. I mean, they did just come out with the -- and awarded the ASB reset program, which we won. There are quite a number of programs that we have proposals in. And it's just the pace at which new program requirements come out, the speed at which RFPs are ultimately released and evaluations are done, I think there's just a general slowdown. And as I said earlier, I don't think that's going to change as we go through 2012 with all the uncertainties around their budgets. So as we look at most of our programs and significant contract opportunities, we think it won't be unusual to see those things slide to the right, 3 to 6 months. It's not that new programs aren't going to happen or that contract awards aren't going to happen, but the guys in the building that do all this sorts of work are really sort of overloaded at this point with all of these different budgetary exercises and the amount of time they're having to spend modeling and thinking about what different configurations or what program opportunities, timing, there's a lot of different sort of churn, if you will, within the building that these guys are having to do to respond and react to all the different potential budget outcomes. And that's, frankly, a lot of work. It's on top of what they would normally be doing. And so I think that's resulting in a general delay of a lot of programs. So I think, obviously, we don't want to get into 2012 guidance at this point, but that is going to pressure the top line at the systems business. And I think it, obviously, is having an impact on what our expectations would have been this year to where we're down below a couple billion of revenue, and I think it's going to continue to pressure that top line in 2012.

Okay. And just as a quick follow-up. On the -- you have a $0.10 variance in the Q4 estimate. I wonder if you can just clarify what is behind that variance? What are the main drivers?

I'm not sure what you mean by variance.

It's the $1.05 to $1.15. Are you talking about the spread? I think the bulk of it is really going to be -- where do we end up on Cessna deliveries, will drive the bulk of that swing. As I say, we still do have some aircraft to sell, and there's work going on to make that happen. But there's still some variability in terms of, obviously, in the business jet market today, what that total number of deliveries will be. So in my mind, and when I look at sort of what's the variable in the quarter, that's probably the most significant. That is the most significant.

And I think it all ties around the macroeconomic environment. I mean, with the volatility that we've been dealing with, you just really be unwise not to have that kind of a view on potential outcomes.

Next we'll hear from the line of Steve Tusa with JPMorgan. Drew Pierson - JP Morgan Chase & Co, Research Division: It's Drew, in for Steve this morning. I just wanted to follow up on the 4Q guidance. I mean, the EPS range on a headline basis is basically unchanged, except for the adjustment to the below-the-line items. But at the segment level, just to understand what is changed versus the last quarter. It feels like Cessna and Industrial are probably about the same, Bell a little bit better, Systems may be a little bit weaker. Is that the kind of the right way to think about it? And then walk us through kind of what's changed in the outlook.

Well, as you know, Drew, we don't really do quarter-to-quarter kind of guidance per se. But the numbers, the way I would see the quarter playing out is I think we'll see a little bit stronger outperformance out of the Manufacturing businesses, particularly Bell and Cessna. But when you do a quarter-over-quarter comparison, you're going to see the pressures of the cost of the convert flowing through there. I think you'll see some higher corporate expense. You'll see a little bit higher loss quarter-over-quarter in the Financial Service business. And that's really where you end up on the quarter. Drew Pierson - JP Morgan Chase & Co, Research Division: Sure. But I mean your Manufacturing free cash guide hasn't changed. So fundamentally, there hasn't been a change, looking at the way you look at the year now versus at the end of the last quarter?

That's right.

No, there really hasn't been. I mean, as I said, we're still believe – granted towards the top of the range, but that we'll see the number of Cessna deliveries we expected, and we'll see the number of Bell deliveries that we expected. So there, really -- from an operational perspective, we don't really see a change in terms of what our expectations were for the fourth quarter. Drew Pierson - JP Morgan Chase & Co, Research Division: Okay. Perfect. And then just lastly, did you guys give a cash conversion number at TFC?

It was about 80% in the quarter.

In a moment, we'll hear from the line of Noah Poponak. [Operator Instructions] Noah Poponak with Goldman Sachs.

Just a couple of clarifications. If I understood your comments correctly, it's dynamic and a moving target, and you're not giving '12 guidance. But with what you see now, you would expect the Industrial top line more likely to be up in '12 versus '11, despite Europe auto production probably being down, and the Systems top line in '12 with what you see now a good chance of being down in '12 versus '11. Is that a correct interpretation?

With you, I don't even need to give guidance. Perfect.

All right, ladies and gentlemen, I believe we have no more calls in queue. Thank you for joining us today, and we'll see you in January.

Thank you very much. And ladies and gentlemen, that concludes our conference today. We appreciate your participation, as well as your using AT&T Executive Teleconference. And you may now disconnect.