達信公司 (TXT) 2005 Q1 法說會逐字稿

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

At this time, all participants are in a listen-only mode.

Later we will open up the lines for questions and answers.

If you should require assistance during this call, please depress star then zero.

As a reminder, today's conference will be recorded.

And at this time I would like to turn the conference over to your host, Vice-President of Investor Relations, Mr. Doug Wilburn.

Please go ahead.

Thank you and good morning everyone.

With me 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 first quarter results.

Revenues were $2.8 billion, up $454 million from last year, over a 19% increase.

Segment profit was 244 million, up 41% from last year.

Our reported GAAP earnings in the quarter were $0.91 per share compared to $0.26 a year ago.

During the quarter, we adopted the new accounting rules for expensing options and other stock-based compensation.

This had a net cost impact of $0.01 per share in the quarter and we would currently expect it will have a total impact of about $0.09 for the full year.

Now let me turn the discussion over to Lewis.

Thank you, Doug and good morning, everyone.

Overall first quarter results were very solid.

We had excellent revenue growth and more importantly, continued strong order intake at most of our businesses.

In addition, our transformation efforts continued to drive improved performance, which contributed to an expansion in manufacturing margins and overall ROIC and it also allowed us to invest in accelerated organic growth and capabilities development.

Looking forward to the rest of the year, we expect more of the same.

Continued strength in revenues and orders, continued progress with transformation and performance improvements, and continued investment in future growth.

Now, while we're going to talk about a lot of positives in the quarter, we did have one notable miss.

This related to ramp-up cost of our new fastening systems plant.

After successfully closing nearly 50 manufacturing facilities throughout Textron, across the company, and over the past four years, actually, we put a real push on last year to get restructuring finished.

In hindsight, we transferred equipment and orders into this new facility at a rate much faster than we should have.

And then in order to protect our customer's quality and delivery schedules, which has a priority, obviously, we were forced to incur a number of excessive costs in January and February.

The good news is that we took actions.

We stabilized the new facility and we experienced significant improvement in March.

And we will continue to improve performance at this plant throughout the year as we increase production on a controlled managed basis.

On the other hand, the rest of our fastening plants overall are performing consistent with plan and show good operational progress as we optimize our manufacturing footprint through transformational initiatives such as integrated supply chain and Textron Six Sigma.

Also during the quarter, we secured new pricing contracts that, beginning of the second quarter, will allow us to offset steel cost increases and improve margins on certain other products.

So, we feel pretty good about the rest of the year at TFS as the new pricing takes effect and as we focus on the orderly ramp-up on our new facility.

Now let's talk about other developments at Textron during the quarter.

Our transformation strategy is benefiting both revenue generation and cost performance.

For the past four years, we have been developing world-class processes and competencies that we are leveraging across the enterprise.

Together, these many activities are clearly enabling our businesses to be even more effective in executing their plans and giving us the power to grow.

At Bell, execution is evident in both military and commercial businesses.

On the military side, we delivered four V-22s during the first quarter and we're on track to deliver 19 for the year.

That's up from 12 last year.

Significantly, the V-22 program entered OPEVAL, our operation evaluation, on March 28th.

We expect our OPEVAL will conclude sometime early this summer, followed by a defense acquisit ion board revue, or DAB review, and the decision on full rate production should occur before year-end.

Another important example of execution at Bell came to fruition in late January when we were awarded the presidential helicopter program in partnership with Lockheed Martin and AgustaWestland.

And on the H-1 upgrade program, to date we have achieved over 2700 flight test hours.

During the quarter, low rate initial production was approved for lot 2, which consists of four Yankee and three Zulu ships at a total value of 104 million.

Production on this lot has commenced and we're readying this program for OPEVAL , scheduled to begin later in 2005.

The ramp-up of the armored security vehicle program is progressing on schedule.

Good news here, too.

We met our March production target of 13 vehicles and will soon manufacture as many in a month as we used to build in a year.

At this time, we -- a supplemental budget proposal is progressing through Congress to fund an additional 724 vehicles with a further ramp-up to 48 per month from our current target of 36.

If the supplemental is approved, we expect to hit 48 per month by the middle of next year.

So execution is paramount for this program as well.

On the commercial side at Bell, aircraft deliveries were up and we maintained our backlog on the strength of new orders.

During the quarter we completed final delivery -- ahead of schedule, by the way -- on the remaining aircraft for the Pakistani 412 program.

We also had a very successful Heli-Expo, where with announced the new 429 Global Ranger.

This light twin incorporates a number of new helicopter technologies that we actually accelerated from our Modular Affordable Product Line, or MAPL, development program.

The MAPL project aims to deliver a completely new line of commercial helicopters towards the end of the decade, incorporating new customer features in the platform, designed within a lean manufacturing framework.

The Global Ranger has been well received, as we've already accepted deposits for over 100 units, which is extremely strong demand for a commercial helicopter that will not begin delivery until 2007.

By the way, these orders will enter backlog sometime next year after full aircraft specifications have been finalized.

We also made steady progress with our 407X development program.

This is a significant upgrade to our best-selling single engine bird, with an improved engine and upgraded avionics suite.

Just last week we completed our gate 2 review of this program, validating conceptual design and aircraft feasibility.

And finally at Bell, our premier customer service execution was recognized once again, as we were rated number one in Professional Pilots' Customer Support survey.

By the way, this is the 11th consecutive year to be rated the best, something we are all very proud of.

Similarly, last week Textron Financial was named 2005 Floor Plan Lender of the Year by the Manufactured Housing Institute.

While I'm on TFC, I want to share something with you that I think you will find a little surprising.

Each year we recognize the top three Textron Six Sigma projects and the top three Black Belts from all of our businesses around the globe.

Interestingly this year, four of the six awards went to TFC.

Now, while you might expect that Six Sigma is more of a manufacturing of related tool, TFC has fully embraced Textron Six Sigma to improve performance in literally every aspect of how they serve their customers.

In fact, there is little doubt that this effort contributed to winning the award.

So, over the next year, TFC becomes the Best Practice standard to which the rest of the organization will aspire.

Achievement of this kind supports our transformation goal to become Premier.

And we know we will achieve Premier status when every one of our businesses is consistently recognized for delivering outstanding customer leadership, an absolute prerequisite for generating superior sustained organic growth.

So we're absolutely committed to continuous improvement without every business unit.

For example, strong double-digit organic growth in the quarter at EZ-GO and Fluid & Power was helped by our strategic pricing process, which is part of our customer leadership initiative.

Okay.

Turning to Cessna, revenues were up significantly, reflecting a rebound in the jet market and the popularity of the products that Cessna continually brings to its customers.

Of the 55 jets delivered in the quarter, 60% were the CJ3, XLS and Sovereign models, all new within the last year.

The Sovereign achieved European certification during the quarter and won Flying Magazine's Editor's Choice award.

Development of the new entry-level Mustang is proceeding on schedule and we expect first flight this quarter, and the CJD-Plus prototype took its first flight on April 2.

Further evidence that customer leadership is a hallmark at Cessna was the continued strength in new customer orders.

During the quarter, we booked another 73 new Citation orders, in spite of the fact that we had little inventory available for delivery in the near term.

We now have 230 orders for delivery in 2006, including 20 for Citation chairs.

We are also working this year's production schedules to see if we can squeeze a few more jets through the line, and we now believe we will be able to deliver about 240 jets for 2005.

Okay, to wrap up, we told you that 2005 would be a year of strong revenue growth, margin improvement, and ROIC expansion and we are off to a very good start with the first quarter.

We are seeing very strong demand in Aircraft, Defense, Electrical Tools and Commercial Finance, and solid demand in most of our other industrial markets.

And our transformation initiatives continue to provide more efficient operating infrastructure which leverages the revenue expansion and allows us to make additional investments for the future.

Longer term, we believe Textron will continue to deliver strong top-line growth, driven by the ramp-up of our significant military programs, additional domestic and foreign military opportunities, expansion and recovery of our commercial and industrial markets, and our considerable ongoing investment in new products.

To update a point I made on our call in January, aircraft backlog, including Citation shares, has reached another all-time high of almost 8.9 billion.

So we feel confident in our forecast for a stronger 2005 and more importantly, as we forecast continued growth in earnings, cash, and returns, through the rest of the decade.

Ted?

Thank you, Lewis.

Good morning, everyone.

Thanks for being with us.

I'm going to start off with a review of our results and then Doug and I will come back and walk you through our outlook.

In keeping with our plan to discuss results on a GAAP basis, earnings of $0.91 per share were higher than a year ago by $0.65.

The increase reflects a number of unique items as well as what I call the fundamentals of our business.

So I'm going to break this into two separate parts. $0.27 of the improvement came from these unique items and $0.38 from our business fundamentals.

So let me do the $0.27 for you, to start.

Lower restructuring costs improved reported results by $0.30.

We also had a positive $0.34 for a tax gain related to our discontinued InteSys business and a negative $0.31 for an investment impairment.

Now, those two last items were those that we discussed in our press release of March the 17th.

And lastly, a negative $0.06 arises from last year's one-time gain on the sale of marketable securities.

Now for the $0.38 related to business fundamentals.

Positive items were volume and mix $0.56.

Pricing contributed $0.29, or a 2.6% increase.

Cost improvement was a favorable $0.25.

Textron Financial contributed a penny.

And other miscellaneous items contributed a penny.

On the negative side, we had inflation of $0.49 or 4.6%.

Spending for growth and capabilities cost an additional $0.14.

Increased pension cost was a dime.

And we had $0.01 for the adoption of options expensing, as Doug mentioned.

Let's run through those again one more time.

First the $0.27 in unique items, plus 30 for restructuring. $0.34 gain for InteSys, minus $0.31 for the investment impairment, and a minus $0.06 for last year's securities gain.

The $0.38 of business fundamental improvements: $0.56 for volume; $0.29 pricing; $0.25 from cost savings; $0.02 from TFC and Other;

Negative 49 for inflation; $0.14 for growth and capabilities; a dime negative for pension; and a penny for options expensing.

Now, let me go through each of the businesses, and I'm going to start with Bell.

Bell segment revenues increased 109 million while profit was up 23.

Commercial revenues increased due to higher helicopter volume, reflecting the early delivery of 412s to Pakistan and higher spare parts sales.

U.S.

Government revenues were down, reflecting lower V-22 revenue as previously planned, partially offset by higher sales of air-launched weapons and spare parts.

Segment profit was up, as higher profits in the commercial business, primarily driven by higher international military sales, more than offset lower profits in the government business.

The early shipment of the 412s and early execution on some other programs accelerated about $0.07 of earnings from the second quarter into the first quarter.

Backlog at Bell Helicopter ended the quarter slightly higher than year-end, at 2.9 billion.

And that does not include orders for the Global Ranger, worth about $400 million.

At Cessna, revenues grew 295 million, primarily due to higher Citation jet volume and the consolidation of Citation shares as well as some higher Caravan volume, all partially offset by lower used aircraft sales.

Profit increased 65 million, due to higher volume and pricing, partially offset by inflation.

Cessna's continued strong order intake resulted in an increase to backlog of 100 million during the quarter, yielding an ending backlog level of 5.5 billion for unaffiliated customers plus an additional 470 million for Citation shares.

Next is fastening systems.

Revenues were up 24 million as a result of higher pricing and favorable exchange offset by lower volume, primarily due to softer demand in the North American auto market.

Profits were down 26 million, due to inflation, primarily steel cost, and new plant ramp-up cost, partially offset by some higher pricing that we started to get in Q1.

By the way, the new plant costs were about 15 million, worse than what was reflected in our guidance.

However, we expect those costs to continue to decline throughout the year and we see pricing and steel costs coming in somewhat better than planned.

Those things combined lead us to believe that we are still on track to hit our profit target of about $60 million for the year.

Moving to Industrial, segment revenues increased 19 and profit was up by 7 million.

The increase in revenues was primarily due to favorable foreign exchange and higher volumes at EZ-GO, Fluid and Power, Greenlee, and Jacobson, partially offset by lower volume at Caltex.

The increase in profit resulted from improved cost performance and better pricing, partially offset by inflation.

Finally, the Finance segment revenues increased 7 million and profits were up 2.

The increase in revenues was primarily due to higher average finance receivables.

The increase in profit reflected the higher receivables and a lower provision for loan losses, partially offset by higher selling and administrative expenses and lower securitization gains.

Portfolio quality continues to be excellent.

Nonperforming assets came in at 2.01%, down from 2.18 at the end of the fourth quarter.

And 60-day delinquencies of 1.37 were down from 1.47 at year end.

Moving on to cash flow.

Manufacturing cash flow from continuing operations was 124 million compared to 171 last year.

Free cash flow was 63 million, compared to 110 last year.

Historically, our businesses have been users of cash during the first half of the year, so we are pleased with cash performance during the first quarter.

Now, just a quick comment about our tax rate.

Our reported rate for the quarter of 33.6% reflected the tax impact of the investment impairment. 13 Excluding this one-time item, we currently expect our full year rate will be about 29 to 30%.

Now, let's move on to outlook.

Based on the strength of our markets and continued progress with transformation, we now anticipate full year revenue growth will exceed 12%.

And we are now expecting full year earnings per share will be in the range of $4.05 to $4.25.

That's up $0.20 from our previous guidance.

For the second quarter we expect earnings per share to be between $1.05 and $1.15 per share.

We continue to forecast full year manufacturing cash flow from -- excuse me, manufacturing cash flow from continuing ops will be between 850 and 900 million, resulting in free cash flow between 500 and 600.

Now I'm going to turn the call back to Doug for additional detail on our second quarter guidance.

Thank you, Ted.

At the Bell segment we expect second quarter revenues of about 625 million with margins slightly better than 9.5%.

At Cessna we're projecting revenues will be about 870 million, margins of about 13%.

At Fastening Systems, we're projecting revenues of about 500 million and segment profit of about 15 million.

We expect Industrial revenues will be about 840 million and margins of about 7.5%.

Textron Financial revenues we are expecting will come in at about 165 million and segment profit in the area of 40 million.

Finally, restructuring expenses are expected to be about 9 million in the quarter.

And that concludes our prepared remarks.

Before we take your questions, I would 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.

All right. [OPERATOR INSTRUCTIONS] And our first question today comes from Goldman Sachs, from the line of Jack Kelly.

Please go ahead.

Good morning.

Lewis, just maybe two question on your comments.

Would you just remind us on the V-22, the revenue stream, lets say looking out to next year, let's assume we get the full production contract toward the end of the year, we do 19 aircraft this year.

What's the revenue ramp-up, if any, in '06, and how do margins trend in that range?

And then secondly, with regard to Cessna, in terms of the current backlog, how many aircraft do we for '06 based on where we were at the end of March?

And then maybe one for either Doug or Ted: it looks like the bulk of the earnings increase for this year of $0.20 or maybe net $0.15 was all in the back of Cessna.

So just -- I would be interested on your reaction to that.

Okay, let me do the V-22.

We may lay our hands on the exact numbers on the V-22 but I can get you pretty close.

The V-22 revenue ramp-up is not as dramatic as you might think because we stay -- let me see if I can explain this.

We're just getting finished modifying the aircraft that we built kind of during the shut down period of several years ago.

And we are just ramping up the new model.

And government spending, you remember, slid some ships to the right.

Didn't cancel them.

Slid a few to the right.

So I will give you kind of general numbers.

'05 is going to be pretty close to 600 million, not quite. '06 will be maybe mid-600s. '07 kind of flat. '08, unless they patch some in as kind of the beginning of a ramp-up phase, so it will be probably around a 500, and then it goes to 6 and then a billion and then almost 2 billion.

So, it ramps near the end of the decade because that's the way the customer wants them to be received.

But that could change in a heartbeat, depending how the next couple years go.

So I would say generally you're going to see flat, up 5 or 10% each year.

On Cessna, that number is -- next year is really amazingly strong. 230 solid orders.

We aren't seeing hardly any cancellations.

And we had a heck of a order intake month this month.

We really didn't expect to see 73 come in, having delivered 55.

So Cessna is really -- you know, their new products are what is driving that and they are feeling pretty good about it.

Cessna did have a strong up.

They were a driver of our performance.

No doubt about it.

If you look last year versus this year, Bell was strong, Bell and Systems combined, the Bell segment was strong.

They contributed about 20%.

Cessna about 70%.

Cessna is going to be strong for a long time.

Bell will be strong and then as Fastening Systems and Industrial pick up with strong order intake that we are seeing, we expect pretty solid across-the-board improvement.

I do want to correct one comment there, Jack.

Of our improvement of the year, on the year, of about $0.20, I would say Cessna contributes no more than a third of that.

It's a little bit and -- really, across a lot of our businesses, with the exception of Fasteners, which were holding flat, it's not all on Cessna's back.

Okay.

And finally, on the margin ramp-up, if any, for the V-22, how does that look over the next couple of years?

It's fairly stable.

Margins on the V-22 are around on average the 9% range.

There's some programs that are a little higher and some programs that are a little bit lower.

But it will stay fairly consistent.

Okay.

Thank you.

Thank you.

And our next question comes from the line of CSFB from Nicole Parent.

Please go ahead.

Good morning, guys.

Good morning, Nicole.

On the negative, because you had such a great quarter, I just want to ask you, Lewis and Ted, kind of what your confidence level is in Fastening Systems' ability to forecast and the execute, given the repeated misses there?

And still -- is it still a long term keeper -- [inaudible].

Well, I can start out.

Ted and I have spent a considerable amount of time with that team and as I said, we kind of shot ourselves in the foot.

We really had a successful trans -- not transformation, a restructuring over four years, and this one really caught us by surprise.

No doubt about it.

We're not real proud of it.

But on the other hand, we've done all the necessary things we've had to do with adding people and putting some extra resources down there that helped them get back on their feet.

We just did too much too quick and took some things for granted.

So, it's a lousy situation, but obviously it didn't affect our quarter and it will not affect our year.

I feel pretty good about it.

I mean, yes, we didn't have affect of pricing in the first quarter.

We got all that -- that's all contracted, signed, we don't have to do any more negotiations.

That's all coming at us.

Steel pricing is a little bit less than we thought it was going to be when we put forward our guidance.

They're a little slower, yet better than we thought.

So, if you take all those factors into consideration, as we said, we still confirm we will see them getting to around 60 by the end of this year.

And then I guess I would have to say, we will have to wait to get them healthy before we consider what next steps are, concerning, you know --

We've done the pretty deep dive on what caused all these issues and -- the encouraging thing is that we can track monthly performance, January, February, March, on about five or six key indicators that are really the drivers of the problem.

And while one month trend doesn't give me 100% confidence, clearly what we saw in March was a meaningful improvement from what we experienced in January and February.

Great.

And I guess with respect to just the negotiations that went on, going in the first quarter with the automotive customers, it sounds like you actually were able to lock in some price.

Could you just comment about those discussions?

Yes, I think we -- you know, they were tough.

But they had to be and we had to get this recovery from what's happened to us with steel.

And we have now signed essentially everyone up.

There may be a straggler here or there, but they're of no consequence.

And basically we were still in negative territory in Q1 on a year-over-year basis.

We were about $6 million negative on steel pricing versus recovery.

In the second quarter we go positive to the tune of about $8 million, again on a year-over-year basis.

About a $12 million improvement that's expected in the second quarter versus the first quarter.

So, now I'm talking sequential so I don't confuse you.

As a result of these agreements that have been reached, the net result of all of that is we think pricing for the year will come out better than what we had in our plan to the tune of 15 million or so.

We think steel cost will come out about 10 million better than our plan.

And then we think these performance issues are going to essentially offset that to get Fasteners back to what we had previously communicated to you.

So, some pretty big pluses and minuses there.

Obviously we were disappointed not to get to keep the improvement in the recovery on steel, but we will fix the plant problems and hopefully now we've got a pricing situation in place that will go on for the future.

Great.

Thanks.

And Ted, do you have color on TFC, by segment?

Kind of who the big drivers of growth were there?

In TFC?

Yes.

Clearly our fastest growing business in TFC is the Distribution Finance group.

They really are.

And that's the largest piece.

But we have seen improvements across a number of the other businesses as well.

But they are our biggest business and they are our fastest growing business.

Great.

Thank you.

Thank you for your question.

And we have a question from the line of Smith Barney from Jeffrey Sprague.

Please go ahead.

Hi.

This is Ron Erdmirsky on Jeff's behalf.

Hi.

I just was wondering if you could shed a little light on why free cash flow in the quarter was growing at a lowered rate than net income.

Did it have something to do with aircraft deposits?

Or the time of those?

Or --

Yes.

Aircraft deposits came down from that fairly significantly in the quarter.

Yes, we delivered a lot of aircraft that had -- that were at the highest level of deposit because they were approaching their delivery date and we took in a lot of aircraft orders that, because we were essentially sold out in '05 and have limited slots available in '06, a lot were out in the '07 time frame, for example.

So deposits came in much, much lower.

So total customer deposits at Cessna were down $70 million in the quarter and that had a significant impact.

Still, given our prior history, last year was the first year in a long, long time, maybe -- probably forever -- that we had positive cash flow in the first half of any year.

And so having a positive number in the first quarter is still very good, but we couldn't overcome the huge deposits that we got last year and those deliveries in the first quarter.

Okay.

That makes sense.

Thanks a lot, guys.

Thank you, and we have a question from A.G.

Edwards from Tony Boase.

Please go ahead.

Thanks.

I want to clarify something on the guidance.

On the 405 to 425 full-year estimate, are we using a $0.91 number for the first quarter?

Yes.

Everything we are talking about now is pure GAAP.

Okay.

And then, another clarification: so, of this $0.20 increase, you got $0.13 of it in the first quarter.

So you have another $0.07 of positive EPS and you said a third of that is coming from Cessna?

Roughly, yes.

And then you have a pretty positive bump from the Pakistani order -- what can we expect as far as foreign military sales for the rest of the year for Bell?

Let me make sure you understand.

The Pakistan deal is just timing.

We had -- this program required us to send disassembled helicopters over in-country, assemble them in-country, get the rotors turning and get an inspector to sign off on acceptance of the product.

We had seen that that was going to happen this month, in the beginning of the second quarter, and it literally happened on the last day of the first quarter.

That doesn't change our guidance at all.

So the notion -- the fact that we got $0.13 as you say -- that's against your numbers, by the way, not against ours -- that we got that the first quarter by itself doesn't change the full year.

It's the other performance across our businesses that do.

Tony, specific to your question on foreign military for the year, we're actually going to be down this year by about 45 million, which is one of the reasons that gives rise to a backing down on the margins a bit this year over last year at Bell.

Yes, the profit margins on that program were very nice and we did deliver more of those, even though we had a big first quarter, we delivered more last year than we will deliver this year.

Could we get a bit of an update on Caltex -- maybe it's obvious that car production is down and so Caltex is impacted.

But are you still getting the benefit of increased penetration of the Caltex fuel systems?

Yes, I think there is nothing different about the long-term story at Caltex.

The drag here, and really, it's not a drag so much as a flattening out, in '05 and '06 really has as much to do with model changeovers, you know, programs we're going off of versus new programs that we won, than it does the immediate weakness in the market.

That's having some impact.

But Caltex continues to be on most of the car models that sell very well.

For the last 15 years, Caltex has grown at a 15% compound growth rate.

We think over the next five, ten, whatever, it will continue to see that, but it's never been linear.

And we do see a flattening out in '05 and '06 and then an acceleration of growth at Caltex in '07 as some new models that we've already won the business on but have not gone into production yet, starting to come on-line.

One last question here.

What is your forecast for Bell deliveries for 2005?

Deliveries in -- do you mean in the commercial?

Well, total commercial, foreign military and also government.

That will take a minute to find.

We have that.

Can you find that, Doug?

Actually, I don't have it here.

19 V-22s.

We know that piece.

Not only that, for first quarter -- I might have full year.

We can get it after.

We will get that for you. 23

When we find that we will just it yell out when we get it.

Thanks very much.

First quarter year-over-year was 28 last year, 45 this year.

If you look at all units shipped and that includes used aircraft and [inaudible]kits.

Okay, I'm done for now.

Thanks.

Thank you.

And our next question comes from Lehman Brothers from the line of Dan Wang.

Please go ahead.

Yes.

Good morning.

My first question was around Cessna. i think you talked about 73 net new orders during the quarter and I guess sequentially that was down from the 120 in the fourth quarter.

I know the fourth quarter is seasonally stronger, but could you -- in that context, could you just make comments about the current market conditions, what you are seeing and -- it sounds like you might have had maybe a couple of cancellations and maybe comments around that as well?

No, we're not -- we are seeing very few cancellations.

The market is stronger than we expected, frankly.

When we -- as we start to not have availability until for some products out into '07, '08, '09, we expect to see order rates slow down.

So last year we did roughly 70 a quarter for the first three quarters.

We had the bump in the fourth quarter, which always happens around NBAA and is always driven by new model announcements.

So NBAA, in the fourth quarter we announced the CJ1+, we announced the CJ2+, we get a big slug of orders for those.

That's very typical.

Orders never flow linearly in this business, particularly when you introduce products at the rate that Cessna does.

There is a lot more order flow around new product introductions.

But frankly, 73 orders in the first quarter well exceeded what we had internally forecasted we were going to be able to do.

Okay.

How about in terms of Cessna margins, longer term.

I know we -- you've kind of talked about that outlook, going into '07 or so.

Could you provide an update on that?

I don't have anything new, other than what we've said in the past.

We think Cessna has room to expand margins above kind of the peak 13% range that we've had historically and I think they've demonstrated that we're hitting the same margin levels now at much lower aircraft delivery rates than we were able to in the past.

And as we see aircraft deliveries go up, which they certainly will next year, we are already sitting at 230 versus 235 of deliveries for all of '05, we expect that we will continue to see margin improvement at Cessna.

Okay.

Also, I think you received an approval to, I guess, market or sell jets over in Europe.

Could you provide comments around that and what sort of demand you could see from the market?

Or --

Well, we've always sold jets in Europe.

I think much of what you are probably referring to is the Sovereign certification.

Right, right.

Okay.

That's just -- every new aircraft has to go through this process.

And it's typical that we go through the U.S.

FAA certification process first, which we did, and start selling into the North American market.

That happened last year.

And this is just a normal follow-on certification of that particular aircraft.

Okay.

Finally, you talked about some of the progress on getting pricing at TFS.

Could you talk about the pricing environment for the other businesses in general?

We can go down the road.

At Cessna, we are getting decent pricing in the marketplace.

In the kind of the 2 to 2.5% range.

It's a competitive market still, even though it's a strong environment out there for our products.

But we're getting decent pricing on the aircraft side.

We are seeing a lot of inflation on the aircraft side as well.

Bell, on the commercial side, it's about the same.

Pricing is not tremendous but decent.

We're able to get cost covered.

Then the -- in steel related businesses, like Jacobson and Fasteners, it's a recovery kind of a pricing that's going on and that's been pretty effectively done where we are really just getting our steel costs covered so that we are back to break-even, from an inflation standpoint.

Some of our other businesses, I think -- in general the other businesses are getting kind of 2 to 2.5 % as well, across most of the Industrial businesses.

They have a little more strength in Greenlee and a few other places than we do on average.

But pretty much all kind of in that ballpark.

Okay, great.

Thank you very much.

Operator, before we go to the next call, I just want to follow-up on Tony's question about commercial deliveries.

We are expecting about 125 commercial units this year compared to about 93 last year.

So, we will take our next question now.

Okay.

Thank you.

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

Please go ahead.

Good morning.

Hey, Ron.

Just a couple quick questions for you guys.

What kind of order activity are you guys seeing in the piston business at Cessna?

Actually, very strong.

Surprisingly strong.

It appears to us that, like I tried to explain in my opening comments, I didn't reference Cessna, per se, in this comment, but the driving force for why we took our guidance up and why we feel pretty good about where we sit right now is that it appears that in the markets that we're in, order demand is picking up much more rapidly than we would have thought, even three or four months ago.

And that is almost without exception.

The single-engine piston aircraft is picking up nicely.

Also a little faster than we thought.

We've got the capability to ramp that pretty good.

And you remember we upgraded most of those models with the new avionic suite that's in the Mustang.

So, it will be a lot of people -- a lot of young, new pilots flying around in single-engine piston, staring at this great glass cockpit and in a couple of years they will be able to climb into a Mustang and that's the way that we grow customers at Cessna, so, we're really looking forward to that.

We've got really very, very strong outlook there.

Well, Ron, we've got a backlog of about 800 units in single-engine, which is not typical.

It makes it difficult to sell, but at the same time, we took over 50 orders in the quarter.

Wow.

That's good.

And we are starting to see if we can't get some interest outside the United States with the single-engines.

So, we're looking in Asia, China, different places.

Bodes very well.

So, another question for Lewis.

What are you thinking now about M&A activity?

Are you --

Well, it's not a lot different than I have been before.

I mean, those of you that have known the new me in the last four or five years, I'm so locked down on transformation, we are going to keep our pedal to the metal on transformation.

We are going to continue to take out costs.

We knew our markets would come back and we know that alone will leverage really strong earnings growth and you just saw a little bit of that first quarter.

And so if you believe our markets are coming back, you are going to like the leverage.

Now, we've acquired a lot of companies since I have been at Textron, so it's not like we don't know how to.

But we've been pretty careful in looking to say, you know, where are those opportunities that really fit with what we know how to do?

And we have looked at a few that looked somewhat interesting but they didn't quite fit our models or we weren't willing to pay prices other people are going paying and we're not in a hurry to do this.

I would have to say, if something -- you know, if anybody ever gave us an opportunity to expand in the markets that we are in, like Cessna or Bell, we'd sure want to step up and do that.

But I don't think anything big there is going to happen.

So, look for us to make -- kind of look for us to make product line extensions and those kind of things.

Not big huge leaps but just very careful moves to strengthen our current businesses and expect us to do more of what you've seen us doing and that is continue to transform the Company, take out costs, and lever up when the volume goes up.

And then, just one last question, again, I guess for Lewis.

There has been some talk of another competitor entering the light jet market.

Yes, I know.

Ember Air [ph].

Strategically, how do you think about that?

Well, I will tell you what I think about that.

We know that company pretty well.

They're a good company.

This market is a little tougher than people give it credit for.

Cessna has been building light jets since 1970 or 71.

That's why we are so successful in designing the planes that our customers want.

So they are probably going to try to put something in the air, but there is a lot of infrastructure, a lot of effort that has to get in place before you start buying that plane because, here you go, here is a brand-new whatever-they're-going-to-call-it.

It's probably going to be a small jet.

We've got a pretty strong position in Light, so if you're going to come after us, we'd just as soon you come after us right there.

Now, so you are trying to market that plane, so somebody says, well, maybe I might buy one.

Usually people want to step up from a plane to another plane.

Whoops, no place to go from there.

So, I don't know.

I'm going to be surprised if in my lifetime here, if that's going to be a big threat to us, and we've got some things up our sleeve, too.

So, it's certainly not a big issue and I don't know what they're going to do.

But they're going to do whatever they're going to do.

Thanks.

Yes.

Thank you.

And our next question comes from JP Morgan, from the line of Steve Tusa.

Good morning.

At what stage did you know that you were going to have these -- the impact of the four military sales in Bell?

I mentioned earlier, the last day of the quarter.

Last day of the quarter.

Sorry, I might have missed that.

Okay.

That's it.

Thanks.

Okay.

Thank you. [OPERATOR INSTRUCTIONS] And we have a question from UBS from David Bleustein.

Please go ahead.

Good morning.

Hey, Ted, just a clarification on the steel: Did you see actual price reductions, or are you looking at actual price reductions going forward?

Or are you just talking about a smaller increase first-year plan?

Yes.

No, we have seen some reductions in just the last quarter or so.

Okay.

In what classes?

Sheet?

Bar?

I mean, where are you a big user --

The number one driver for fasteners is number one bushling Chicago scrap.

Yes, David, let's be really super clear on this.

Steel pricing began to increase at a fast rate last year and we didn't know where it was going to end up.

And because we had long-term contracts, most people buying steel had thought they had lifelong term contracts.

And then those guys just kind of -- we had long-term contracts with our customers and so then all of a sudden those contracts blew up and steel pricing went through the roof.

So we began to recover by going after price and that took a while to negotiate.

Those prices are now in place to get price from our customers.

And in our guidance we gave you three months ago, we had to put some kind of a forecast together on what we thought steel was going to cost.

And our forecast now have been reduced and we hope they stay that way.

They could get even better, actually, but you don't know that until you get through the year.

So, we just have visibility in the first couple quarters here and it looks like there is a softening, but your guess is as good as ours on where it goes from here.

That's great.

Thrilled to hear it.

Thanks.

Thank you.

And our next question comes from Langenberg & Company, from Brian Langenberg.

Please go ahead.

Hey, guys, good morning and great quarter, obviously.

Just talk to us a little bit about deals on the going-out-the-door side.

A lot of private equity money out there and prices aren't cheap.

Not that you need to a fire sale, but how are you think about divesting some of the -- let's call it noncore assets that you have, given than we are a probably good year or so into a Industrial upcycle.

We have a process of constantly evaluating everything in our portfolio.

We take all of our businesses through an exercise every year to understand how they fit and how they don't fit.

And part of that exercise for any business that we have issues around is to figure out what is the best way to maximize value if we do decide to exit some businesses.

Obviously we have done a lot of that.

We sold almost 30 businesses over the last four years and I think the track record of getting out well is pretty solid.

Most of them were smaller.

Some were smaller.

Some were bigger.

They were 2.5 billion in total, over that period of time.

So, I don't think they were all small.

But I don't think we're going to tell the whole world exactly what we are thinking, so I'm not going to answer your question too specifically, but to tell you we have a process and we do spend a lot of time trying to figure out if there is a business that we don't want for the long term, what is the smartest way to deal with that.

On the margin, though, when you think about -- you've got a couple things here.

Number one, is demand is up, things are improving, people are optimistic.

On the other hand, you do have some noncore assets, and I'm not going to ask you to go into specific ones, where the margins are going to get better later versus sooner.

Just in a broad brush, how are you thinking about this?

Is this about holding toward mid-cycle?

Or you just don't think the prices are quite right yet, or you think there is a lot more you can do in terms of margin capture?

We've analyzed every one of these businesses and we understand it has as much to do -- it has to do with the market and where we are in the cycle, it has to do with liquidity in the marketplace, but in a number of our businesses, it has to do with specific trends in the industry.

What -- is it already consolidated and you better move fast?

Or is it still highly fragmented and you have time in order to work process improvements and get operating efficiency up higher so that you can get better value for it?

So, there are a whole lot of factors and we go through a very rigorous process, but I don't think we want to publicly talk about what we are think about on each of those businesses.

Thank you very much.

Good quarter.

Thank you.

And our next question comes from the line of Stephen Volkmann from Morgan Stanley.

Please go ahead.

Good morning.

I just wanted to follow up quickly, Lewis, on a previous question.

I'm thinking about Cessna, obviously the business is booming here.

The fact that you guys are sold out almost through '06 seems to be giving potential competitors a window to enter the business, which I'm guessing you'd prefer didn't happen.

At what point do we start to think about raising your capacity and your delivery rates and so forth?

Every year.

Okay, let's do this one now.

You remember that it wasn't too long ago that we delivered 313 jets, I believe it was, in 2000 or 2001.

And back then when we looked at it, if I remember, we said on a call sometime, so I don't -- even if this is -- I don't think this is new info -- we thought we would go to about 350.

When the market slowed down during the '01, '02 time frame, a lot of our suppliers either went bankrupt or decided to get out of the business, whatever.

So we've had to kind of regrow the supply base.

That's coming along pretty nicely.

Little nicer than we thought. we took production up -- or deliveries up just a little bit this year, based on that improvement.

Things keep improving and we should -- I don't know, we should see steady progress.

We aren't even mentioning Mustang.

All these numbers we're talking about, Mustang is not even in the numbers.

So if you just follow along about what could happen if manufacturing profits continue -- or corporate profits continue to be strong, which most people say they're going to be, which is the best tracker of Cessna's long-term growth.

If they stay strong -- here is a scenario for you:

You've got 800 back log of in single-engine piston.

Most of those guys are flying around, that are buying them now are flying around with a new cockpit which is just going to entice them to get into a Mustang.

Mustang's sold out until about 2000 -- well, maybe I think you can get in one in 2009.

They start ramping up 106 and then 1607 and away we go.

So if you can just see order growth in the business jet business -- in our business jet business other than Mustang into '07, I think you can get there pretty easy, then the Mustang starts kicking in, and then by '08 Mustang customers get anxious to be in the bigger jets, so now we have a whole new cadre of buyers who want to stay in Cessna products, which has historically proven to be a fact.

This is not a guess.

Once you get them in a small, they step up, step up, step up.

So I tell you, the Cessna story -- oh.

And then, you know, they have been one of the more aggressive outfits concerning Textron Six Sigma, which includes variation reduction and Toyota production system lean.

So the opportunity to grow Cessna and to expand margins and improve return on invested capital, and more importantly, to take a big chunk of that money and not turn into a media earnings per share but rather to invest in new products and you have a tremendous franchise for the rest of the decade.

Then you say, well, how about Bell?

For the longest time we were kind of complaining about Bell's Commercial product line.

We've poured a lot of money in there.

We've hired some new folks down there to put more emphasis on it.

We're starting to make real, honest to goodness profit margins on new ships, where before, that was lackluster and you made it on the spares.

And so if the MAPL program turns out what I think it's going to be, somewhere near the end of the decade we will again have a very superior commercial line at Bell.

And, of course, the V-22 goes without saying.

Bell's going to double by the end of the decade.

So I tell you, in the aircraft segment, I don't think we have been as well positioned since I have been at the Company, I will tell you that.

I guess I'm kind of agreeing with you here, but I'm just sort of thinking on the other side of this, basically.

I mean, if the fact that you guys are unable to deliver me a new plane before '07, '08, '09,depending on what kind of jet I want, that's giving your competitors opportunities to enter your business.

First of all, I don't think anyone in that time frame, no one new is going to enter.

There are other competitors though, that, you're right, they have capacity.

But Cessna's also -- we are very focused on protecting market share.

At the same time, we're trying to ramp up production levels as logically as we can, so we don't go too fast in any one particular year.

But we're not going to walk away from market share.

We will get the product out.

You know, we have a -- since we have been in the jet business so long, we have a very good algorithm to decide what the production rate is for each model and then that then gets cumulated into our annual build.

So, we literally look at each market segment, the models we have in the segment, when we're going to do break point changes where we upgrade the model, when we're going to do a new model.

And then of course you see the net of that when you say, okay, we're going to do 240 ships this year.

So we haven't commented much, but we had a pretty tremendous competitor in Raypheon, which has kind of backed off a little bit here.

So it's not like we haven't seen stronger competition than we're seeing right now.

That's just the nature of the business.

We just happen to think we are in the segments of the market we know the best and we think we are the best of anybody that's in that segment and we intend to maintain that position.

Any rough sense of what type of production increases you can do without adding bricks and mortar?

Well, we said back then you could get probably close to 350 without having to do anything big.

The only question I'd have there is would we have to add a paint shop or would we outsource some segment of paint, which is not a big deal.

I mean, we've done more -- I think we've done two paint job shops since I have been here.

So, we've sure got the room on the site to do it.

We just have to see if we want to do it in-house or out-house.

But -- let -- let me see here.

You know, we've already figured out how to do the Mustang without adding bricks and mortar, so that's behind us.

We've designed the CJ1, CJ2 and CJ3 to go down the same line.

The reason that's important is because we used to have three lines and now we have one.

So that gives us more production capacity because every time you have a line you have to use up the floor space.

And right now we're designed so when we get all three up and running, CJ1s, 2 and 3+, they will come down the same line in whatever order the customers want, and that's a real benefit, too.

So I don't think capacity is going to be a problem here.

All right.

Thanks very much.

Operator, I think we have time for one more call if there are any still on queue.

Okay.

Thank you.

Our last question today will come from CSFB from Nicole Parent.

Sorry, guys.

Just one last one.

Doug, you gave us the margin targets for the second quarter and Ted, you alluded to kind of the -- a third of the upside in the new guidance comes from Cessna.

I'm just wondering if you could give us some revised margin ranges to think about for the full year?

They are not altogether different from what we provided the last time.

Between the revenue number that we provided and the EPS, I think that we can -- we can work within the range.

Yes, and we can work with you as you work through the details, Nicole.

That's fine.

Thank you.

Thank you, and there are no other questions.

Please continue.

That's the conclusion of our call, Operator.

Thank you very much, everybody.

Have a good day.

Okay, thank you.

Ladies and gentlemen [OPERATOR INSTRUCTIONS] This does conclude our conference for today.

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