達信公司 (TXT) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Textron third quarter earnings conference call.

At this time all participants are in a listen-only mode, and later we will conduct a question-and-answer session.

If you have a question, please press star then one on your touch-tone telephone.

You may remove yourself from queue at any time by pressing the pound key.

If you are using a speaker phone, please pick up your handset before pressing the numbers.

If you should require assistance during the call, please press star then zero.

As a reminder, this conference is being recorded.

I would like now to turn the conference over to our host, Vice President of investor relations, Mr. Doug Wilburn.

Please go ahead.

Thank you, good morning, everyone.

Welcome to the our third quarter call.

Joining he here today are Lewis Campbell, Textron's Chief Executive Officer, and Ted French, our Chief Financial Officer.

Before we begin, let me add that over the course of our discussions this morning, we may be making forward-looking statements.

Any such forward looking statements are subject to various risk factors which are detailed in our SEC filings and also in today's press release.

Now for a summary of our results.

Revenues were $2.6 billion, up $338 million from last year.

Our reported GAAP earnings in the quarter were 73 cents per share, which included 10 cents per share in costs related to restructuring.

Excluding costs related to restructuring and other special items, our third quarter '04 adjusted earnings per share were 83 cents compared to 59 cents last year.

The earnings per share and cash flow amounts that we will discuss today will be before restructuring costs and other special items.

A reconciliation of these items to GAAP measures is contained in our press release, a copy of which has been placed in the investor relations section of our website at www.textron.com.

A reconciliation of any additional non-GAAP measures that we may discuss today will also be placed in that section of our website.

Now let me turn the discussion over to Lewis.

Thank you, Doug, and good morning, everyone.

Overall, this year is progressing just as we said it would.

We said that our end markets would come back, and they have done so.

We also said that the over-arching effect of our transformation initiatives would continue to bear fruit, and they have.

And we clearly saw the benefits in our third quarter operating numbers as we came in at the high end of our target rate for earnings and exceeded our cash flow targets.

Very solid performance at Cessna, Bell & Industrial more than compensated for weaker performance at Fastening Systems, and that particular performance issue was related to escalating steel prices, and costs associated with our plant consolidation activities.

With yet another quarter of solid results plus confidence that our growth and transformation improvement trends will continue, Textron's Board has authorized a 10 cent increase in our common stock dividend as well as a new $12 million share repurchase program.

Now I'd like to share with you a few comments about our business and our accomplishments during the quarter.

Let me start with Cessna.

The market environment for business jets just continues to be strong.

We exceeded our plan again for new jet bookings during the quarter.

In fact, we added 71 new orders, including 22 for the new CJ2 Plus.

I will talk about that in a minute.

With these orders we're totally sold out for 2004.

We added 25 new orders for delivery in 2005, and the remainder of those bookings will be in 2006 and beyond.

So at the end of the quarter we had 185 orders for 2005, or about 82% of next year's delivery plan of 225 jets.

While Cessna's order recovery reflects a continuing strengthening in the overall business jet market, it's also the direct result of our unrelenting commitment to new product innovation.

Many of you will remember that even during the recent downturn, we continued to invest in model upgrades and new jets.

And during the quarter, three of these projects reached fruition.

We delivered three Sovereigns and 13 new XLS models.

In addition, we began deliveries of our new single-engine aircraft equipped with the Garmin (ph) glass cockpit.

And the cadence of our innovation continues.

Just last week we received certification on the CJ 3 and will begin delivering that aircraft later this quarter.

Cessna's product innovation was also evident in last week's NVAA convention in Las Vegas, where we announced two new jets, the CJ1 Plus and the CJ2 Plus.

Both of these upgraded jets will incorporate new technologies and features that we developed for the CJ3.

Now this represents a tremendous upgrade in value for our customers, and with the enhanced commonality of systems and components across the CJ1, 2 and 3 we will increase manufacturing efficiencies and thereby improve margins.

This is truly a win/win for our customers and for Cessna.

On the performance side, the impact of transformation initiatives was apparent in Cessna's results as well.

However, let me assure you our work is not done there.

We've got more to do, and we will.

Even as volumes ramp up over the next several years, we are accelerating our efforts to create a more efficient Cessna, especially through the lean manufacturing concepts that are part of our Textron Six Sigma program.

To sum up on Cessna, our outlook for top line growth looks really good, and together with our operating improvement plan, we expect to deliver strong and improving results over the next several years.

Bell is also having a very positive year, and we're encouraged by what we're seeing in the marketplace on both commercial and military.

Year to date we've booked over twice as many commercial orders as we did this time last year.

And just like Cessna, Bell had a very positive experience at NVAA last week, in fact their best in over five years.

We're essentially sold out for 2004 and working on building our 2005 backlog.

On the military side at Bell, we're seeing very strong interest in a broad range of products.

Textron Systems, for example, we're finding ever-increasing applications for their products in today's world environment.

At Bell helicopter, we have a number of defense-related opportunities that we are pursuing like the Army light utility helicopter, the armed reconnaissant helicopter for the Army, and the Air Force personnel recovery vehicle, as well as several others around the world.

In addition we continue to make good progress on the two very important programs, the H 1 and the V-22.

More specifically on the V-22, year to date, we've delivered nine aircraft, and this quarter we'll deliver another seven.

And, as you know, we're in the final stages for preparing for Operation Evaluation, which we expect to conclude successfully at the end of next year.

Assuming that, in '06 we will begin ramping up to full rate production.

Feedback on the V-22 has been very positive.

For example, earlier this month a number of senior military officials flew in the V-22.

One of them, the Air Force Chief of Staff, actually piloted the aircraft while the Army's commander of special operations parachuted from it.

The test drive, as I'll refer to it, was a complete success, and afterwards these military leaders expressed their confidence in how well the program is going.

Moving to Fastening Systems.

We're obviously disappointed with our performance here, and later on the call Ted will walk you through an analysis of the factors that affected us.

Now while our recent results reflect a tough environment, we do remain convinced that we're taking the right actions to put this business on solid footing.

Actions such as aggressive pricing, restructuring, global manufacturing, product rationalization, and Textron's Six Sigma, including an accelerated application of lean manufacturing techniques.

I have two more quick comments, one on industrial and one on Textron Financial.

At industrial the benefit of transformation initiatives contributed to good margin conversion that we saw on our revenue growth, and at Textron Financial, improving credit results reflect good execution and our prior decision to exit non-core businesses.

To sum up.

Our transformation strategy is making a difference.

We are launching new products, and we're demonstrating clear progress in reducing our cost structure.

Going forward, as we think about our outlook for business jets, military products, industrial products, and portfolio expansion at Textron Financial, we're looking at significant growth through the rest of the decade.

Bottom line, we're excited about Textron's future, and we're determined to deliver superior growth in shareholder value.

Ted?

Thanks, Lewis.

Good morning, everyone.

Thanks for being here with us.

I'm going to start with a review of our overall results.

Earning in the quarter came in at 83 cents and was higher than a year ago by 24 cents.

That's in spite of a negative impact of 37 cents from inflation, which represented a 3.6% cost increase.

About a third of that 37 cents was directly related to higher steel costs.

Additionally pension income contributed to non-cash, but negative 6 cents.

On the positive side, cost improvement contributed 36 cents during the quarter, which included 9 from restructuring.

Volume mix and foreign exchange contributed 22 cents, the majority of which was from higher jet deliveries at Cessna.

We also produced 7 cents from favorable pricing, that's 0.6 of a percent.

And finally, 2 cents came from performance at Textron Financial.

Running through those again, the negatives -- 37 cents inflation and 6 cents from pension, and the positives -- 36 cents of cost savings, 22 for volume and mix, 7 for pricing, and 2 cents for Textron Financial.

Now let's walk through the results of each of the business, and I'll start with Bell.

Segment revenues there were up $49 million while profit was down $10 million.

U.S. government revenues were down due to lower revenue on the V-22 program and lower sales related to a contract for training aircraft that we completed at this time in 2003.

Partially offset by higher sales of air-launched weapons, higher revenues on the H1 upgrade program, and increased volume of spare parts.

Commercial revenues were up due to higher helicopter unit volume and higher volume in the aircraft engine business.

The segment profit was down due to lower profit in the U.S. government business, partially offset by higher profits in commercial.

U.S. government profit decreased, primarily due to the decrease in V-22 revenue and the impact of the lower training aircraft volume, partially offset by higher sales of air-launched weapons.

Commercial profit increased primarily due to the impact of higher commercial helicopter volumes, partially offset by higher engineering expenses, lower pension income, higher insurance cost, and certain positive 2003 items that did not reoccur.

Backlog at Bell Helicopter ended the quarter at $2.4 billion, down $51 million from the second quarter, but up over $1.2 billion from the third quarter of last year.

At Cessna, revenues were up $183 million, and profit was up $51 million.

The increase in revenues was largely the result of higher volumes across the board.

Additionally, the consolidation of CitationShares -- you'll remember we bought an additional 25% there -- contributed $38 million to revenues.

During the quarter we delivered 47 jets compared to 42 a year ago.

We also delivered three jets for CitationShares' vector fleet.

Accordingly, we did not recognize sales revenues for these units, but over time will recognize rental revenue as JetCards are actually used.

Profits at Cessna increased primarily due to improved cost performance, the higher jet volume, and a contribution from modestly higher pricing partially offset by inflation.

Backlog at Cessna increased again, up $128 million during the quarter, ending at 4.9 billion.

We also have orders from CitationShares totalling an additional $555 million.

As Lewis mentioned, we booked 71 orders.

That included 22 CJ2 Plus jets that were pre-sold and under contract before the end of the quarter.

It also included 13 jets for CitationShares that are not part of our $4.9 million reported backlog.

And we're off to a good start on orders in the fourth quarter.

With the introduction of our two new jets and a benefit of strong showing at NVAA, we have another 41 customer orders so far in the fourth quarter, 9 of which are for delivery in 2005.

Next we'll turn to Fastening Systems.

Revenues there were up $50 million, and profit was down $9 million.

The increase in revenues was the result of higher volumes, but also foreign exchange and higher pricing.

As Lewis mentioned, I want to walk you through an analysis of the change in profit at Fasteners.

Higher volumes and foreign exchange produced a positive $8 million, and we had $18 million in improved cost performance.

That performance was partially offset by $13 million in costs directly related to the heavy restructuring activity we undertook during the quarter to close five older high-cost plants.

That $13 million represents costs that don't qualify as special charges, such as the cost of re-certifying product with customers, duplicate operating costs, and new plant launch costs.

By of the end of the quarter, we ceased production at four of these five plants; however, we did extend operations at the fifth because we were unable to fully execute the outsourcing portion of our consolidation plan.

This was due to the fact that in many cases, steel pricing has forced our sources' bid prices to be higher than our own internal costs.

So we're now in the process of transferring these parts to other plants within our Company and will close this plant by the end of the fourth quarter.

As we get all of this activity behind us, all of these restructuring-related costs are going to go away.

We also had inflation headwinds of $28 million. $10 million of that is for items such as employee costs and non-steel related raw materials; $18 million was for steel.

Since the escalation of steel prices began, we have been aggressively negotiating higher prices from our customers.

Unfortunately, there seems to be about a two-quarter lag between when our costs increase and when we have been able to fully effect our new pricing.

Our recovery specifically for steel passed through in the quarter was only $11 million.

All other pricing impacts during the quarter were a negative $5 million year over year.

To summarize, volumes, improved cost performance, and pricing were not enough to offset inflation and the plant consolidation related costs.

So looking forward over the next couple of quarters, as our aggressive pricing enables us to catch up to the rising cost of steel, as we get the restructuring related activities behind us, and as we continue to work on global manufacturing, product rationalization, and Textron Six Sigma improvements, Fasteners will begin to show some meaningful improvement.

Now we'll move to industrial.

Revenues there increased by $63 million, and profit was up by $21 million.

The increase in revenues was primarily due to higher sales at each of the industrial divisions with the exception of fluid and power, and also favorable foreign exchange, partially offset by the divestiture of a non-core product line in the second quarter.

The increase in profit was largely due to improved cost performance, higher volume, and improved credit performance.

Finally, finance segment revenues decreased by $7 million and profit increased $4 million.

The decrease in revenues was primarily due to lower average finance receivables, reflecting the continued liquidation of our non-core assets.

The increase in profit reflected a lower provision for loan losses and lower operating expenses, partially offset by the impact of the lower average receivables.

The decrease in the provision of loan loss has reflected a continued improvement in portfolio performance.

We had another very good quarter of improving credit stats.

Non-performing assets were 2.3% compared to 2.5% in the second quarter. 60 day plus delinquencies came in at 2.1%, down from 2.3% last quarter, and chargeoffs on an annualized basis stood at 1.7%, down from 2.1% for the full year 2003.

Now let me move on and cover a couple of other items.

In addition to increasing margins, our progress with transformation is also reflected in a significant improvement in cash flow.

Year-to-date free cash flow before restructuring was $669 million, compared to $183 million last year.

Now I want to be clear -- in the third quarter, we did -- there were some items that were really timing related from the fourth quarter.

For example, we received a number of early government payments at Bell helicopter and Textron Systems, and both Cessna and Bell received a number of customer deposits for products that are going to be delivered in the fourth quarter.

We are now forecasting that free cash flow for the year will come in somewhere between $600 and $700 million.

Generating cash flow significantly in excess of net income reflects the progress that we've made in improving capital efficiencies, which contributes to higher returns on invested capital.

Another important item affecting our results is the effective corporate tax rate.

We're lowering our as-adjusted rate for the year from 30% to 29% due to a number of miscellaneous factors.

And probably more important, we expect that rate will be able to hold at about 29% though 2005 as well.

Moving to pension matters.

Depending on the market's performance through the rest of the year we might be required to book a non-cash adjustment to equity through other comprehensive income, which does not impact EPS.

That adjustment would be made at the end of the year if it turns out to be necessary and could be up to $100 million.

In addition, based on the market's performance so far in 2004 and the possibilities that we could now see a reduction in the pension discount rate rather than our prior assumptions of an increasing rate, we're now estimating that pension expense could be anywhere from a 25 to a 35 cent headwind in 2005.

Moving on to our outlook.

We now expect full year earnings per share will be between $3.25 and $3.35 for the year.

Correspondingly, then, the fourth quarter would be somewhere between 99 cents and $1.09.

And looking to 2005, we're expecting EPS growth of 15-20% compared to our '04 adjusted EPS.

Now let me turn the call back over to Doug for a minute.

Thank you, Ted.

The guidance that I'm about to share with you are all fourth quarter items.

I'll start at operating level.

We're now targeting total manufacturing revenue in Q4 to be about $2.7 billion, with total manufacturing margins of about 8%.

At Cessna we expect revenues between $800 to $850 million with (NAP) margin of about 12 to13%.

At of the overall Bell segment, we're expecting revenues to be about $650 million with margins of about 9%.

At Fastening Systems we're projecting that revenues will be about $450 million with low single-digit margins.

We expect industrial revenues will be about $750 million, with margins similar to the third quarter.

And finally, we expect revenues at Textron Financial will be down slightly with (NAP) of about $50 million.

Now, below the operating line, we are targeting corporate expenses for about $40 million, and that would be it on the guidance items.

So that concludes our prepared remarks today.

Before we take your questions, I'd like to remind members of the media that they are in a listen-only mode.

If any of the media do have questions, please feel free to give us a call after the teleconference.

And with that, operator, we are now ready for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Nicole Parent, from CSFB.

Please go ahead.

Good morning guys.

I guess I was just hoping that you could give us a little bit of color on the automotive end market.

You were able to get some pricing in Fastening Systems.

We've heard from other companies that have reported so far this earnings season that the automotive guys seem to be the most difficult to get price increases to stick.

Could you talk a little bit about that and then the outlook for what you're seeing as we move into 2005?

Yeah, let me do that, Nicole.

It's Lewis.

How are you today?

Great.

How are you doing?

Good.

Well, the automotive guys are tough.

Having come from General Motors myself, I understand this topic pretty well.

But the fact remains the steel prices were increased dramatically and suddenly, and we had to react accordingly.

We actually were one of the lead component suppliers who decided to take on the logical and aggressive approach to pricing with our big customers including the OEMs.

And I would have to say, by and large, we've had success.

I want to temper that by saying it's kind of a paced success because some of our contracts -- we have an agreement on pricing on some areas; we have agreement to change pricing later this year -- actually early next.

So I would have to say when we get finished with our recent pricing efforts at the big three, we should be recovering the costs that were incurred by us when the steel prices went up.

And we've also increased prices across the board to all of our end customers, and that's unfortunate, but we had no other alternative.

And we intend to basically get every bit of the steel price increase to us passed through our customers.

That will take another couple of quarters.

It lags a couple quarters, actually.

Yeah.

Most of the non-big-three customers, we've been pretty successful and pretty aggressive, and have, at least through the October time frame gotten prices out there that pretty much fully recover.

But the larger customers we have agreements with, two of them not to come back with an increase until January 1 and with another not to come back until the first week of March.

So we do have a little bit of lag, and of course, unfortunately the price increases have been unabated since that time.

So we're constantly fighting the uphill battle, but we've been doing so very aggressively.

And this is working its way through the market, and we think we'll be successful in the end.

But we'd sure like to see it stabilize.

Once it's stable, we can go out and get some good results.

You really haven't seen much of that pricing in our numbers yet.

It will be in full effect next year.

What are you thinking in terms of production levels as we look into '05 from European and North American OEMs?

My view is probably flat.

It's -- you know, it's been amazing how production levels have held up, and I have always said myself that production levels tend to be threatened when interest rates rise, and they've not risen to the levels I thought they might have by now.

Unless anyone is forecasting a dramatic increase in interest rates in the U.S., let's say for example, I think the automotive guys should do next year pretty much like this year does.

And as far as Europe is concerned, I kind of have the same viewpoint.

As we told you guys in the last quarter's call, we had anticipated that there would be some cuts in the fourth quarter.

Those were already in our guidance that we gave you last time.

So what you are hearing in the news today is not new news.

And one follow up.

Just head on finance.

Could you give us any color by subsegment?

Did you have any writedowns in there?

And we are still comfortable with kind of the 20 to 25 increase that we were forecasting in the third quarter based on what Doug said?

I think two things are happening.

One, we have continued to see really incredible performance on the overall statistics and performances portfolio, but as we've said all along when you get into the late cycle like we are, there's some lumps out there.

And during the quarter we had about a $5 million writeoff for one syndicated bank loan.

You know, that seg business that we're exiting.

And we're working our way down in that portfolio, but we had one lump catch us in the quarter.

And right now we're looking for a very strong fourth quarter out of the business.

So we feel really good about the progress that's being made there, the underlying performance, improvements.

We feel really good about how well we've executed on re-focusing on the core, getting out of some of these non-core assets.

We're down to only about a half a billion remaining in the non-core bucket.

But, you know, it's not to say that there's not going to be a lump here that comes at us, and we did have one of those in the third quarter.

Super.

Thank you.

Thank you, and our next question comes from the line of Jeff Sprague with Smith Barney.

Please go ahead.

Thanks.

Good morning, everyone.

Just a little bit more on Cessna.

I missed some of what you said at the beginning. 71 orders in the quarter.

Can you give us a sense -- do you know what the number was last year?

In the -- this quarter last year? 86.

That's a good quarter.

That's surprising.

I wouldn't have guessed it was down in the quarter.

Can you give us a sense --

Last year we went from 83 to -- we were at 83 in the second quarter; we went to 86 in the third quarter for delivery this year. (INAUDIBLE - Multiple speakers).

Oh, yeah I don't know what the orders were.

We'll see if we can find it.

I guess kind of what I'm getting at is it sounds like you got pretty good order activity spilling into '06.

Obviously you've got '06 backlog around Sovereign and Mustang and other things, but can you give us a little sense of, you know, what the early read is on kind of possibility for '06 deliveries based on the order trends?

We haven't finalized the what the number is going to be for '05 yet, so it's a little premature.

But I will tell you, as of right now, and I want to be sure I don't confuse anyone, because usually we give you always quarter ending numbers, but because of NVAA and because we put out a press release this morning on NVAA results, I'm going to give you as of right this minute -- as of right this minute we have 194 orders for '05, and we have 151 orders for '06.

We're close to closing in on '05, and depending on how strong a quarter we have here, we're going to hope to get a lot of that work done.

And then we'll get into the process of building '06.

But right now the only thing we are publicly out there with is we intend to -- we think the best number you can give right now for production deliveries in '05 is 225.

That's the number we've given you before, and it's just way too early to determine what we're going do in '06.

I guess what intrigues me about Cessna's results here is -- and that obviously goes to your comments about transformation.

You're putting up margins that have historically been associated with higher volume levels.

So there is really evidence of a change in of the profitability.

You kind also intimated that's not done.

So, I'm kind of wondering if we're actually on a volume plateau in '06 -- if '06 is equivalent to '05 in deliveries, would there be cause to think the margin is higher?

I can answer that one.

I think you should see improved margins every year.

You remember when we were in New York earlier this year, we committed to improving margins every year at all of our businesses through transformation, and Cessna is really doing a very good job.

We haven't said a lot about it, but they've done a really good job on applying Textron Six Sigma and lean.

And I was out there recently -- in fact, we're taking our Board out next week.

So I would say you've got to think about two things -- first of all, I don't know of any forecasts out there by anybody that forecasts business jet sales that are saying anything but, you should see an increase in business jet deliveries in '05 versus '04, '06 versus '05, '07 versus, so forth and so on.

Unless something disrupts the economies of the world and something strange happens, I think we're on a steady path upward for the the next 5 years.

That's confirmed by the Honeywell forecast and the Rolls forecast and everybody else's forecast, so I think we're on pretty firm ground.

And our own forecasts say that.

And then secondly, we have really drawn a line in the sand across the Company and said, Hey, you know, there's no reason why we couldn't improve margins significantly while we're increasing production, because that's the best time to do it.

Because if you lean out a cell and eliminate, in essence, two employees, it's a great time do that when you're increasing volume because nobody loses their job.

They just go to inflow and work someplace else.

That's the time to really make the hay.

Secondly, I think we did a really good job in the downturn.

I think if you look back and see how well we did when we had to shut the production the production lines way down, that really set the foundation for some of the improvements you are seeing today.

We're not ready to talk about the numbers in '06, and it's not because we have them.

We just haven't decided how we want to position '06.

You take the CJ1 Plus, the CJ2 Plus, the new CJ3, the XLS, the Sovereign, and now the Mustang, and now think about any other business you had manufacturer we sell against, and put their new model line up on the field, I think you will see we have got darn strong models to sell into a growing market.

And we have a very strong transformation program, not only at Cessna but across all the units.

I think the best is yet to come, Jeff, myself.

Could you -- this may be kind of tricky.

It may be a historical artifact.

Go ahead.

But the fact that the order booked for two years out is almost as strong as the order booked one year out, how unusual is that?

Well, I've been at Textron since 1992, and I've been very involved with Cessna over that timeframe.

And I would have to say that we are -- in my recollection, our percent sold out for '05 and the strong orders for '06 are just about what we were seeing during the mid '90s when we were seeing a real good solid expansion of the business jet business.

Usually -- it's not often that we're completely sold out for the next year when we enter the year.

But you know, with 194 orders against 225, you know, you can almost check the box for '05.

And then '06, you see, I think you put your finger on it.

In my mind, that's about as good as we've seen even 10 years ago when we were really in the boom of the business jet market.

But I think the business jet market is coming back, at least for manufacturers that have the products their customers want.

I'm hogging the phone too much, but one more.

Could you give us color on corporate versus fractionals in terms of what you're seeing in the order activity?

Fractionals continue to be strong, our own business citation shares is really doing well both our vector card and the fractional business it's really continued to hold up very nicely, I think.

The unfortunate aspect of commercial flying these days is certainly in kind of a sad way, helping us.

But that's the way life is.

We haven't seen any weakening there to my knowledge.

We've had a pretty good year so far, we've sold over 132 vector cards as of a few days ago.

With only a couple of the months in the market, we've got about 80 hot prospects for that product.

CitationShares has continued to be very, very good.

I do have, Jeff, the question that you asked earlier.

I understand where the confusion was now with Doug's numbers.

There was a big Mustang quarter if you remember last year in the third quarter.

If you exclude Mustangs, we had 25 net orders last year in the third quarter compared to the 71 this year.

Yep.

And just on the fractionals -- so fractionals are what percentage of the order are backlogged?

Do you have that number down?

We have it somewhere.

It's a big number because you have all of the outyears.

What might be more helpful is that year-to-date we've delivered about 27 of the jets to fractionals.

And next year will be probably similar.

Remember, over time the fractionals deliveries from Cessna have varied between 10% to 16%, so it's kind of lumpy.

It just depends on how the orders flow.

One of our big customers put in a big order in for Sovereign, so that covers the deliveries for the next year.

I think the most important thing that I keep in mind myself is how many orders are depending on the big customers for year by year by year.

So that would be -- any given year should be about 14% to15%.

That's the pertinent number it will always been be a much larger percent of backlog because they are the only customers that put multi-year orders out.

Right.

Got it.

Thanks a lot.

The backlog number is about 20% plus add in $555 million that we mentioned earlier for CitationShares for looking at the backlog.

All right.

Thank you.

Okay, thank you.

And our next question comes from the line of Jack Kelly with Goldman Sachs.

Please go ahead.

Lewis, you had mentioned the 100 -- or Ted, 194 for next year out of planned production of 225.

At what point, if this trend continues, do you think we can look forward to boosting that 225 number?

I mean, could that occur at the end of the fourth quarter assuming you had a reasonably good booking quarter?

Because you're already up to, as you said, 86% of next year's production.

Right now that's the number.

We look at more than just 2005 orders to try to determine what the 2005 production and deliveries ought to be, because we're obviously trying to run the business over a multi-year planning horizon.

So it's not solely going to be driven by that fact.

Right now that's just the best number that we have as to what we think we're going to want to end up doing in 2005.

There has just been the passage of an extension of bonus depreciation through both houses of congress, and we expect the President will sign that shortly.

We'll have to see what that means right now.

We still have quite a few slots left to sell for 2005.

We're certainly not going to turn down customers if we have any option not to turn down customers that want to get in on that.

We'll have to see what happens over the next two months.

But based on our understanding of what's likely to happen, based on orders in hand, based on how we think '06 is shaping up, 225 is just the best number we have right now.

Maybe another way to ask it is, what flexibility do you have to go above 225?

Could you do another 15 or 20 planes if you decided -- at the end of this year if you decided you want to increase production above 225, what would be a reasonable flex above 225?

You could go another, let's say, 10% if you had to.

It's all in when you decide.

You can decide in the next two months.

Let's say you decide at the end of this year.

Comfortably, what you would like to do is -- I'm looking at the booking versus the order rate in 2005, a bar chart, and obviously the back half of the year needs more orders than the front half of the year.

That is kind of obvious.

You would think that, anyway.

So that's a good thing.

So if you had to increase production --

You would like to have about 12 months, truthfully.

If you could know by the end of the year, then you could probably affect next year by 10%.

I think the real wild card that Ted mentioned is bonus depreciation.

That bill that might go to the White House this week, and then a ten-working-day clock starts that the President has to sign or veto, and I'm sure he'll sign it.

I hope he does, but I'm almost sure he will.

If that really triggers a lot of demand, it's really tough for us not to build those planes because there is such a tremendous benefit to the customer.

He gets, in essence, 60% of the full depreciation the first year, and that's a real benefit.

So I don't know what that's going to do, Jack.

Some people say it's really going to drive a lot of orders; some people say it might not do so much.

I'm kind of in the middle of the road.

I think Ted's answer of 225 is pretty good.

We'll know a lot more in the next two months, that's for sure.

Ted, just in terms of your numbers, you mentioned inflation, a hit of 37 cents, pricing, a pickup of 7.

So if you kind of net the two simplistically, you come up with a 30 cent hit.

If you go through the same arithmetic for the second quarter, if our numbers are right, it was about a 19 cent net hit, which was a 28 cents inflation, 9 cent pricing.

So we went from 19 to 30.

Do you think the 30 is the max number, given you talk about getting through price increases, and et cetera.

Obviously it depends on steel courses, but do you think that spread is as large as it's going to be?

I do, Jack, but for a couple of reasons.

I think the spread on steel alone could be slightly worse in the quarter -- in the fourth quarter than it was in the third quarter.

But in the third quarter inflation number, frankly, there were a number of catch ups, if you will -- true ups of medical expenses and the like that are not going to repeat.

So I think the -- overall it's likely to be a little narrower, but it won't be because the steel got narrower.

That's really going to happen as we get out in to the first quarter.

Okay, thanks.

Thank you, and our next question comes from the line of Don Macdougall from Banc of America Securities.

Please go ahead.

Good morning, gentleman.

Nice looking quarter.

Ted, I had a question on pension.

Sorry if I missed this, but what when you gave the range of headwinds expected, I think it was 25 to 35.

What is the discount rate and the plan returns that underlie that range?

Well, what's changed -- the bottom line there is we're assuming in that number that we'll have to lower the discount rate down to -- if we had to do it today, somewhere between 5.90 and 6% versus our prior assumptions that as we started into this year with Greenspan starting to raise rates, we thought it would go the other direction.

We're at 6.25% now for this year.

We also had begun the year with our plan, because you don't have any better estimate, that we would earn -- on assets in the year, our long-term earning rate, which is 8.9%.

That estimate I gave you there assumes that we'll be down closer to 4%, which was where we were a month ago when those numbers were re-run.

Right now it's improved a little bit.

We're up about 5% on a year-to-date basis.

So the bottom line is we don't have any way of knowing how this is going to end up.

It literally comes down to the stock market's performance in the fourth quarter and what happens to the ten-year corporate bond rate at the very last day of the year.

But given that we were only at 4 now we're at 5% on a year-to-date basis on plan performance and given where the bond rates are right now, and that some calendar year end companies that ended in September have gone down to the 6% level, we felt obligated to just update you guys on what that might be.

But again, it's really volatile.

I just depends on what happens in the fourth quarter

You're not the only one who thought interest rates would be higher, by the way.

I'm a little shocked, but that's what we thought.

Now, just to be clear, the guidance range that you talked about for next year, does that incorporate your pension head winds?

Of course.

Okay, okay.

Following up on the fractional question, I just wanted to get a sense for what the relationship was like between Textron and Net Jets, if there are any frictions that have been caused by the continued growth of CitationShares.

I can do that one.

Well, I would have to say that we're kind of past all of that.

I guess we kind of tussled it a little bit back maybe earlier this year.

Tussled might not be the right word.

We've been trying to decide exactly how we want to position our fractional ownership.

Net Jets has positioned theirs pretty much at the high end.

I think we're still their largest supplier of aircraft going forward.

So we have a very good relationship with them.

They're a very big company.

They are a lot bigger than we are.

I think the best thing I could say is, you know, we're putting Sovereigns into our fleet, and they're taking a large number of Sovereigns and putting them into their fleet.

So we have kind of found a way to co-exist.

And there's plenty of business to go around.

And we have decided how big we want to be and how fast we want to get there, and I don't think that's going to encroach on what they're trying to do on their business model.

So I'd say it's kind of business as usual right now.

We have a pretty good relationship.

Okay.

Good.

Question on Fastening Systems.

Lewis, you had said that you were going to re-double your efforts there and look at opportunities to zero in and get that margin higher.

Could you elaborate a little bit and maybe talk about strategic options for the business?

And, I guess, if we think about restructuring, is there a risk that some more (INAUDIBLE -- audio difficulties) in 2005.

You're cutting in and out a little bit.

I'm sorry about that.

The question was on Fastening Systems.

Yeah.

I lost you.

You said is there a chance of more restructuring, and from there on it was blippy.

Is there a chance of restructuring charges next year related to Fastening Systems?

First of all, I just want to make it clear, if there are any, they'll be in operating numbers because we're not going to report on an as-adjusted basis after next year.

I think if you -- the Fastening Systems guys are really pushing that by the end of this quarter now when we get the last of those large plants closed down that large-scale restructuring is behind them, and the focus is turning to portfolio and customer rationalization, product rationalization, lean manufacturing, and really getting the new reduced operating footprint operating more efficiently and more effectively, and that's going to be the big push and growing our business through the full service provider model to our targeted customer base.

I'm never going to say never.

Obviously we're going to continue to do what we need to do.

The real issue with that business right now is that we've got to get back the pricing.

We can't be the loser in the supply chain.

So we've taken the steel pricing.

We're going to go out, we're going to get that pricing back from our customer.

If we hadn't had that gap and we hadn't had this $13 million of expenses in the quarter, we'd be having a very different conversation about the fastening business right now.

And I'm not going to go there because we're not at a place to have that conversation yet.

I think we are seeing some underlying fundmental improvements in that business.

We've got a good team of people there who are working hard to make that business better.

This is -- we're all crying for them in some respects because they've done such good work and made so much progress.

And it seems like every time we get up a step something else is going on in the business that makes it just a tough place to operate.

But we think we're doing the right things, and we're looking forward to a couple more tough quarters, but then starting to really be able to see some improvements in this business.

One final one on capital allocation.

Should I interpret the share repurchase announcement and dividend news to say that acquisition activity in the future is likely to be fairly modest?

I think we've been telling people that there's three things you can do with cash -- dividends, repurchase stock, and acquire strategically important acquisitions to help our businesses be stronger, and you can assume we're going to do some of each of that.

Now it all depends on what grade opportunities we find out that are in the marketplace, and obviously with the cash flow that we've been generating, we felt very comfortable to go ahead and take a step on stock repurchase and shares -- excuse me -- and dividends right now.

Thank you,.

Thank you.

And we now have a question from Ron Epstein of Merrill Lynch.

Please go ahead.

Just a couple quick questions for you.

When you look out at oil that is somewhere between $50 and $60 a barrel, what impact do you think that is going to have on your businesses, and in particular what impact do think that might have on Cessna?

On what?

On Cessna.

Yeah.

And your other businesses, but Cessna, too.

I don't think very much.

I think the way to think it -- for our Company, the way to think the oil prices really is whatever your judgment is as to how will oil prices affect the global economies into which any of the companies in America sell their products.

So I would say that unless you have a feeling that oil prices are going to severely effect the U.S. economy and put us into some kind of a downward spiral -- I don't believe that.

Unless you had that feeling, then I would say that, you know, oil prices are just going to be something we have to deal with.

I don't think it could get to Cessna too much because of --

The 10% of the operating costs.

Yeah.

It's not a big, big factor, number one, and number two, people are still going to have to travel.

And we've never seen much of a correlation between changes in oil pricing at Cessna -- changes in oil pricing and Cessna business.

The correlation that's the best for us is the eight-quarter lag between corporate profits and their volumes.

And so far corporate profits on the rise, so I feel pretty good about where we sit.

Oil is a strange one, that's for sure, but so far it hasn't -- I don't think it has affected us much.

Yeah.

And, Ron, we have -- they are minor impacts.

We talk a lot about steel.

We are seeing broad-based commodity inflation across a number of businesses.

Battery-lead is through the roof at E-Z-GO, and we are seeing resin prices a little bit higher at CalTechs, for example.

But most of our other business -- really all of our other businesses, with the exception of Fasteners, has largely been able to go back and pass that through to the customer base.

We are seeing some of our businesses that are more heavily freight dependent, like a Greenlee, seeing some surcharges on transportations as a result of oil prices.

But, by and large, none of that really rises to the noise level.

Yeah.

And another question a little more focused question on Cessna.

You guys sold a boatload of 182s, the Piston182s, during the quarter.

Why was that?

Well, you know, America is coming back into the flight world in the training way.

That is number one.

Number two, our aircraft continues to be improved.

Number three, we've got to new Garmin Glass cockpit.

And I will tell you, if I were to name which of those is the most important, I'd almost pick the last one there.

We we use the phrase, "glass cockpit," that means if you're sitting in the pilot's seat and you used to look at all these round dials and gauges, that's replaced by two flat-glass screens.

The size would probably be about 5X8, 5X9.

And on those screens is like looking on your computer.

You have icons and readouts and so forth, and then you have dials that let you go from page to page.

So basically you're flying jet aircraft instrumentation in a single-engine piston aircraft.

And we may have over 1,000 orders by the time we end this year.

It's really picking up nicely.

And the other great thing about that is, that glass cockpit is the exactly same -- those avionics are exactly the same as going in the new Mustang.

So we get a double benefit.

We get a full year and a half worth of experiencing with it, in case any tweaking has to be done, and then those single-engine piston aircraft pilots who are dying to fly a jet for the most part, can now spend $2.3 million or take a loan for that amount and get in their first jet.

So, we're pretty excited about that development.

You're pretty smart to point that out.

Yeah.

I have another question about that.

Of the folks that are taking the pistons with the Garmin cockpit, it's own option, right?

How many are taking that option?

Do you know what I mean?

I think it is an option.

Yeah.

I think the number -- I think the number is like 70-some take it and 30-some don't.

It's a big number.

Okay.

Thanks.

Thank you.

And our next question comes from the line of Tony Boase of AG Edwards.

Please go ahead.

Thanks.

I just wanted to clarify Fastening in the fourth quarter.

You mentioned this quarter you had $13 million of consolidation, and also there is $10 million of non-steel, and it sounds like a lot of the $13 million is going away.

And it also sounded like maybe some of the $10 million will go away in the fourth quarter; is that right?

Yeah, I think the $13 won't all go away.

We're still doing product re-certification with customers on a lot of product moves.

We still have one more plant to close down.

So the $13 is not going to go to zero in the fourth quarter, but hopefully it will be pretty close to it by the time we get to the first quarter.

And of the non-steel related inflation, there's about half of that, that I would call catch up, like maybe three quarters' worth got into one quarter.

So maybe 2 or 3 million of that would not repeat.

Okay.

And then you mentioned the CJ1 and CJ2 Plus.

When would you expect that those are actually delivered?

Where are we with those programs?

Fourth quarter of '05 and first quarter of '06?

Correct?

Correct.

Excuse me.

One plus fourth quarter of '05, Two plus first quarter of '06.

Okay. as far as Sovereign and XLS and CJ3 expectations as far as deliveries into '05, that has not changed?

About 40 a piece for the Sovereign and the CJ3.

I don't know what the XLS number is.

It's roughly 30 a piece for the Sovereign and CJ3.

And then just a question on the V-22.

Next year is a really important year.

If you get through next year, it sounds like it is all systems go.

Is there anything that concerns you at all about next year?

Or do you think given the trials you've gone through previously that you feel very confident that it is may be not a formality that you should go through next year without issues.

It's never over until it's over in this very, very large program.

First of all, I feel very confident that we will exit off eval (ph) and will be allowed to flow into full rate production.

And that's what I was trying to communicate in the brief remarks I made during my introductory remarks.

But let me put a little bit of color around that.

If you take off (eval) and say, What are the components of it, there's actually two components.

One is does the aircraft perform to the specifications that it was intended to perform at?

And that answer has pretty been much asked and answered as a yes.

The second is, can it do what it is it supposed to?

Second is around it's performance and maintainability and reliability, etc., and that also has to be proven during op eval.

So I think, bottom line, when we finish op eval, we will finished it successfully.

This is an aircraft that the government and the military really need.

It would have been ideal to use in any of the recent combat locations in Afghanistan and Iraq.

Next year is a big year for us.

Let me tell you a little bit more about next year -- this year we will actually ship, I mentioned, 16 aircraft. 8 of which -- I said 7 plus 9. 16.

Eight of which are the brand new design.

So, remember, we had several modifications on that aircraft, so 8 of those planes are built in sequence, in line, exactly to the production specifications.

Next year we'll build a total of 14, and we will not be revising anymore aircraft until the following year, '06 and '07.

Basically what you're going to see is a ramp up of production-ready aircraft at the latest modification, 11, 11, 11, 11 for the next four years, unless the government decides to speed that up.

So we're very cautious about op eval.

We're not bragging that we're certain it's going to be successful, and we have got a lot of things that we have to work through, Boeing and ourselves and the government customer, but I think bottom line this will be a very successful program.

What about if there's a change in administration?

Is that a concern?

Not really, if you remember, this program was bilaterally supported.

The Democrats were in favor of it, when they were in the White House, and then when the Bush administration came in, actually interestingly, one of the concerns was that Vice President Cheney had, back ten plus years ago when the world was very different, questioned this aircraft when he was in the position to do so as the Secretary of Defense.

Obviously he has changed his mind on that because of the need for this aircraft given the way the Marine Corps has decided to go to war.

The Marines have put their entire forward strategy around our technology.

So it would be a very disruptive thing to the way we protect our country, to change the ten plus year forward strategy of the Marine Corps, which now is beginning to spill over into the Air Force and Army, I think.

I just don't see a change there regardless of who gets elected.

You never know, but that's not something we worry about.

Good.

And just a couple of housekeeping.

Of the three models to CitationShares, can you tell us what models they are?

And also accounts payable and depreciation and amortization for the quarter.

I'm sorry.

Say that again.

The three models that are destined for CitationShares, can you say which ones -- what models they are?

Model of aircraft?

Well, is it CJ2s or XLSs or --

You mean in CitationShare's current fleet?

No.

No.

Just the three -- so you delivered 50, but three of them were for CitationShares, right?

Hey, Ron, how about, no more than three were for Citation?

The three were for on the Vector program, which means they don't get revenue recognition.

That was the point we were trying to make there for everyone to understand.

We shipped 40 jets if you will -- 50 jets, if you will, during the quarter. 47 of them were shipped for full revenue recognition.

Three of them went to CitationShares where they're going into the Vector fleet, so we're only recognizing revenue as the hours are actually used by the Vector card holder.

That was the point that we were trying to make there.

I don't know what aircraft those three in particular were.

Most likely CJ1s or 2s or XLs.

The current fleet of Vector -- or I mean of CitationShares is CJ1s;

Bravos, which is the 2, and XLs.

And I think we're taking a delivery yet this year of a Sovereign or two.

So basically it's those three, and then Sovereign will be the next aircraft added into their fleet.

Thanks.

And then what was accounts payable and depreciation and amortization?

You mean for Textron?

Yes.

I'm not sure what you're asking.

You're asking --

I didn't see an accounts payable number on your --

Balance sheet?

Balance sheet.

It's inside the other current liability number.

I don't have it specific accounts payable number right now.

Can we follow up with you on that one?

Sounds great.

Thanks guys.

Operator we typically try to end the call within an hour I know we have at least two people in queue, so we'll go ahead and entertain those two and shut it off.

Our next question comes from the line of Steve Tusa with J.P. Morgan.

Please go ahead.

Pretty good margin on the industrial side.

Just quickly, could you just run through some of the trends that are going on in those various businesses on industrial products?

I think the biggest thing you're seeing go through that business right now -- and really, I guess it's in more than one place.

The golf business has substantially improved on an a year-over-year basis.

It had a lot of challenges last year in that business.

On the credit front and on the volume front as well and the year-over-year performance there is very strong.

We also saw a very good quarter from the fluid and power business again on a year-over-year basis the third quarter.

Greenlee is kind of a tale of two businesses.

We're just in the final stages of getting ourselves out of the Intesys business, which is primarily cell phone manufacturing, and that has pretty well wound down and going away.

It's been causing us difficulty over the years.

Inside the rest of Greenlee, the core tools business is doing very, very well, seeing some good growth across all of our markets, particularly strong in Europe right now with new products out of the Klauke business.

The Tempo business, which is our telecom/datacom test and measurement business frankly still struggling.

We think will be a good long term business but sells its products to the big phone companies who are still not in the buying mode right now.

The CalTechs (ph) business is with the exception of our issues we've talked about in the past at the plant in Windsor.

The CalTechs business continues to be very strong and growing and performing very well.

Windsor is improving.

We did see the amount of pain caused by that plant go down significantly from the second quarter to the third quarter, but it hasn't gone away.

And we still probably have another quarter or two hopefully before we have that turning around and hitting on all cylinders again.

Great.

Thanks guys.

Okay.

Thank you.

And our last question is a follow up question from Jeff Sprague with Smith Barney.

Please go ahead.

Are you there, Jeff?

Operator my guess is that Jeff has moved on to another call, and so I think it's time to bring this to a conclusion.

Thanks to everybody for joining us today, and we'll talk to you again soon.

All the best.

Okay, thank you.

And ladies and gentlemen, this conference will be available for replay after 12:30 p.m. today through midnight December 31.

You may access the AT&T teleconference replay system at any time by dialing 320-365-3844 and entering the access code 723574.

And that does conclude our conference for today.

Thank you for your participation and for using AT&T executive teleconference.