達信公司 (TXT) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Textron earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded. I would now like to turn the conference over to your Vice President of Investor Relations, Mr. Doug Wilburne. Please go ahead, Sir.

Good morning and welcome to our second-quarter conference call. Joining me 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 discussion 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.

We'll also be discussing our free cash flow and return on invested capital forecast for the year, the calculations of which have been provided as an attachment to our press release and can be found on our web site at www.Textron.com.

Now for a summary of our second-quarter results. Revenues were 3.2 billion, up 665 million or 26% higher than last year. Segment profit was 317 million, up 37%. Our GAAP earnings in the quarter were $0.89 per share which included a $0.30 charge related to the impairment of our Collins & Aikman preferred shares due to their bankruptcy, which was announced in May.

In our April call we indicated that earnings per share for the second quarter would be between $1.05 and $1.15. Allowing for the fact that our reported EPS includes the $0.30 Collins & Aikman charge we ended up exceeding the high-end of our range. However I also want to point out that about $0.08 of our earnings related to activities that we had expected to occur in the third quarter. These items included advanced delivery of 2 V-22 units, a few more business jets and the benefit from early execution of a commercial research and development cautionary contract at Bell Helicopter.

Now let me turn the discussion over to Lewis.

Good morning everyone. Second-quarter results were solid, again reflecting excellent revenue growth and continued strong order intake at most of our businesses. In addition, our transformation efforts continue to drive improved performance which contributed to an expansion in total manufacturing margins again this quarter. Having said that, we also recognize that we have a number of operations for which performance is just well below standard. So we still have a lot of work to do with these businesses and we intend to do just that.

On the other hand, from an enterprise perspective, it appears that we are on track for the year to increase overall return on invested capital to about 12%. That would be about 300 basis points above our weighted average cost of capital but more importantly looking beyond this year we intend to generate much higher returns.

We will do this through consistent execution of our transformation strategy as we pursue our vision to become the premier multi-industry company.

Let me discuss a number of a strategic portfolio moves we made during the quarter. In June, we announced the acquisition of U.S. Helicopter, an Alabama-based helicopter and maintenance and overhaul business. This acquisition advances Bell's strategy to strengthen its aftermarket service and support offerings for our important military and homeland security customers. At CapEx we actually added and subtracted. In July we purchased our partners' 35% interest in Kautex (), a Japanese joint venture.

This transaction improves our ability to compete and expand in the important Asian growth region, which is still undergoing a significant transition from steel to plastic fuel systems.

On the subtraction side we sold the gear tools and rotaflow machines productline at Micromatic. At Fashion Systems, we sold a small stamping facility in Greensburg, Indiana. And finally we continued to orderly liquidation of Textron Financial's noncore receivables and we actually reduced them by 700 million year-to-date. You may recall in 2002 we identified 1.7 billion of receivables as noncore and with this latest reduction we have a remaining balance of only 380 million which we expect to substantially liquidate over the next few years.

While the two acquisitions were not particularly large, they both advanced Textron's ability to compete in important growth markets.

Moving now to enterprise management, as you know, we are making additional investments this year to enhance our growth and capabilities. On the cost side, we've accelerated the deployment of the lean improvement component of Textron's Six Sigma across the Company both on the factory floor and in our offices.

While we're currently incurring significant costs for this accelerated deployment, the benefits of these activities are already continuing to improved performance. And on the customer's side of the equation we continue to invest and make progress with new products that will drive future organic growth.

For example, in April we conducted the first flight of our Citation Mustang and I might mention ahead of schedule. To date, we have accumulated 78 test hours -- test flights, excuse me, and over 150 hours of flight time and performance has been superb.

In June we received FAA certification for our CJ1 Plus, bringing this aircraft closer to its first delivery, which should occur later this year. During the quarter we also announced the first commercial application of our Intevia (ph) Intelligent Fastening System technology. It is being used in the latching system for application in aircraft interiors.

It's just a beginning but the Intevia system has the potential to start a revolution in manufacturing and assembly techniques.

Bringing successful new products like these to market is what the customer innovancy aspect of our enterprise management strategy is all about. Fostering innovation is pivotal to the process of developing new products, which is why we have established the Chairman's Award for Innovation way back at the inception of transformation. This year, we announced 13 awards for product and process creativity that will support an estimated 700 million in revenues over the next 5 years.

And if ever a product embodied innovation it is the V-22. Certainly we made great progress with the program as evidenced by the conclusion of the official operational testing on June 18. Even better the Opaval (ph) Report declared the aircraft operationally effective and suitable for military use. The aircraft met or exceeded every key performance requirement and proved even more reliable and trouble-free than expected. Last week's media event at New River, North Carolina based on the articles written was a resounding success and demonstrating the aircraft's unique capabilities.

We are now waiting a report which is required to be filed by the Pentagon's independent director of operational test and devaluation. We expect that report to be issued in August and then a final decision should be forthcoming in the September/October timeframe from the Defense Acquisition Board.

Through the first half of the year, we delivered 11 Ospreys, 7 in the second quarter as a matter of fact, and we are on track to complete our 19 unit company that commitment for 2005. As you would expect, we are applying our lean manufacturing and integrated supply chain management tools to enhance our ability to execute this program.

Innovation is also evident in the development of the Bell 210, an affordable utility helicopter. We are expected to receive certification for the 210 from the FAA, actually this morning, in a ceremony at Fort Worth. This aircraft is ideally suited for homeland security, law enforcement, utility and firefighting applications. Furthermore, the 210 is also a particularly effective paragraph from the upcoming Light Utility Helicopter program or LUH because it is very compatible with the Army's existing infrastructure.

Innovation helped to drive another strong quarter for commercial demand at Bell; and we received 69 orders and increased commercial backlog by $120 million. As we discussed on our last call not counting international military sales we expect to deliver in excess of 125 units this year compared to 93 in '04. Actually at this point, it looks like we will have another significant increase in deliveries next year too.

Looking long term at Bell's total business we are on track to hit our target of doubling revenues by the end of the decade. We also received further good news on our Armored Security Vehicle program. Recently the Army officially ordered an additional 724 ASVs. We expect to deliver about 250 this year while ramping up to produce about 550 ASVs in 2006.

Elsewhere in the Textron family, demand in our Golf car tools fluid handling and power transmission businesses was also strong in the quarter where we saw double-digit growth in revenues.

Now moving to Cessna, demand remains strong across our product lines there too. Through the first half we have taken in 753 single-engine orders and are on track to deliver 850 this year -- up 200 from a year ago. During the quarter, we also delivered our 1500th Caravan as we celebrate the 20th year of this venerable workhorse. And here's an interesting point on brand loyalty. Over 50% of the Caravans sold during the last 10 years have been purchased by existing Caravan owners.

Now turning to jets, demand for CitationJets during the quarter remained very robust and we booked 85 orders. However, I should point out that we expect slow order activity. Of course, we've said that the last couple of quarters and it hasn't come true but I still think we are going to slow down some here over the next several quarters because availability is moving further and further to the right.

For the year then, in 2005 year-to-date we booked 158 net orders through the end of the quarter and that includes 43 from factual (ph) operators of which 11 were Citation shares. Of the 158 orders, over 60 were for delivery in 2006; and this brings our total of about 250 jets ordered for next year.

Based on this backlog, we are setting our preliminary production plans to build between 270 and 290 units in 2006 at this point. We are working with our supply chain, which is specific by model, actually, to determine precisely what we will be able to produce.

Looking beyond, given general long-term demand plus the ramp up of the Mustang, 2007 is also beginning to solidify as another strong growth year.

In fact, demand across both of our aircraft businesses -- Bell and Cessna -- is stronger than ever. We have now reached another all-time record backlog, including Citation shares of $9.3 billion. It should be clear that Textron has a significant number of emerging growth opportunities. And as you'll hear from Ted later, we have decided to increase our planned capital investments through the balance of the year by about 18% in order to support even further future growth.

Let me summarize. At the beginning of the year we said we expected strong revenue growth, margin improvement, and ROIC expansion in 2005 and we are off to a good start through the first half. Our transformation initiatives continue to provide a more efficient operating infrastructure which leverages the revenue expansion and allows us to make additional investments for our future. We see continued strong demand in aircraft defense, electrical tools and commercial finance, and solid demand in most other industrial markets.

Longer term, we believe Textron is primed for growth driven by the applied innovation of our employees, our considerable ongoing investment in new products, the ramp-up of our significant military programs, and the expansion in our commercial and industrial markets. Okay, Ted.

Good morning, everyone; thanks for joining us.

I will start with a review of our results and then Doug and I will walk you through our outlook for the third quarter and the balance of the year.

Let's examine the factors that drove our year-over-year increase in earnings. First we had the negative $0.30 for the Collins & Aikman impairment. Excluding that earnings were up 48% -- excuse me -- $0.48 the previous year. Starting with those positive items, volume and mix provided $0.46. The pricing was up $0.35; that is about 2.9%. Cost improvement was a favorable $0.21 and miscellaneous items, including interest expense, lower share count, discontinued ops were a positive $0.06 and Textron Financial contributed 4.

The negative items were inflation of $0.48 -- that is about 4.4%, pension expense up $0.11, and additional investments in growth and capabilities worth $0.05. I will run through those quickly one more time. The positives, $0.46 from volume, $0.35 from pricing, $0.21 from cost reduction, 6 of miscellaneous and $0.04 for TFC. The negative items were $0.48 inflation, 11 for pension expense and $0.05 for growth and capabilities.

Now let's go through each of the business units and I will start off with Bell where segment revenues were up 199 million, while profit was up 12. U.S. government revenues increased primarily as a result of higher revenue on the V-22 program and greater volume of Armored Security Vehicles. In commercial, revenues were up as well, primarily due to higher helicopter unit volume and higher volume of commercial spares, partially offset by lower international military sales.

Segment profit was up for the U.S. government business, largely from the V-22 program and segment profit related to our commercial business decreased from lower international military sales volume, a favorable resolution of a warranty issued that we had last year, and an additional warranty provision related to Lycoming crankshafts this year.

The commercial profit decrease was partially offset by lower engineering expenses as a result of its spin sharing with new co-development partners. With regard to the Lycoming warranty provision, we determined that there are additional crankshafts that need to be replaced due to possible microcracks like those that prompted the 2002 replacement program. This is not a recurrence of the problem but just an expansion of the population of engines that could potentially have the issue. During the quarter an incremental $5 million was added to warranty reserves at Lycoming.

Backlog at Bell end of the quarter at 2.8 billion, essentially flat with the end of the first quarter. Keep in mind that that does not include about $.5 billion worth of orders for our new 429 Global Ranger, which will not go into backlog until sometime next year.

At Cessna, revenues were up 410 million as a result of higher volumes across the board and the consolidation of Citation shares. Notably we delivered 67 jets in the quarter up from 35 a year ago. Profits to Cessna increased by 77 million, primarily due to the higher volume of the pricing, partially offset by inflation. The strong order intake resulted in an increase to Cessna's backlog of nearly 300 million during the quarter yielding and ending level of 5.8 billion for unaffiliated customers, plus an additional 610 million in orders from Citation shares.

Next is Fastening Systems. Fastening Systems revenues were up 27 million primarily as a result of higher pricing and favorable foreign exchange. However lower volume -- primarily due to soft demand in automotive markets -- partially offset these gains. Profits were down 13, primarily due to lower volumes, new plant ramp-up costs, and general inflation. Improved pricing compensated for higher steel cost.

On to industrial where segment revenues were up 19 million and profit increased by 1 million. Revenues increased, in spite of lower overall segment volume, primarily due to favorable foreign exchange in pricing. Lower volume at Kautex and Jacobson more than offset higher volume at E-Z-GO, Fluid & Power, and Greenlee. The slight increase in profit resulted from improved cost performance, better pricing, and foreign exchange, partially offset by inflation and the lower volume at Kautex and Jake.

Finally finance segment revenues increased 10 million, and profit increased 8. Revenues increased, primarily due to higher average finance receivables, partially offset by lower other income. The increase in profit reflected a lower provision for loan losses resulting from continued improvement in portfolio quality, partially offset by lower net interest margin. TFC's portfolio of quality remains excellent. Nonperforming assets were 1.92% while 60-day delinquencies were 1.08.

Looking at cash next, year-to-date manufacturing cash flow from continuing ops was 452 million, compared to 435 last year. Free cash flow was 320 million, compared to 317 last year.

Now for a quick comment on taxes. Our second quarter tax rate of 35% is abnormally high, primarily due to the tax impact of the Collins & Aikman impairment. For the third and the fourth quarters of this year we expect the tax rate of about 29%.

Moving on to outlook, we expect continued strength in our markets and anticipate additional progress with our transformation initiatives. We expect full-year earnings per share will be between $3.75 and $3.95 with third-quarter earnings expected to be between $0.85 and $0.95 a share. Our full-year guidance from a business fundamental point of view is unchanged. It has been solely adjusted as a result of the Collins & Aikman impairment.

Finally, in order to support the emerging growth opportunities that Lewis mentioned earlier, we have increased our capital expenditure estimate for the year by $65 million to approximately 425 million. We also expect full-year manufacturing cash flow from continuing operations will be up by a similar amount and should now be somewhere between $900 million and $1 billion. The increase in operating free cash flow covers the increase in CapEx so there is no change to our free cash flow estimate between 500 and 600 million.

Now I'm going to turn the call back to Doug who will give you some more details on guidance for the balance of the year.

Starting with the Bell segment, we expect third-quarter revenues of about 735 million with margins between 8 and 9%. At Cessna, we are projecting revenues will be about 850 million, margins between 12 and 13%. Fastening Systems, we are projecting revenues there will be about 475 million and segment profit between 15 to 20 million.

I will also make a comment on full-year outlook for Fastening Systems. We are now projecting that Fasteners will reach between 40 and 50 million in profit compared to our former projection of about 60 million. Given that our full-year EPS guidance has changed only for the C&A impairment we are obviously expecting slightly better full-year performance from the Cessna, Bell, and Finance segments.

Also for the balance of the year we are expecting about another $7 million of special charges for restructuring expense. This is slightly lower than our previous expectation, reflecting better proceeds from related asset dispositions.

At industrial (technical difficulty) we expect third-quarter revenues will be about 670 million with mid single digit margins; and, finally, Textron Financial revenues should come in at about 155 million with segment profit between 40 and 45 million.

Doug, let me interrupt 1 second. This is Lewis. When I gave the TFS stats, I think I misread a number because I should've said 70 million in noncore receivables liquidated during the first half. I think I said 700 by mistake so I just want to clear that up.

So that clarification, then, was 70 million of liquidation for year-to-date at TFC (indiscernible) noncore.

Operator, that includes our prepared remarks. Before we take questions I would like to remind members of the media that they are in a listen-only mode. If any of the media have questions, please feel free to give us a call after the teleconference and with that, Operator, we're now ready for questions.

+++ q-and-a.

Jack Kelly, Goldman Sachs.

Just one broad question, kind of unrelated to the topic of the day here but maybe you could help us out. Given the revaluation or likely revaluation of the Chinese currency and let's just assume at least our economists are saying over the next 12 months it could strengthen maybe 5 to 10% versus the dollar. I know you haven't maybe had a lot of time to think about it but maybe just any kind of initial reactions you have to that, in terms of your business?

Yes, that just came across the wire. Most have been like five of nine or something so that is going to happen. It looks like it's strengthened but not a whole lot. We didn't add too many comments on the call here so far but we're moving into China in a pretty measured way. We've got our second Kautex plant done in Shanghai; third one in southern China started. We've set up an office in Shanghai so from a standpoint of the Chinese economy, we are trying to take advantage of that. I guess it probably slightly favors the balance of trade, as to China gets stronger, I suppose.

Most of our opportunities in China, the largest bulk are production in China for the Chinese market. We do source from China so on the margin it could increase cost of some of our products, particularly Greenlee sources but it is a very small piece. I would say 90% or more of our impact is producing country for sale in country. So should be fairly neutral.

I see on the Greenlee on the sourcing side, you would need something a lot greater than 5 to 10 to probably change the economics?

I don't think that that would have any impact on our sourcing decision if that is all that the impact is.

Secondly, moving on to Kautex, I think in the past you mentioned that things were going to flatten out in '05 and '06 due to changes and model changeovers. Is that still pretty much the case? Anything new there in terms of production and outlook? Let's say for '04, '05?

I think that's true in the short term but Kautex continues to do quite well in capturing new business for the future. We just recently got a large new contract with Toyota and been invited to put up a plant on their Toyota campus down in Texas. We are excited about that and the opportunity to be on-campus with them and learn some things, as well as the business that we've gotten. And we are continuing to get good follow-on contracts. But this is fairly typical and Kautex has had a great compound growth rate over quite a long period of time in the mid double-digit kind of range but it has never been linear. It's always been big surge forward and then flatten out a little bit and then another surge forward. That is kind of where we are.

Finally on Cessna, looked like the margins in the second quarter were around 13% and maybe they were inflated a bit and in the sense that you delivered more jets than you thought. The guidance in the second through the third quarter is 12 to 13. Is the falling back to maybe 12 versus 13 a function of that shifting or is there something else? It looks like on the sequential basis, margins should be improving there. I guess that's really the thrust of the question.

I think for the next few quarters and I would say probably the next three we expect to be in that 12 to 13% range and probably out in the second quarter of next year, we will see a step up in production levels. It's coming in the April timeframe. And at that point in time I think we could see margins get a little bit stronger.

I think we are shipping fewer jets in second, I guess. (MULTIPLE SPEAKERS) The third quarter relative to second quarter so that would account for part of it.

Nicole Parent, Credit Suisse First Boston.

I guess just my question I seem to ask every quarter we missed the plan for Fastening Systems again on margin side and you lowered the guidance. Can you talk a little bit about the confidence and how do you get comfortable given that you keep having to reduce the forecast in this business with what is going on there? And I guess, is it a keeper in the portfolio?

As we announced already we are continued to lighten up even more in Fastening Systems by the sale of -- what is that? Three.

.25 billion.

Yes $.25 billion of Fastening Systems so, start there.

No. 2, it did get off to a slower start in the second quarter than we wanted so that was a disappointment. But it does look like it's picking up some steam now as we -- in the last -- well, second month of the quarter and the third month of the quarter. We have a monthly review with those guys and they are doing all the right things and so I think we'll start to see -- if we see the improvement, remember, we took the entire year down but that was based on the fact that we didn't see what we wanted to see in the second quarter.

So if we see the sequential improvement again in the third quarter and again in the fourth quarter, then we would be at a pretty good run rate going into the next year. But that's about all I can say (indiscernible) lightening up. I --

Is it when you think about the issues in the business is it more a volume issue? Or how would you characterize their ability to execute on the plan that you put forward in terms of the margin?

It's a combination of both right now. Clearly some of the customers are taking the production levels down so we are seeing some volume impact. Our biggest challenge, frankly, has been executing on some of those final restructuring moves and getting all of the reduced plant footprint back up and operating in an efficient manner. We are struggling with some of that. Did make good improvement. We sequentially improved earnings 17 million second quarter versus the first quarter. Six of that was priced -- about 11 of that, though, was fixing some of these problems out in the operations at fasteners. But we got much more work to do and as Lewis said we're going to look for some fairly sequential improvement in each of the next couple of quarters; and then I think we'll be back to a more reasonable run rate.

Ted, could you just give us some color within the subsegments of finance in terms of -- I mean, I am assuming distribution, I guess. Which businesses were the best and which -- did you have any laggards there?

No. We had pretty good performance in across the board in the second quarter. The biggest piece of the 8 million improvement was at aircraft. We had good growth in receivables, lower loss provisions year-over-year. At aircraft, the next two best businesses were Golf, where we had a stronger pricing and stronger pickup and Resorts, which had a bad year last year so that was partially driven. They were up about 3 million, largely driven by lower loss provisions. Distribution and asset base were about flat year-over-year; that's because we had some big gains last year in the distribution business and we also had a big benefit from prime rate floors. And that has been hurting us as prime rates have gone up but fortunately I think we just passed through the point where that is no longer going to be a hurdle. It is starting to become a help.

Then those good performances were offset by about $3 million of impairment charges that we had on some equity holdings we have in a couple of companies that had been workouts. And fortunately on one of them I think we are down to just about having that one all written off so it can hurt us anymore.

Lewis, just one last question. Could you characterize for us the positives and the negatives that you see impacting the rest of the year that would allow you to either hit the low-end, the midpoint or high-end of the range?

Sure. I tell you, we feel pretty good about the year. We've stress-tested quite a bit of the numbers -- I'm just thinking through each segment. Cessna is just about where we think they are going to end up for the year. They could move a couple of planes one way or the other. They are historically pretty darned good at that if you look back over the last 12 years so Cessna could move us up a little bit. Bell might be able to do a little bit more, depending on how they ramp up their commercial line. They are bringing in some pretty darned good delivery -- sorry, orders now. So depending on some orders we might get back for quick delivery that can move a little bit.

I don't see those numbers moving down against the bottom of the range. You got Fastening Systems you got to worry about and we just talked about that one. Industrial news improved in certain areas, too, so I think it's there. So you got those things working against each other. I think we have more positives than negatives and I think finally (indiscernible) pretty darned solid.

So I guess on the balance, I'd say we lean toward supporting the top end of that range because we have more strength there than we have things that worry us right now. I don't see any economic things unless somebody around the table here thinks of something. I don't see any economic things unless oil shot through the roof but I don't think that is going to happen.

We are already factoring in lower automobile build bills in the second -- third quarter, excuse me. That is about it.

Jeffrey Sprague, Smith Barney.

Hey Jeff. Must be on mute.

Strong and people are willing to take backlog even on to -- even on slot.

Hey, Jeff. You didn't come through. You must have been on mute or something so can you start over?

I actually was not on mute but I will halfway start over.

I don't know what happened.

I was just wondering it is interesting that people are willing to place deliveries for slot further and further out in the future and could you give us some perspective on that versus the last cycle? And give us a little bit of color on -- I mean you did table '07 in your opening comments what you're seeing the early read on '07?

I'll do some of that and if Ted wants to add, then, he sure should -- could. Here is what you got going on. You got an unusually nice mix of new product so you have got CJ1 certifying at the end of -- certified now and for sale next -- this year. First unit delivered in Q4. That's CJ (indiscernible). CJ2 plus certifies later and delivers second quarter of '06. Then of course you got the Mustang coming on but set the Mustang aside for a minute because it is locked and loaded. I think it makes more difference what the baseline of just -- without Mustang is going to do. And that is the one where I think your question really resonates.

So we have got more new products than anybody else bit so consequently a new product always drives, historically it's always driven really good order flow because Cessna has been doing this since 1971. So they have a very good track record of creating products that customers want. So it is not unusual -- I know it seems weird -- but it is not unusual, believe it or not, to get the first year or two sold out not too distant from when they announced the plane.

Over the next six months after announcement, it usually sells pretty good. So the first factor is, you've got a very good mix of new models and of course Cessna's reputation and so forth, just underpins all that.

The second factor which kind of snuck up on us and we began to talk about it on this call maybe two quarters ago is, we were really surprised that the percent of Cessna models for sale in the used market seem to have stalled. I thought it was going to go down to 10%. It got as high as 17 or 18% two years ago and now it's stalled at about 14%.

So we dug into that a little further and some 75 or 80% of the used aircraft in that 14% are over 10 years old. So what that means is, you just don't have many used planes out there that are new enough that people would want to buy. I don't remember the number but there's a small -- I think it is only 20% but I could be wrong -- that are for sale on the used market that are currently being produced today.

The third factor is, we continue to pick up and improve market share and we are back now to where we thought we should've been and we should pick up more share as the new planes come on board and I guess the last thing I would say is the commercial -- sorry, the business jet business continues to be strong fundamentally because people, business folks and private individuals, still realize that it is much safer, quicker, faster and more efficient to fly in a commercial -- in a business jet and all those different ways of doing it from jet cards to factual ownership to whenever tend to be very good.

Now we have had a good pickup in Europe. Europe is very strong right now for us, and we are starting to see a pickup in Asia. So it just seems to be a different cycle this time than last for those reasons I just talked about.

I think it'll continue too.

Part of that same question you are taking CapEx up to elaborate where that's at. The point of my question is I guess we had conversations before about going to or through that prior peek at Cessna 310.

I know at 30 million -- I think it is only over 30 is for Bell, because as we get closer and closer to -- I will throw this to Ted in 1 second -- as we get -- I was just at the Pentagon here on Monday and talking with Assistant Secretary Young who is doing a heck of a job there for the Navy. And of course that's the Marine Corps customers right in there. And so, it's getting more and more certain we are going to have to be ready to do whatever we need to do on the V-22. So we are doing the things we know we have to do to get ready for what should be a very good long production run but, Ted, why don't you fill in the planes on the (indiscernible).

There's lots of -- there's no one big item. There are lots of pieces but Lewis is right. About half of it is at Bell. We are putting up what is called an ROR -- repair of repairable -- dedicated facility with what is going on overseas right now. We are seeing a big surge in demand for repairing military aircraft. Unlike commercial where we have always had a separate repair facility, on the military side we are trying to do that on production lines, not very efficient. So we are setting up a special separate facility for them. We are increasing our component manufacturing. That is about 10 million. We are spending about 10 million to increase component manufacturing capabilities at Fort Worth; and we are spending about 12 million incremental to further increase capacity at the Amarillo and Mirabelle (ph).

At Cessna we are spending about 15 million incremental. The largest part of that is tooling investments out in the supply chain to increase capacity of the supply base. Systems we are spending another 5 million to ramp up ASVs faster. And then we have approved this third facility for Kautex in southern China and that is about 10 million of incremental spending over what we had originally planned this year.

By and large you would expect to be able to continue to ramp Cessna up to and through that prior peak without a lot of incremental investment except maybe some of this stuff where you are supporting the supply chain and with tooling and other things?

Yes we have already -- well in our plan this year we did make a fairly sizable investment in Cessna to put up another much larger paint facility with the sovereigns coming down the line. They take up the space of 2 planes that we used to could put in some of our paint booths; but we had already made some of those moves and then, obviously, we already had in our plan most of the capital that we needed at Independence to start ramping up the Mustang. Although I think we are spending a little bit more than our original plan on the Mustang as well.

I think there are two interesting things there if you look in the '07, '08, '09 timeframe and that would be assuming the Mustang stays on track which I'm pretty doggone certain it will -- if not more than on track -- how soon do Mustang customers begin to migrate up the food chain because that has always been Cessna's strength is, once you get in a CJ1 you soon want a CJ2 and so forth.

Depending on when that happens, that will trigger a stronger than normal growth in -- let's say, the traditional product line. Then you have to think about how strong can our -- how much can our suppliers ramp up? So they have got to ramp up with us, which once they get convinced that it is worth their while, I'm sure they will and (indiscernible). So, I see it to be a pretty doggone strong decade for Cessna as well as Bell.

Last thing if I could. On V-22, I mean it sounds all systems goes certainly from the Opaval, the services interest of the airplane. And we had the push out several most ago and that whole -- and a budget rejiggering process. Could you help us think about how the funding should play out for this? What is currently funded if you get the thumbs up in September? And then are we just going to annual budgeting process from there as we move forward?

I can only say a certain amount on that and the reason is because we are in -- negotiations is kind of the wrong word. We are in discussions about the best way to fund the V-22. And we aren't quite to resolution yet but just to sketch out in broad terms, ideally big programs like the V-22, once they get through this next stage, conceptually you can offer the customer some pretty good cost savings by getting what is called a multiyear contract. So you go with a fixed price plus incentive fee and that stays firm for X number of years. In doing that you can go to your suppliers and demand the same kind of cost improvement and you can key out those savings and basically just hand them back to the government which is a good thing. Because you have more certain production than waiting on each year's budget to be approved.

Right now we are lot by lot, lot by lot approving the production capability. And if I can find it here in my notes, find out which lot we are on right now -- but we are probably getting ready to firm up lot 11 and when I say a lot that is usually 8 to 10 aircraft to be produced over two or three years.

I think the question that is impossible for us to answer and you can make your own judgment on it is, this machine is needed by the war fighter. It statistically does things that the product it is replacing cannot do. It is repaired in much shorter time than the product it is replacing. So that it is something the government wants.

On the other hand, we have to ramp up and that ramp has been pretty good. We delivered 3 to -- let's see, three years ago, then six, then 12 then we did 19 and we did 11 through the first half. So we are ramping up at a pretty good rate.

The question in my mind or our mind on this call would be, what will the government customer want to do and what are we able to do on ramp up? Because as soon as they get give the green light, I would suspect they will want more. The mitigating factor to that is, there are a lot of good government programs out there that are in addition to V-22 years so there are a lot of mouths to feed.

And with the war continuing, that is coming out the same DOD budget. Different pocket, but that said, it certainly is very positive, Jeff, and I'm kind of hoping we pick up production more than what's planned. But I'm very comfortable with what we have planned. I feel good that we are where we are but I think there's a chance we could see a few more units put in in the near term.

Dave Bleustein from UBS.

Most have been answered but did you update us on your Cessna jet shipment for 2005?

No. We have not changed the estimate, which is approximately 240.

And you are really looking for a slower pace of jet builds from the Q2 levels in the back half?

On deliveries, yes. And then it really -- really for about the next three quarters and then in the second quarter next year it will be an other kind of step function up as we increase our capacity.

(MULTIPLE SPEAKERS)

David, we are thinking probably about 55 to 60 jets in the third quarter and then the balance in the fourth quarter to get to the 240.

Lewis, can you just walk through where availability is on the CJ3 XLS and the Sovereign if somebody wanted to place an order today?

Yes, just let me get it. I don't keep those memorized but, yes, one second. I had that right here, too. Do you have that handy, Doug? I got it -- here we go. Why don't I just run it down? Mustang is Q2, 2009; CJ1 plus Q1, 2007; so sold out in '06. CJ2 plus Q2 207, (indiscernible) there's Q1 2006 so Volvo (ph) we must have pretty decent Opo (ph) orders on that. By the way keep in mind, because something is available for sale in Q1 2006 does not mean we don't have orders for Q2 or Q3 or Q4 for the same product. In other words they're not stacked up like cordwood. They're placed when ever somebody wants to buy them, for whatever reason. A lot of times that has to do with when the lease expires or so I'm just giving you availability. CJ3 is -- .

Lewis, let me make a converse point to that. That also doesn't mean that if you want one of these models earlier that in certain cases we might not be able to work that out (MULTIPLE SPEAKERS) because there are flexibilities in some of the delivery schedules. So I don't want you to get the impression that there as a marketshare loss situation necessarily.

Because our broad customer base we can usually do with them to say hey, how about moving over 2 quarters and let this person buy in. CJ3 is Q4 2007. Encore Q1 2006; XLS Q3 2007, Sovereign Q1 2007 and Citation 10s, we have some available in '06. So, it is getting longer and longer. It is about as long as I've ever seen it and I came here in 92. It's pretty far out there. That is why I made the comment on orders but I've been wrong every darned quarter. So -- .

Steve Tusa, J.P. Morgan.

Goodlooking result. On the business jet backlog, looking at this in a different way, what happens when a customer cancels an order? Is there a fee he has to pay or something to that matter?

All of our orders that are in backlog by definition have quote non-refundable deposits on them. What happens in reality varies in the number and instances where the customer is clearly going away and let's take for example the dotcommers that ordered jets and then blew up. We tend to keep people's deposits.

Our first choice at Cessna is that we try to reschedule a customer. We hold their deposit; we try to get them to move out a couple of years to stay in the queue as we speak. But there are other cases where if it is a very good customer we might give them their money back. But the contracts other than the (indiscernible) I'd say is an exception but in most cases the contracts are not non-refundable deposits.

Is there a standard deposit or is there a negotiated percentage of the total that you have with these customers?

There's an average deposit that is probably about 10% upfront with maybe some progress payments later on. But that's just an average. They are all over the place.

Dan Whang, Lehman Brothers.

Just shifting back to Bell for a moment. I think you talked about expected delivery of units of ASVs. Can you talk about the expected revenues tied to that and also doing commentary about the profitability of the ASVs. That Six Sigma average?

Total revenues this year will do somewhere around 160 to 165 million next year somewhere north of 300 million maybe 325-ish. Profitability round numbers 9 or 10%.

Typical government contract return on invested capital by the way, may be double that.

What's the potential for additional volumes beyond what's been currently in a stated --?

We think there's opportunity for foreign military sales and once people see the capability really demonstrated on the ground which is happening as we speak that we may see sales from other people. We have a complement -- we think the U.S. government wants to buy a couple of thousand of these things and then after that we will be out shopping it around with some real experience behind it.

The program on record and of course this isn't funded that the program of record is 3000 units with the Army.

What's interesting is I've been emailing back and forth with a general or two over there in Baghdad so they are really anxious to get these things. That's a good thing but what you find out is, right now as these flow into the theatre over there, neighboring countries see the performance and see the paneling and the safety characteristics. And so I wouldn't be a bit surprised if you didn't see foreign military sales to our friendly NATO allies.

We don't have any of those in and I wouldn't be a bit surprised to start seeing those because this vehicle really is about as safe a vehicle as you can get in, other than being in a tank. So you are really in a very safe position in this and of course, that is what they're looking for.

We're probably booked up for the next few years, assuming the Army comes through with the funding for all of what they've asked for. We will be full up for a few years and we're going to be looking to start filling in the white space out in two or three years now.

In terms of the inflationary commodity cost impact, I think you talked about the Company overall. Could you break that down by segments a little bit?

Yes I can do that, if I can find a piece of paper. I got it. Let's see if I can do that.

Overall inflation for the quarter year-over-year came in at 4.4%. It ranges from Bell Helicopter, Greenlee and Jacobsen all under 2% systems right at about 2%. Up to 5.5% at Cessna. About 8% at Fasteners. About 5% of E-Z-GO. A lot of new things coming on now.

The guys that are the most heavily influenced by scraps steel pricing -- which would be Fasteners -- particularly this No. 1 Chicago busheling really seeing the prices of steel starting to come back in. They are still quite a bit higher probably 50% higher than they were 2 or 3 years ago. We started off at $100 a ton. It zoomed to -- it peaked at 400 for a couple of days. Not for long. But it's back down to 150 or so so it's still quite a bit up from a couple of years ago but coming back down nicely.

A lot of our other businesses are seeing more of a delayed effect. Some the stuff is coming through their supply base to them. Flat steel didn't go up as much but it hasn't come down and we are seeing still stronger increases in things like lead and plastic resins for fuel systems and the likes. So it's a little bit of a mixed bag right now but the business that got whacked the worst at Fasteners is clearly seeing those prices come back down.

We've negotiated arrangements with most of our customers over the last year or so where we are now adjusting for changes in steel price. We get a little benefit when it comes down because it's about a 30-day lag from when those prices come down to when we pass it back to the customer. But that is more tightly aligned right now.

I think last time, last previous quarter, you talked about at Cessna you saw some of the components -- aircraft component costs go up is due to a lag. Is it the higher commodity price posted at supply chain. What do you see in the quarter in regard to that?

Overall the inflation rate at Cessna is running pretty high as I said to about almost 5.5% on a year-over-year basis. It is a combination of their -- it is engines, it's avionics. But it is also labor. Labor cost in Wichita market are up quite a bit. We did settle a new contract at Cessna here about 2 or 3 months ago. And we've got some fairly significant cost increases as a result of that.

Ron Epstein from Merrill Lynch.

So during the quarter you guys sold a boatload of pistons compared to last year.

(MULTIPLE SPEAKERS)

Lewis, you mentioned what? 850 for the (MULTIPLE SPEAKERS) delivery this year? What is driving that? Is there kind of a renaissance in the GA market or what is going on?

I would say that. I would say that more and more pilots are getting back into aviation. I think many times this is a precursor to wanting to own the business jet and we got a pretty darned exciting enhancement to our product line. We put in that Garman (ph) flat screen aviation -- avionics in there which is, again, we've said this before but it's worth repeating. We put the same avionics suite into the single-engine piston aircraft that is in the Mustang; and the Mustang is built in the same factory as the single-engine piston.

So I would also expect some step-up buying pretty quickly from single-engine to Mustangs. In fact anyone who is really following closely the Mustang and wants to get into one and wants to fly it themselves they would be very obvious potential buyers for a single-engine piston aircraft for a couple of years, get trained on that, and then slide over and fly their first jet at very low price of 2.5 or $2.4 million. I think it's just a combination of good things all happening at the same time.

Another question for you. If you got these folks who are going to be flying Mustangs, next natural evolution will be up into what -- a CJ1 or 2? (MULTIPLE SPEAKERS) Is there any thinking of putting a G1000 in one of those aircraft?

Maybe. Yes.

With regard to the ramp up of ASVs, how is that going? Could you give us more color? Because you're going from very few to a lot in a relatively short period of time.

I'm just down there and so was Ted. Went down there and kicked the tires so to speak, but you can't kick them very hard. The ramp up is going knock on wood, darn near perfectly. The only time we got offtrack by a couple of units was when the hurricane came through just recently and we missed delivery of like 2 units or something like that.

We're really in good shape. What our production plan there is to run at rate on the 1 line and then duplicate the line and then run a rate on the second line. aligned. So we have proven we can run a rate on the first and our suppliers are keeping up with us; so I would be very -- and we took our automotive guys down there who are very used to high-rate production. And we simulated line flows and balances and so forth. We started out lean. We got full systems in place and so it's -- I don't think there is much risk of it, so far, so good.

Great, that's great. And I guess one last final question.

Before you do your question, let me throw another commercial in. We do plan to visit the ASV manufacturing location in New Orleans in November associated with the MBAA. So keep that in pencil on your calendar.

Great, great. Regarding the armor reconnaissance helicopter (MULTIPLE SPEAKERS) there's a lot of press out there, a decision that could be imminent this month. Any thoughts? Can you add any color on that?

Let me start and just make one comment before Lewis responds to that and that is, as you know we are active in that situation right now. So it would be particularly inappropriate for us right now to make specific comments about the status of the competition. But I'll let Lewis go ahead and respond in his general way.

First of all, just like I said on the presidential helicopter both the ARH, which should -- it should be awarded sometime the next month, let's say. Maybe sooner maybe not. The LUH -- Light Utility Helicopter -- that would be further out. We think we really have been competitive offerings in these two ships. We just certified the 210. The ARH is a variant off the production chip so that is a great thing. Well-proven, well-liked helicopter so I think we have better than a 50-50 chance to win.

But on the other hand, we didn't put any of that in our members and if that didn't happen I sure wouldn't follow fall on my sword on it because we've got plenty of new programs and growth on just what we've talked about and we haven't even seen V-22s go into consideration for volumes outside the United States. And also the H1 program which I didn't bring up is also a solid contributor and will be for a long time. So I think we had -- what did you expect me to say. I think we have the best offerings in the bunch but (MULTIPLE SPEAKERS). So if we get it it will be great and if we don't we will go on down the road.

Tony Boase, A. G. Edwards.

You mentioned at the beginning of your comments that there was roughly $0.8 pulled into this quarter and it was from Bell and (technical difficulty). Could you maybe go over how much assessment or citation was pulled into the second quarter?

The biggest part of it is at Bell. We shipped a few more jets than what we had anticipated. So I'd say of the $0.08 it's 2 or 3 at Cessna and 4 or 5 at Bell.

Just clarifying the guidance for the full year of 375 to 385, does that include discontinued operations or not include discontinued operations?

375 to 395 and it includes discontinued ops. That's bottom, bottom-line gap.

Does that mean that the first quarter which First Call has at $0.91 needs to be adjusted for discontinued?

I think we will leave First Call's decisions to themselves. We reported what we reported and we'll move from there.

Yes, we are reporting actual bottom-line GAAP. We will do everything we can to help people understand things they might want to adjust for but that is what we're going to report.

We reported $0.91 so that should be okay.

Just on the fourth quarter for Citation, just working through the numbers, it looks like it could come out between 58 and 63 planes. And it just seems a little bit light, relative to what your typical fourth quarter is relative to the rest of the year. Is there much wiggle room on the upside there?

I think Lewis already answered that question. Cessna is already always going to be plus or minus a couple of jets in any particular quarter depending on what happens with suppliers, what happens with weather, what happens with customers' desires, etc. So there's a possibility but I think we like the fact that we don't have to deliver a bunch of planes over the Christmas weekend to get the quarter done.

Just to reiterate what Ted earlier said is that the quantum leap in ramp or production rate at Cessna occurs more like in the second quarter of next year.

I thought I said step up instead of quantum leap.

The step up occurs second quarter next year. So that's pretty much our systemic rate at the current time.

Just to clarify in '06 for Citation, I think Lewis said 270 to 290 for '06.

Yes.

What was the prior or did you even talk about a prior expectation for '06?

No. We never have talked about prior expectation for '06 and just make sure everyone understands, we are trying to be as transparent as we can be. We had put our plans together for '06, the Cessna guys are in a lot of conversation with the supply base right now to see what we can make in '06. So, there's some tightness out there in the supply chain in the short term. So we may change that number as we go through our planning process but right now that's the best insight we can give you.

We have 250 orders in hand and we think we are going to build somewhere between 270 and 290; and we hope it will be up at the (indiscernible) end of that range but we've got to work that through with our supply base.

Operator, I know that we have already gone a little bit over our typical hour and lots of people have to go for other companies' releasings. But understand we have two more questions on the line so we will stay on and take those.

Brian Langenberg, Foresight Research.

Great quarter. Two things. No. 1 is, your results are great; your backlog is up; your stock is down. Just tell us if you decide you wanted to move as many planes on the fourth quarter as you wanted to, just let it rip, how many jets could you move if you wanted to? And then (MULTIPLE SPEAKERS)

Into or out of? (MULTIPLE SPEAKERS)

Ship and get money. I mean -- if you wanted to deliver as many jets as you could. How many could -- ?

How many could -- (MULTIPLE SPEAKERS)

Basically, yes, I'm trying to nail down, there are a number of questions I think they are pretty relevant about deliveries and (MULTIPLE SPEAKERS) fourth quarter. If it's, to Tony's point, 58 to 63. You did 64 last year; I suspect that if you wanted to deliver a lot more jets in the fourth quarter, you could or several more.

It's not really necessarily a want to, it is whether believe it or not whether the customers want them quite yet and -- .

No question.

That kind of thing. Just historically I can tell you, I don't think we have ever seen more than three or four ever flow in from the out year and we have seen them go the other way, too. So I think if you go back that 12 years -- I can't ever remember more than three or four and it's usually pretty close to right on.

We will go into it a little bit later; I will follow up with you. Just looking at Bell, we have a big year-over-year change in revenue, not too much on profit side. That 200 million in round figures increase year-over-year revenue, how much of that was V-22 money year-over-year?

I don't know if I have that for the quarter or not. Doug will look for that. The bottom-line at Bell, just to really get to the crux of answering your question is a very unfavorable sales mix on a year-over-year basis.

Last year, we were shipping a lot of the Pakistani order at very high margins and we were shipping the 2000 pound JDAMs (ph) at very high margins. This year, we are now transitioned to where we are shipping in the 500-pound JDAMs which have much lower margins than the 2000-pounders. We are shipping a lot more ASVs that have that 9, 10% kind of margin. We are shipping a lot more new commercial helicopters non 412s which is what the Pakistani order was. And most of our other commercial helicopters have -- we make a ton of money on spares but -- which is half the business but on the new ships our margins are much lower than they are on the 412. So that's really the driver.

So what we're looking at in the third quarter guidance that is going to be closer to normal? For some of these other things' ramp up.

The answer to your question on the second quarter Delta for V-22 is about 167 million.

167 million; I think that's the bulk of your revenue chain and was that fairly low margin business?

(MULTIPLE SPEAKERS)

(MULTIPLE SPEAKERS) 412 program for Pakistan.

Understood. Thank you. Good quarter.

Quint Nufer from Susquehanna.

Good quarter. I just want to dig down into guidance here for a second. The official guidance was lowered by the $0.30 of the call (indiscernible) charge. In there, you are also eating it, if I take the midpoint of your range, a $15 million shortfall for the remainder of the year for TFS and a $7 million charge. That is about $0.12. Am I understanding you correctly on that?

The TFS part is correct but the $7 million you are referring to is the discontinued ops piece, right?

No. I thought you had mentioned there would be several million dollars of restructuring and (MULTIPLE SPEAKERS)

No. That's actually a couple of million good news to our prior forecast.

Oh, it is.

Yes.

So, it's just 15. The reduction at Fasteners you are correct on and I think Doug mentioned that we are expecting marginally better performance out of Cessna, out of Bell, and out of Finance.

I think this is fairly obvious but I want to make sure that I understand that the 270 to 290 number for '06, is it constraining factors capacity not orders given that you already you your 250 (indiscernible).

The constraining factor is supply chain capacity not Cessna's capacity.

And against the 270 to 290 we already have billable orders that we know we can produce. We think we can produce 270 to 290 also but already have orders against that of 250. That is about as strong as we've been in some time midyear.

Thank you. Operator, with that, that includes our call and as I said if any of you from the media have questions, please call us at the conclusion of the call here.

Thanks, everyone.

Take care and have a good day.

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