達信公司 (TXT) 2005 Q3 法說會逐字稿

Welcome to the Textron third quarter 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 our host, the Vice President of Investor Relations, Mr. Doug Wilburne.

Please go ahead, sir.

Good morning.

And welcome to our third 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 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.

We'll also be discussing our free cash flow and return on invested capital.

Calculations of these items have been provided as an attachment to our press release, and can be found on our website at www.textron.com.

Now, for a summary of our third quarter results.

Excluding impairment charges related to Fastening Systems, we achieved solid results with strong gains in revenue and earnings.

Revenues are at $2.86 billion, up 12.3% relative to last year, and adjusted earnings in the quarter were $1.00 per share, which compares to our guidance of $0.85 to $.95.

We estimate that Katrina lowered earnings relative to guidance in the quarter by about $0.09 per share.

Adjusted segment profit was $265 million, up 25% from the third quarter of last year.

Including the Fastener charges, which amounted to $2.25 per basic share, Textron recorded a loss of $1.23 per share on a GAAP basis.

Because the impairment charge puts us in a GAAP loss position for the quarter, GAAP results are calculated using basic shares of 132.9 million.

On the other hand, adjusted per share results are based on fully diluted shares of 135.6 million, which gives rise to a $0.02 difference when reconciling adjusted EPS to GAAP results.

Reconciliation schedules for third quarter results and full-year outlook are provided in our press release, and can also be found in the Investor Relations section of our website.

Now, let me turn the discussion over to Lewis.

Thank you, Doug, and good morning everyone.

First, I want to address Hurricane Katrina.

This disaster had an enormous impact on our 1200 Louisiana-based employees and their families.

Katrina wiped out many of their homes and completely disrupted their lives, but the way our Company pulled together in this time of need was nothing short of remarkable.

I know a number of our employees listen in on this call and so I'd like to take this opportunity to personally thank everybody involved in this extraordinary effort.

Now, let's discuss our plans for recovery and restoration and the revised ramp schedule for ASV.

First of all, part of the $0.09 Hurricane Katrina impact that Doug mentioned, relates to our decision to continue paying our employees through this period, we never stopped a paycheck.

This was the right thing to do for our employees and our customers and it's exactly what we needed to do to ensure the quickest return to production.

We've made necessary repairs to our final assembly facility in Slidel and resumed limited operations there several weeks ago.

In fact, we're currently building about two ASVs per week and we're doing that from assemblies and parts already on hand or in the supply chain.

Our other facility, located across town in east New Orleans, suffered more extensive damage but we're well along with repairs there, too.

We're expecting to resume full production activities by December, which will allow to us restart the process of ramping up volumes on the ASV.

We believe we'll be able to reach our targeted production rate of 48 vehicles per month by August of next year, which really is only about five months later than our original schedule.

Our culture of transformation is a significant factor in this rapid recovery.

Many of our organizations across the enterprise contributed to this effort, spontaneously and without question.

And utilization of enterprise management planning and analytical tools are bringing efficiencies to the restoration process, so we're getting things back on track quicker.

Now, Ted will address the further financial impacts of Katrina in just a minute.

I want to make a very important point here before we get into our discussion of quarterly specifics.

The point is that it is quite evident that significant earnings momentum is building within Textron, especially when you consider the Company's ability to overcome Katrina's impact this quarter and for the fourth quarter as well, you'll hear more about that later.

Okay.

Let me get into the third quarter.

Very strong performance as Bell, Cessna and Textron Financial overcame the impact of Katrina, as well as operating issues at Fastening Systems and to a lesser extent, Industrial.

Let's go right to TFS.

TFS experienced an operating loss in the quarter resulting from a bankruptcy filing by one of our major customers and continuing operating losses primarily at three of our North American plants.

We're moving very quickly to address these issues.

For example, on Monday we announced that we're closing one of those underperforming plants.

In addition, late on Tuesday, we signed an agreement to sell two other noncore TFS plants which we expect to close in the next several weeks.

As we continue to execute these actions, Fastening Systems results will improve significantly, which in turn will enhance the value and attractiveness of the remainder of the business.

At the same time, we're moving swiftly with the evaluation of strategic alternatives.

We're making excellent progress and expect to have an approved plan before the end of this year, with execution to immediately follow.

Now, while volumes were down at Fastening Systems in the quarter, this was not the case in most of our nonautomotive markets, with Textron's total top line growth exceeding 12%.

And we see continued strong organic growth into the future, as we achieved another record level of aircraft backlog.

Aircraft backlog now exceeds $10 billion, including orders for Citation chairs and our new 429 helicopter at Bell.

At Cessna, through the first nine months of this year, we've taken in over 900 single-engine orders and currently have over 1200 in backlog.

Demand for Citation jets also remains robust as we booked an additional 71 net orders in the quarter.

For the year, then, we've booked just under 230 net orders.

Last quarter, we projected '06 jet deliveries would be somewhere in the 270 to 290 range.

We've been working with our supply chain as we promised and we're now comfortable with the high end of our range for next year at that 290.

And looking at the orders on hand for '06, at 260, our marketing efforts are now refocused -- are now focused more on 2007 and beyond.

In fact, at this early stage, it appears that '07 is going to be another solid growth year, as we already have about 210 orders in hand, including about 50 for the Mustang.

While the excellent order activity at Cessna reflects general strength in the business jet market, and the effectiveness of our new product strategy, it also reflects Cessna's dedication to superior customer service.

So I'm very pleased to report that Cessna just achieved the Number One rating in Pro Pilot magazine's annual customer support survey.

This is truly another noteworthy achievement for our Company.

We also had a number of customer wins at Bell during the quarter, most significantly, after years of investment and perseverance, the V-22 was approved for full rate production on September 28th.

This program will provide a tremendous source of revenue growth at Bell for many, many years to come.

And it also opens the door to many future opportunities, including other U.S. military applications, foreign military sales, and the development of tilt rotor variance.

For example, in September, the Textron Boeing team was awarded a contract for conceptual design and analysis of a heavy lift quad tilt rotor.

Another huge win in the quarter for Bell was the armed reconnaissance helicopter.

We were selected to deliver 368 militarized versions of our Model 407 to the United States Army over the next decade, as well as aftermarket support and products.

And this program will also have foreign military sales potential.

The business is booming on the commercial side of Bell, too.

So far this year we've taken 239 commercial orders.

Last year, we delivered 93.

This year, it looks like we'll deliver nearly 140 and we're planning on at least 185 next year.

Also contributing to the 12% top line growth in the quarter were increases in revenues at Systems, Greenlee, E-Z-Go, and Textron Financial.

Systems was up despite the Hurricane Katrina interruption as we were able to deliver 45 ASV's.

E-Z-Go sales were up only slightly, but we continue to win more than our fair share of new courses and conquest business and we are getting some positive pricing now.

Textron Financial is growing their core portfolio.

And Greenlee is seeing a substantial pickup in demand, especially in both the residential and commercial real estate construction markets in North America.

In addition to a healthy market, new products at Greenlee are also stimulating long-term demand.

And looking over the next couple of quarters, we expect that Katrina and Rita rebuilding efforts will have a near-term positive effect at Greenlee, as well.

And finally at Kautex during the quarter, we secured placement on two new future platforms that will provide good, steady ongoing growth.

Now, let me summarize.

Coming into the year, we said improvements and performance and capital management would lead to ROIC expansion.

After nine months, we're clearly on track to increase our return on invested capital for the year to over 13%, that would be excluding the impairment charges.

That's approximately 400 basis points above our estimated weighted average cost of capital and represents great progress but we have much more to do.

In fact, the portfolio work we now have underway will contribute very significantly, going forward, to improved capital productivity.

At the beginning of the year, we were also hopeful that our plans for future organic growth would materialize.

And they have in a very significant way.

Demand for business jets continues to expand, Bell is back in a big way with three important military wins, and is reclaiming leadership in the commercial market.

Textron Systems is meeting the needs of our armed forces with unique light-protecting technologies.

And our continued investments in new products across the enterprise are already paying dividends.

So looking ahead over the next five years, we believe our products and markets will support mid to high single-digit organic revenue growth rates.

In particular, strong demand for our commercial aircraft products, significant ramp-ups in our military programs, new products in our industrial businesses, and steady growth in our core financial receivables will drive this expansion.

When leveraged with our continued focus on transformation initiatives, this expansion will translate into further improvements in ROIC and strong double-digit earnings growth.

Ted?

Thank you, Lewis.

Good morning everyone.

Thanks for being with us.

Let me start with our usual examination of the factors that drove our year-over-year change in earnings.

Excluding the Fastening Systems impairment charges, adjusted earning of $1.00 per share were up $0.27.

Starting with the positive items.

Higher volume, favorable sales mix provided $0.20, pricing contributed $0.29, that's a 2.4% increase, cost improvement was a favorable $0.39, and Textron Financial contributed $0.08.

The negative items were inflation of $0.43, that's 3.8%, additional investments and growth incapabilities as we had planned of about $0.09, higher pension expense of $0.09, a higher tax rate cost us $0.05, and miscellaneous items subtracted $0.03, that was primarily driven by expensing of options.

Recapping the positives, $0.20 volume in mix, $0.29 for pricing, $0.39 from cost reductions, and $0.08 from TFC; and negative items, $0.43 of inflation, $0.09 from growth capabilities, $0.09 for pensions, $0.05 for higher tax rate, and $0.03 miscellaneous.

Now, let me start and go through each business and I'll start with Bell.

Segment revenues were up $104 million, while profit was up $30 million.

U.S.

Government revenues increased primarily as a result of higher revenue on the V-22 and ASV programs, and revenues from our U.S.

Helicopter acquisition that occurred in the second quarter.

These revenue increases were partially offset by lower air launch missile volume.

Commercial revenues, which include sales to non-U.S. customers were also up, primarily reflecting armored personnel carriers delivered to Iraq.

Segment profit improved for both the commercial and U.S.

Government businesses.

The profit improvement on the commercial side resulted from an increased demand for spares, and greater international military volume, partially offset by higher selling and administrative expenses.

Additionally, the resolution of uncertainties and the receipt of cash related to a collaborative R&D sharing agreement from previous periods, increased profits by $13 million.

For the U.S.

Government business, profits were negatively impacted by costs associated with Hurricane Katrina.

Nonetheless, U.S.

Government profits were up, largely due to greater contributions from the V-22 program, higher volumes of ASVs as well, reflecting those 45 deliveries during the quarter.

I also want to point tout that Katrina will reduce Bell's contribution to fourth quarter earnings per share by about $0.07 and the delayed ramp-up of ASVs next year will impact '06 EPS by about $0.05.

So let me recap the Katrina numbers to make sure that your notes are clear. $0.09 negative impact to the third quarter, $0.07 to the fourth quarter, and then $0.05 for next year.

Backlog at Bell ended the quarter at $2.9 billion, up $25 million from the end of the second quarter.

Keep in mind that that does not include approximately $560 million worth of orders for our new 429 Global Ranger, which will go into backlog sometime next year.

By the way, we took an additional nine orders during the quarter for this popular new model.

At Cessna, revenues were up $191 million as a result of higher volumes across the board and higher pricing.

We delivered 61 jets in the quarter, up from 47 a year ago, and one higher than our forecasted range of 55 to 60.

Profits at Cessna increased by $35 million, primarily due to the higher volume and pricing but partially offset by inflation.

The strong order intake resulted in an increase to Cessna's backlog of $236 million during the quarter, yielding an ending level of $6 billion for unaffiliated customers, plus an additional $600 million for Citation Shares.

We're now planning to deliver somewhere between 240 and 245 jets this year.

Next is Fastening Systems.

Revenues were up $3 million, primarily as a result of higher pricing related to steel recoveries and favorable foreign exchange.

However, lower volume, primarily due to soft demand in automotive markets partially offset these gains.

Excluding the pre-tax impairment charges of $341 million, profits were down $6 million due to inflation and a $5 million bad debt expense from a bankrupt account.

As Lewis mentioned, we're making rapid progress with the strategic evaluation, and it's our intention to have an approved plan before the end of the year.

As a consequence, Fasteners will likely be reported as a discontinued operation in the fourth quarter.

Moving to Industrial, segment revenue decreased by $11 million, due to lower volumes at Kautex, Jacobsen and Fluid & Power; which were partially offset by higher volume at Greenlee, favorable foreign exchange and pricing.

Profit was down $21 million, as net price increases only partially offset inflation, start-up costs and lower volume.

Performance here was less than what we had expected.

In addition to to the impact of lower volume and inflation, there were a number of unique items in the quarter.

We had a product recall and a temporary production halt at E-Z-Go, some significant start-up costs in China and Mexico, we had a strike at Greenlee, and had a bankruptcy of one of our European customers during the quarter.

We expect margins will improve somewhat next quarter with normal seasonal volume expansion and fewer unique items.

Looking to next year, we expect a modest improvement to margins in Industrial, but a more substantial improvement will come in '07 when Kautex's volumes turn back up and with the benefit of some new product launches that are planned for later next year.

Finally, Finance segment revenues increased $26 million and profit was up $15.

The increase in revenues primarily reflected higher average Finance receivables; profit increase, primarily due to a lower provision for loan losses; and higher net interest margin from average receivables, partially offset by a decrease in securitization and other income.

Portfolio quality remains excellent.

Nonperforming assets were 1.92%, and 60 day delinquencies were 1.01%.

Looking at cash next, year-to-date manufacturing cash flow from continuing Ops was $691 million and free cash flow was $486 million.

So cash remains ahead of net income.

Looking ahead, we now believe that we will end the year with over $600 million in free cash flow, and that's above the top end of our previous range.

Now, lets talk about taxes.

Our third quarter tax rate, excluding the impairment charge was 31.6%.

Now, that's higher than the 29% that we had planned for, primarily due to the mix of jurisdictions where profits were earned in the quarter.

We do continue to expect the tax rate to average about 29% to 30% going forward.

But as we have seen, it will vary in any given period.

Moving on to our outlook.

For the fourth quarter, we expect earnings excluding implications from the possibility of moving Fasteners to Disc Ops, will be between $0.95 and $1.15 per share, which is consistent with our previous full-year guidance of $3.75 to $3.95.

Just to be clear, our guidance doesn't include additional charges that would occur if we decide to place Fastening into discontinued operations.

As I've indicated before, our fourth quarter guidance reflects an estimated unfavorable impact of about $0.07 a share for Katrina.

And now I'm going to turn the call over to Doug who will give you some for details on guidance for the fourth quarter.

Thank you, Ted.

At the Bell segment, we expect fourth quarter revenues of about $775 million, with margins of about 8%.

At Cessna, we're projecting revenues will be about$ 900 million, margins of about 13%.

At Fastening Systems, revenues are expected to be about $465 million, and segment profit of about$ 5 million.

At Industrial, we expect fourth quarter revenues will be about $740, with an increase in margins to about 4.5%.

Textron Financial revenues should come in at about $170 million and segment profit of about $55 million.

And finally, corporate expenses are expected in the range of $45 to $50 million.

And that concludes our prepared remarks, so Operator, we are now ready for questions.

Thank you, sir, the first question comes from the line of Dave Bleustein from UBS.

Please go ahead.

Ted, how much did U.S.

Helicopter add to revenues in the quarter?

$15 million.

$15 million?

And then the question on Fasteners is, what were the factors that finally pushed you into considering a complete divestiture?

And then maybe follow-up with, why would it not be part of discontinued operations now or in the fourth quarter?

Well, the factors that led us to Fasteners, and then this impairment charge and the evaluations was our work we've been doing over the course of the year looking at a variety of strategic alternatives.

And those strategic alternatives in a number of cases pointed us to the possibility of an impaired asset.

So we started down that path as part of our normal strategic planning process.

Where we are right now, Fasteners at this moment does not pass the test to go into discontinued operations, which is we must have a final and approved plan.

And we have to be prepared to execute that plan with high confidence within a 12 month period of time.

We are working through developing that plan right now, going through all the alternatives.

We fully anticipate that that plan will be complete by the end of this fourth quarter.

And then depending on what that plan turns out to be, if it's substantial enough, it is likely that we will move Fasteners into Disc Ops in Q4.

But right now it just doesn't pass the test.

Okay.

You mentioned that you were shutting down one facility.

Was that a facility that was recently opened or is that a legacy facility?

That's a facility that was recently opened that is generating substantial losses at Fasteners, and will go a long way towards moving that business' performance in the right direction.

Terrific, thanks.

Our next question comes from the line of Nicole Parent from Credit Suisse.

Please go ahead.

You raised the delivery forecast to the high end of the prior range.

Could you give us a little bit more color in terms of the supply chain shortages that you've run into year-to-date and also what you're anticipating for next year?

Nicole, I can give you a little color on that.

We've been working pretty hard on that supply chain, and we were able to go from a range of $2.70, to $2.90 -- up to $2.90 and that's kind of where we're sitting right now.

It's not really any one thing, it's several factors.

Wood is one, cabinetry.

Secondly, there's a pretty interesting thing going on with Avionics now, so there's a little pressure there, too.

As we said earlier, some of our smaller vendors really just didn't make it through the downturn, so we're helping those smaller guys get back on their feet.

As we get all our parts lined up and our supply chain lined up and we now have good visibility that we can see at least the $2.90 number, I don't know whether we're going to do much better than that, though.

I was talking to Jack Pelton, and he feels $2.90 is going to be about where we're going to end up.

Okay.

I guess when we think about the Industrial businesses, Ted mentioned a couple of one timers that impacted the quarter.

Could you quantify those in terms of dollar impact?

And could you also just talk about what you're seeing going on at E-Z-Go and Jacobsen, particularly you just changed out a management team there?

The one timers are in the $6, $7 million kind of range.

What we're seeing going on at E-Z-Go is we're starting to see some positive momentum.

There's not a lot of growth in the market but it's stable to seeing a little bit of improvement, and we're doing pretty well out in the market with E-Z-Go.

Jake's a little bit different story.

We have really been working hard at Jacobsen to move from a push to a pull model with our distribution network, and have been working all year and particularly hard in the third quarter, made a lot of progress in the third quarter, in reducing field inventory that's out in our distribution network.

So at Jacobsen, our actual organic revenues on a year-over-year basis in the third quarter were down about 12%, but that doesn't at all reflect what's really going on out in the marketplace.

Our retail volume, i.e. what our dealer network sold in the marketplace was actually up mid-single digits.

So we made some good corrections, we're pretty much to where we want to be on the turf care side, which is about four months of forward supply out in the distribution network, about another month that we are holding at the factory.

We still have a little more progress to make on commercial grounds care.

But it's our anticipation that we'll get our field inventories exactly where we want them to be by the end of the year, and that will naturally create some revenue lift for us in 2006 at Jacobsen.

We have some other things going on at E-Z-Go that we're working on, that I'm not going to say too much about.

But I think by the end of next year, we'll start to see some pretty strong improvement on that business, as well.

On Bell, could you update us on the status of the old PRV, your new CSR.

Given that the RFP's out there, there seems to be some chatter about technical hurdles.

I'll do that one.

There's really not a technical hurdle.

We have two entrants in CSR, the US101, which we're partnered with Agusta and Lockheed Martin, still in on that one.

And we've just taken a decision, jointly, to pull out of CSR on V-22, really it wasn't because we couldn't necessarily be competitive, they just changed the specification on that.

And literally the statement that came out was the CSR programs requirements and funding profile did not call for the advanced speed and range offered by the V-22, so they're going to use a more traditional helicopter, and this -- the V-22 is more than they need.

It's not that we couldn't have done a good mission for them, it's just more helicopter than they needed.

It's not really a big negative for us.

One last one, just how are you thinking about pension expense for next year?

That's a moving target as always, so I'm going to be cautious making predictions because I always seem to be wrong, when I think interest rates are going to go up.

But right now, they're actually down.

Let me tell you where we are as of this minute.

We told you guys in February we had a big increase in noncash pension costs in '05, up to about $0.42 a share.

And that we thought it was going to go to $0.59 in '06, based on the discount rate not changing.

We're right now at a 5.75 discount rate.

If we had to book '06 right now at the current discount rate, it would have to come down to about 5.5%.

And if you take that level of discount rate instead of going up to $0.59, we'd go up to $0.70.

So if we had to close off the year right now based on what we've earned year-to-date, and performance in our pension plan has been very good this year, but if you take that performance and you take that discount rate, we had about $0.11 of additional bad news coming in '06 for pensions.

But again, it's a moving target, it will be what it will be, and the discount rate is where we end up at the last day of the year.

Of course, at the same time, we're expecting no change in our cash funding requirements from what we had previously predicted.

So it will be -- if it were to end up where it is right now, it would be $0.11 bad news but obviously has no impact on value, because it's a noncash item.

Great, thank you.

Next question comes from the line of Jeffrey Sprague from Citigroup.

Please go ahead.

Thanks.

Good morning.

Hey, Jeff.

First, just on the Q4 range, I mean, $0.20 for the year kind of makes sense, but now that we're down to a quarter, it sound like, you've got the puts and picks pretty well sewed and how you guided the jets and everything.

What would really dictate movement around that large in that range?

Well, when Katrina came along and we had $0.16 of difficulty to try to deal with in the quarter, we have, as all good companies do, tried to pull out all the stops to find ways to offset the impact of Katrina.

And we think we've got ways to do that, but we've got several things that we are working on that may or may not end up happening in the quarter.

If we can pull all of them off, it pushes us to the high end of that range.

If we don't get them all done, it pushes us to the low end of the range.

They tend to be one-off kind of things, anyways.

We're working on a lot of stuff to try to offset all of this impact that we've had to face into.

That creates a little more variability than we would normally see in a quarter.

Can you give us an idea of what you're talking about?

Is it restructuring?

Is it -- ?

Transactions.

Okay.

Now, looking at '07 for Cessna, can you, frame that order input relative to what you've seen historically?

I mean, it sounds unprecedented to have that type of orders in hand two years out.

And maybe just give us a little bit of color on where the orders are coming from; corporations, fractionals?

Any color on aircraft type.

Yes, I can do that, Jeff.

First of all, your supposition is right down the pike there, that's perfectly diagnosed.

It is very unusual.

I've been here since '92, it's very unusual to see this number of orders on the books in 2007.

And we thought it was so unusual that we thought it was important for the people that own our stock or are thinking about to know about it.

Because when I opened up the call, I said the underlying strength of this Company has really improved this year.

We didn't predict -- if you said that we were going to have that many orders in '07 when we began this year, I'd say no.

So it's historically significant.

Now, if you look at what's selling out there, we're filling up '07.

You can't get a CJ1 until the second quarter of '07, you can't get a CJ2 until the second quarter of '07, you can't get an XLS until the fourth quarter of '07.

It's really an interesting mix of airplanes.

And again, this underscores the fact that Cessna, having been in the jet business for so darn long, since 1972, they really know how to hit the marketplace with what the marketplace wants.

So it's significant.

We're not seeing any unusual order activity from net jets, it's kind of online with what we've been seeing.

I think we have a little upside on Mustang, but for right now, we're saying we're going to do about 50 in '07.

But we're ahead of schedule on Mustang.

That will be good.

Nobody has, I don't think, really factoring in the fact that Mustang is so inexpensive relative to the other jets we offer for sale, that the step-up strategy that Cessna has had in place for years and years -- we are just going to have a lot more people in our jets sooner, which bodes really well for for continuation of this order activity into '08, '09.

So I tell you -- and Cessna's got a great management time right now and they're putting in all the right kind of focus on supply chain, they're putting in the right focus on lean and Six Sigma, which is leveraging up their margins.

So man, when you get a pickup in revenues, a long-term forecast in revenues, and then leverage the transformation initiatives, pretty powerful story.

One other thing on Cessna, maybe we'll explore this more this more at NBAA, but Mustang, I don't think, has any orders from the air taxi concept business models.

Maybe that's a positive in your view, I don't know if you believe in that model or not.

But any thought on really what's going on there?

And what Cessna, as an organization, could bring to -- with your infrastructure, to maybe make that model successful?

Well, the Cessna guys and in particular, the guy leading Cessna is really a good leader, Jack Pelton.

He's in constant communication with the big guys who are getting into that air taxi world.

Air taxi is going to be tough to make work, financially, unless the airplane is very inexpensive, much less expensive than the $2.4 million in the Mustang, that's a going-in statement.

Secondly, unfortunately, less expensive airplanes are smaller and more cramped.

Third, you have to fill them up to make the cost per ride at a decent profit for the operator and so the user can afford it.

I do have my doubts about air taxi, but truthfully, I hope it works.

Because it gets more people flying business jets, and the more they fly business jets, the less they're going to want to go through those terminals to jump on that commercial flight and the sooner they're going to get into one of our products.

Thanks a lot.

Next question comes from the line of Brian Langenberg from Foresight Research.

Please go ahead.

Hi Brian.

Hi guys, couple of things.

Number one, if you could maybe just go through segments -- obviously deals aren't a big part of it.

Maybe just give us a breakdown between core and currency by segment.

Second of all, when you talk about portfolio work, are we strictly talking about Fasteners, or are there other things you're thinking about?

Let me do the -- this is organic growth excluding FX?

Yes, taking out FX, anything like that.

And acquisitions, which is just U.S. Helicopter.

Okay.

Bell was up about 20%, just over 20%.

Cessna, about 28%.

Right.

Fasteners about 1%.

Industrial businesses were down about 1%, and the financial business was up, it's really irrelevant, 20%.

Of course.

And with Fasteners and Industrial, could you maybe split that out between volume and price?

I think you have with one, already.

Hang on one second.

Volume and price.

Let me -- you said for Industrial?

Industrial and for Fasteners.

Okay.

For Industrial, I'll give you some numbers.

Pricing for the quarter was up $9 million year-over-year.

Okay.

You'll have to figure out the rate -- the percents here, I don't have them.

For Fasteners, pricing was up $21 million.

In Fasteners?

And then the other thing, n the portfolio work side, does that strictly mean Fasteners or are we talking about other pieces?

Let me cover that pretty specifically because I don't want people to be confused about what we're going and what we're not doing.

The primary comment -- the comment I made, relative to the leverage on capital productivity, relative to our portfolio work, if things go the way they could go, would imply -- would be related primarily, and in this case, solely to TFS.

We don't have plans to sell any of other other assets as I sit here and talk to you now.

Okay.

Let's go back and talk about Industrial, I don't want you to think we're shying away from this segment.

And I want to give you a really good specific color on each unit.

Okay?

Yes.

The biggest driver of revenues is the biggest unit inside Industrial, that's Kautex.

When we went into the year, we thought Kautex was going to have a year-over-year falloff of about $100 million bucks, which is, in fact, about where they are.

We did not predict that resin prices would move as quickly as they have, so we got a little behind the curve.

But on the other hand, we are now implementing some pretty strong cost reduction efforts at Kautex, and we have a really good team over there led by seasoned manager, Lothar Rosenkranz, came out of operations, been there for years.

Right.

And so we have -- we are a technology leader.

So here's what is going to happen, Kautex will improve year-over-year from a productivity standpoint, their volume will probably move one more year down, probably in the neighborhood of $50 to $100 million.

And that's because we're just going through a change-out of certain models, which happened occasionally in the big automotive component business like we're in. '07 will be bigger than '06, '08 bigger than '07; and we're taking orders not only from North American OEMs, we just landed an order for Toyota, who is going to be coming into Texas to put up a new assembly plant there.

That means we are really a competitive supplier.

Kautex also gets good return on invested capital so it's a good cash generator, a good long-term keeper.

Yes.

E-Z-Go.

The golf market is 2% to 3% up.

We've more than held our own with a golf car that's older than the competition.

We can't really talk about our plans too much, but you can kind of bet the fact that we're planning on coming out, one of these days, with a darn exciting new model.

In preparation for that, we've leaned out about a fourth of E-Z-Go, and the lean work we've done saved 30% for labor costs for the pieces that we've gotten to.

So we're continuing to make the facility more productive as we get ready to put some new products in the field.

Ted mentioned Jake.

We like the golf business.

Jake's good in the golf business.

We put a guy down there that's really good in sales marketing and focus on product design.

We took our eye off that a little bit.

So we're really going to focus on doing what we know how to do best, that's putting really, very strong products into the field.

We have most of the big golf courses that are most important like Pebble Beach or Augusta, we have most of the big famous courses.

So our cut is still renowned, we're going to take advantage of that.

Greenlee I talked about, they are in a good business, they traditionally make pretty good margins.

They're kind of coming back into their own now, more new product development.

They've got a good product development focus over there.

Fluid & Power.

Fluid & Power was slower than we thought on improving their basic operating stance after the economic fallout, the economy dropped in the earlier part of this decade, they're starting to make improvement.

You should expect Fluid & Power to bet back somewhere in the next three years, let's say, to high single-digit, low double-digit earnings.

So all that being said, I would expect that Industrial will be a slow but steady contributor year-over-year to margin expansion, and to EPS expansion.

And if you put that against TFC, Bell and Cessna, that's a pretty good story.

Sure.

Okay, thank you very much for that, for giving us that.

Yes.

Thanks.

Next question comes from the line of Ron Epstein from Merrill Lynch.

Please go ahead.

Yes, good morning.

Good morning.

Lewis, I want to circle back on one of the comments you made regarding Cessna, about Avionics.

Pardon?

You made a comment about avionics.

Is there a shortage of Avionics or what were you -- ?

No, first of all, there are three primary manufacturers of Avionics, right?

And basically what we're doing -- and of course, Avionics suppliers supply more than just to Cessna, right?

Sure.

I'm not handing that those markets -- those manufacturers are in trouble or anything like that.

It's just -- let me tell you, this market expansion has taken -- has surprised all of us a little bit.

And so people are gearing up to produce higher volumes as they look into the future, and that's one of the shortfalls that we have to continue to work to overcome.

I don't have any doubt that they'll supply the volumes we need, we just need some more certainty that they can increase their volumes at a faster rate.

Once we get that, that would help us take that number up.

I just don't see that movement happening anytime too soon.

Yes.

Now, do you think there's space for another Avionics supplier?

Maybe.

Coming up from the low end?

Yes, there's one that's emerging that I think could be a major player.

They're on some of our models, we sure like what we see from them.

That's great.

Another question for you, when you look at what's gone on with the ASV production in Louisiana, is there business disruption coverage that you guys have?

Do you think you'll be able to recover some of those costs from the Army?

Or what's your thinking on that?

Well, there are a number of different avenues we're working.

We're in active negotiations with our insurance carriers, there will clearly be -- and we have assumed, in the numbers that we've given you, what I hope will be conservative guidance relative to insurance recovery.

But the battles are being waged in that area.

There are other opportunities from our customer, we're having conversations.

We have contracts that have not yet been priced, and this clearly -- the slower ramp schedule will result in some higher costs and I think our customer is sympathetic to that.

But there are quite a few moving pieces going on right now.

So we've given you the best estimate that we have at this time, and I think they'll be directionally correct, but they could move around a little bit.

Okay, great.

Thank you very much.

Next question comes from the line of Jack Kelly from Goldman Sachs.

Please go ahead.

Good morning, Ted.

Hey.

Good morning.

Just following up on the ASV, you had talked about 250 units for '05 previously, and 550 units for next year.

And I think, Lewis, you mentioned maybe you're going to be five months behind in terms of ramp-up.

Could you maybe -- ?

We're trying to beat that but that's what we generally see.

Okay, fine.

Can you just update us on the actual unit numbers?

In other words, what will you do this year versus that 250 and what might you do versus the 550 next year?

Can you do that?

That's not a number I'm looking at right now.

I can guess at it.

I don't have that either.

Okay.

[Speakers talking simultaneously] We're going to do two a week for the rest of the year, and we had 45 the last quarter.

I might have it somewhere. [Speakers talking simultaneously]

Let me follow up with you on that, I don't think we have that number with us, what the new number is.

I thought I had it on a backup sheet somewhere but I'm not finding it right now.

Okay.

So the $0.05 drag next year in ASV is largely volume-related rather than any other extraordinary cost.

It's just that you -- ?

No, it's probably about -- it's about half of it is volume, and about half of it is housing costs that we're subsidizing next year.

We're building a little city, and we are charging our employees 10% of their pay to stay in that city, and we're picking up all the rest of the expense next year.

So that's about half of it.

Jack, one more thing on ASVs, I did find a note here.

We delivered -- deliveries to date, 138.

That's the first nine months.

And we took orders in June, which you -- we -- I think we talked about.

We took an additional 724 orders, I think we talked about that.

That give us you a starting place of 1,118 minus 138.

So we've got the demand.

Our plan was to have two parallel lines running 24 each.

We got up to rate on one line before the storm.

So I don't have any doubt that we can produce the parts, and it looks like the supply chain,once we get it back on track, can produce the parts.

So it's a a little early to tell right at this minute how many we're going to do next year, but as soon as we get some -- we'll get that out to him.

It's probably going to be a minimum number -- is probably what we're going to have to give you.

Because I think we're going to beat whatever number we put out right now.

Okay.

Just in terms of the carrying value of Fastening Systems, you took a $300 million roughly after-tax charge.

Does that bring the carrying charge down to $800 -- $900 million currently?

No, more like $700, $750. $750ish.

You're going to be selling, you mentioned two plants, at the end of the year, we find out what you do with everything else, is that -- ?

We will have a plan.

Our plan is to have a plan, an approved plan by the end of this quarter.

And finally on Kautex, given what's happening in Detroit, you mentioned the impact on automotive in the Fastener division, what should we be thinking about longer-term for Kautex?

You mentioned next year, I guess is going to be down, because of lack of new platforms, but can you just kind of give us, Lewis, maybe a two-year outlook for Kautex as you see it?

It's going to be down next year for sure, but I have to tell you, it's not unexpected.

The only thing unexpected here was resin prices, and our ability to get those passed through, which took us longer than we wanted because it always does with the OEMs.

We've got a really good cross-section of customers with Kautex, so we are less dependent, but we are dependent on the Detroit Big 3.

Of course I know those guys pretty well.

We had booked business in hand that will see a pickup in '07, another pickup in '08.

So really, I mean, we're staring into the rest of the decade and we -- you have some open space out in '09 and 2010, but we've got a pretty solid book of business.

The reason we do is, those tanks, those fuel systems, they're fairly complicated and they have to be released well ahead of time.

So you know pretty well that you're going to be doing the '08 instrument panel [dell weight] fuel system for the B car and the C car and the G car and so forth.

And we're on a lot of the right platforms, too.

And of course the other thing we've not been able to factor in too well, is we're opening our third plant in China.

So what that market does is going to be interesting, and we're really well placed there.

We have a plant in the north, a plant in the middle and a plant in the south.

So that's kind of an upside kicker that's a little too early to talk about.

Thanks.

Yes.

Next question comes from the line of Steve Tusa from JP Morgan, please go ahead.

Good morning.

Good morning.

Just a question,then I guess I can do the math, but the Bell margins in the fourth quarter excluding the Katrina impact?

The Bell margins include.

So excluding, what would they come out to?

$14 million high.

So basically around 10%?

Yes, you got it.

So you're going to finish the year at pretty close to the high end of your '07 target at Bell.

What's the ultimate profitability here?

Is there any reason why we should be flat for the next couple of years?

Bell -- is the military business continues to grow relatively, Bell is going to be, for most of the decade, kind of in that 10%ish range.

We're not going to have -- we had some odd things happen in the second quarter -- the first half of this year with 412's and with this settlement we had in the third quarter.

But as we go forward, that 10% kind of range, but with return on invested capital, with hopefully a two in front of it, is going to be what our expectations would be.

Obviously, as we get later in the decade, and we start seeing some foreign military come in and we start seeing the big ramp-up in V-22 which happens in 2010, 2011, we will start -- post-2010 seeing some upside opportunity to Bell margins.

Did you refer to Bell there or are you talking about the Bell segment?

I'm talking about the entire segment.

The Bell segment.

Yes, okay.

Well, that might even be a little north of that.

Usually systems margins are a little higher than Bell, so --

Got you.

Is there anything unusual in Finance about -- in the fourth quarter guidance, anything that's -- that would help the profitability there in the fourth quarter, that wouldn't help it going forward?

No.

There are always transactions, securitization, but all year this year we've had less of that stuff than we've had in prior years.

A lot more of this is what I would call more stable steady-state earnings than what we traditionally have.

But we have securitizations and things of that nature in every quarter.

But the fourth quarter does tend to be a more than 25% quarter.

So I wouldn't want you to take the fourth quarter and make that your run rate for '06.

That tends to be because most everyone in the industry wants to trade assets in the fourth quarter.

Get ready for next year.

And then lastly, do you have any kind of -- this is probably margin to gauge, but any kind of idea of -- are there people that you're turning away, that are coming for jets in 2006 and can't get them until 2007, are they going elsewhere?

Is there any kind of fundamental dynamic like that going on?

One or two here and there, but you don't hear us complaining about it, I'll tell you that.

I hate to keep beating on this, but it's just a matter of fact.

We have such a strong product line right now, and we poured a lot of money into Cessna back when it hurt us on an EPS basis, back in '02 and '03, and '04 even, and we're putting more money in now.

So the new product, CJ1 Plus, CJ2 Plus, CJ3 Plus, Sovereign, XLS, the new Mustang; we've got the newest stuff out there, people are willing to wait.

So I mean, it's just not a big issue for us, currently.

We look at that all the time.

It's always a balance between how many should you deliver this year and next versus what the ongoing sustainable delivery rate is.

We've been doing it a long time so we're pretty good at it.

Great.

Thanks a lot.

Yes.

Our next question comes from the line of Don MacDougall from Banc of America Securities.

Please go ahead.

Good morning everyone.

Hello, Don.

Hello.

I'm looking at your guidance for the fourth quarter on Cessna, I think you had said 13% off margins on $900 million of revenues, which is up from last year, but the margin is down.

I'm wondering, what explains that?

And how should we really think about incremental margins on Cessna revenue?

Are there unusual cost pressures right now that would lead you to expect that margin to come in lower than it normally does?

Because historically, the fourth quarter is actually your strongest margin quarter at Cessna.

Yes, I think really there are two things.

There are fairly strong inflationary impacts across the supply chain for aircraft, as you might expect with some of the conversations we've had earlier.

And then there's also a step-up in R&D spending of Cessna that's in the fourth quarter guidance.

Now, will that R&D spend persist?

Is that a one-quarter phenomena or is that going to bite into margins next year as well?

Well, we've been raising R&D spending at Cessna pretty regularly over the last several years, and we would expect R&D costs to be higher next year.

We've got more and more new product coming.

Okay.

We wouldn't really characterize it as biting into margins but rather a very wise investment.

Absolutely.

Okay.

Ted, you had mentioned the '06 pension numbers, I think it's at $0.11, incremental to your guidance.

Should we think about that $0.11 as the sensitivity to a 25 basis point interest rate -- sorry, discount rate move?

Yes, that's -- 25 basis points is about $0.08, it actually depends on which direction you go.

It's more linear going down, it gets more complicated going up, but that $0.11 detriment factors in kind of everything we know right now.

It actually includes the earnings, a little bit lower earnings assumption, although right now we might actually beat the earnings assumption.

But it's not that sensitive to earnings.

It is most sensitive to discount rate.

I think the best guidance, if you only move 25 in one direction or the other it's about $0.08.

If you start moving more than that, it gets a little wilder, but that's a pretty good sensitivity.

Okay.

And then finally, I don't think I heard any commentary on the H2 upgrade program.

What's your latest thinking or visibility on that?

It's actually the H1, right?

Sorry, the H1.

Doesn't matter. [Speakers talking simultaneously] Well, the H1, I gave you the stats on that.

We're going to begin Op Eval, operation evaluation, just like we did on V-22, we're going to begin Op Eval on the first quarter of '06.

It should complete the third quarter of '06.

We should have the milestone three decision, which is the same one we got on the V-22 in September.

That will probably be in the fourth quarter of '06.

And then we would start delivering the first low-rate initial production ships, which would be a Y and a Z, which is a utility and an attack helicopter, before the '06 ends, probably.

That's the way the schedule looks right now.

And I mean, it's a great program, and it's just really early in the development of the H1 as far as getting it into production.

But we still feel it's -- it's really a must-have for the military.

I'd be surprised if they don't really find this exactly what they're looking for.

And sea trials are underway and that's looking pretty good, too.

Right now, how much is that program contributing to revenues through R&D?

It's about $100 million, Don, this year.

It's going to go up to about $180 next year, there's really not a lot of contribution to the bottom line at this point.

Right now we're -- this year we're in zero.

As in zero.

We're in development phase this year, next year we go into [ELRIP] phase, but it's still a very minimal contribution.

It'll be a few years before it has big impact.

One more, if I could slip in, just on -- you mentioned in the commentary that foreign military sales at Bell were unusually strong in the quarter.

What's your outlook there in the fourth quarter and looking into '06?

Is there a backlog?

No, the strength in the quarter at the Bell segment was the armored personnel carriers to Iraq.

Not helicopters.

Oh, okay.

Got it.

Thank you.

You get confused sometimes when we say Bell, but that was a Bell segment comment.

Got it.

Our next question comes from the line of Tony Boase with A.G. Edwards.

Please go ahead.

Thanks, I wonder if I could get a clarification on the Bell helicopter deliveries for 2005?

I think you said 140.

But is that off of just commercial, which I think year-to-date you did 68, or commercial and foreign military, of which you've done 80?

That is -- that's both commercial and foreign military, total deliveries of commercial aircraft. 140 up from 100ish last year, a little over a hundred.

But over the year to date, though, I'm just trying to figure out what -- so does that mean 60, then, of foreign military and commercial for the fourth quarter?

That's not what I have here, Doug.

I don't know if --

The total should be 111.

So is it 140 on 111?

In the commercial side, that's right. 80 on the commercial side, year-to-date.

So you're going to have 60 -- ?

Yes.

Which is pretty strong.

It is.

Yes.

Also, just to clarify, on the two per week of ASVs, how many weeks do you have in this quarter?

Well, it must be 13.

Or 12, which -- I don't know, 12 or 13.

And then just one last one here.

As far as Kautex goes, you talked about resins.

What has the impact been on increasing resin prices?

Well, let's see.

I can do oil in total or -- I don't know if I can break resin out of the sheet that I have here.

We've done an analysis of the impact of the oil in total on us, and for the year -- Which includes resins -- probably the biggest single piece is the flow through of resin, I have Kautex separate, so Mike can break that out.

Our estimate right now for the year, raw material including oil will be a hit of $21 million, and direct costs of higher oil prices, about $18 million.

So about $39 million of increased cost, of which right now we've recovered about $17, that's our forecast for the full year, back from customers.

So, a net hit of $22 million or $0.11 a share is what's in our current forecast and current guidance.

Kautex -- full-year impact for -- at Kautex, so this would be all resins, about $16 million, of which Kautex has been able to recover a little over $10 from customers.

And then just for next year, I mean, I'm going under the assumption that resin prices keep going up.

Is that your assumption?

And do you think you can reach parity sometime next year?

Yes, I think -- well, I don't think it's our assumption.

Right now, resin prices are being heavily impacted by the fact that one of our major suppliers has declared forced [indiscernible] from down in the Louisiana area.

And that has created a shortage and has created a requirement for many of our industry to import resins from Europe into the U.S. at some fairly high transport costs as well higher price per pound.

We would expect that to moderate over time.

I don't think we assume that they're going to continue to go up.

But we are going out to customers and working to pass resin costs through.

I would say, with the exception of a couple of customers, we've had great success in doing that.

We're still working on a couple of other customers.

So the -- we do have a little bit of a gap that we're having to absorb, particularly here in the fourth quarter.

But I think we'll be -- it's too soon to say with a lot of certainty, but I think we'll be okay on this issue for next year, it may cause a little bit of a detriment.

Thanks very much.

Our next question comes from the line of Cai von Rumohr from SG Cowen.

Please go ahead.

I believe we lost him.

Since we're short on time, do we have any other calls?

One moment, sir.

Cai von Rumohr from SG Cowen is reprompting.

Yes.

Could you give us a sense at Cessna of what you're seeing in terms of time to complete a sale from first inquiry until you actually close the sale, has that been coming down?

We've had some -- it's all over the map.

I guess I don't know that I can make a lot of comments, other than the last couple of quarters, we have surprised ourselves with orders where we thought we would -- orders wouldn't be quite as strong.

And some of that has been because we've had more of what Roger White would call walk-in business, that walk in the door and conclude a transaction fairly quickly.

But that's just an anecdotal comment, I don't know if I can --

One thing is different right now, what's different now is the last six months has been that we've had to spend less marketing effort for -- to get sales, and that's that walk-in thing.

I think people are just getting more and more frustrated with other alternative ways to travel.

So word of mouth is -- I personally sold a lot of planes this year because it's just word of mouth is really working nicely for us as far as supporting the brand.

And our customer service, too.

That's another important thing.

Our customer service at Cessna, I talked about that award, it is really renowned in the industry.

Our service centers are well-placed, we do 24/7 only on Citations, and that also supports a real strong sales base, too.

Thank you very much.

Next question comes from the line of Gary Liebowitz with Wachovia.

Please go ahead.

Good morning, gentlemen.

Good morning.

You mentioned a 13% ROIC that you hit in the quarter.

Do you have any sense how much the divestiture of Fasteners would increase that ROIC metric?

A couple things.

First, that is a full-year forecasted number, the 13%.

And not an in the quarter number.

What was your question?

On a pro forma basis, if you would, what would the divestiture of Fasteners, how many percentage points would that increase that ROIC metric?

I don't think I'm going to go down that path right now, we do not have an approved plan, we haven't said exactly what we're going to do yet with Fasteners.

The answer will depend on what we end up doing with Fasteners, it would depend on what proceeds come in, and it would depend on how those proceeds would get applied.

But I think you can assume it would be positive.

Okay.

Also, was there any work that was accelerated from Q4 into Q3 that would have maybe partly offset the ASV work that got pushed out?

As we got into the issues with Hurricane Katrina, all of our businesses pushed to help offset that but I can't say that was anything material.

Pretty clean quarter really.

Unlike last quarter, this quarter was what it was.

That's why I asked.

Also, could you clarify, did you bid on the South Korea helicopter program and what you expect the -- when did you -- ?

Which program again?

South Korea helicopter program?

We are involved in discussions regarding that program.

I haven't had an update recently, but -- and I know we have had some ongoing conversations with them.

Well, we've got our segment leader over in Asia now, he's been in South Korea, he's in China now.

And I'd say that we're pretty positively positioned, but that win's not in our hand yet.

Okay.

Pretty good chance, but you never know about those.

That's a big one.

Right, when would a decision -- I know these things are hard to predict, when would a decision, a down select be made on that program?

This one has not been run like a U.S.

Government program with bids and dates, it's been an ongoing discussion and negotiation.

So it's hard to say.

Also do you have the repurchase numbers for the quarter, the stock repurchase numbers?

Yes..

Hold on just a minute.

I will tell you what we've done.

In the quarter, we bought back 2.2 million shares, program to date, we had a $12 million share program to be executed over 24 months.

Through 11 months, we have done 8.4 million shares.

And in the quarter what was the spend?

The quarter -- what was the what?

How much did you spend?

Oh, the spend was -- we had -- we spent $161 million to repurchase, and we took in $13 million from option exercises, so $148 million net.

Thank you very much.

All right, I think we're a little bit over time, but let's take one last question.

Yes, sir.

Our last question comes from the line of Dan Whang with Lehman Brothers.

Please go ahead.

Good morning.

Hey, Dan.

You talked about Cessna, the pricing helping there, could you talk about that overall environment year-over-year and maybe sequentially?

And how that is looking?

Yes, I think pricing is -- has picked up at Cessna.

We do suffer to some extent in the short term from the fact that we're delivering jets still today that got priced in a less robust environment if you will, in the post-9/11 era, but we are seeing improvement there.

And we expect that we will continue to see strong pricing.

In the quarter, pricing of Cessna was about $17 million year-over-year.

Okay.

Dan, one thing that contributes to that is we're continuing to see a little bit tighter used aircraft market.

We're -- now we're down to 12% versus 13%, it's not a real big movement but 80% of that -- those Citations for sale are over 10 years old.

Basically, you've got a little more than 100 Citations -- a little more than 100 Citations out there that are the less than 10 years old that for sale in the used market.

Our pricing on used, I saw a study just the other day -- our pricing on used -- on resale has really held up nicely.

And so that supports pricing on new product.

We don't chase volume with price, we just never have and never will.

Our prices have held up pretty nicely.

Finally, under the ASV, you talked about third quarter $0.09, fourth quarter $0.07, how does that work out on a quarterly basis, going into '06?

I'm sorry, we said third quarter this year was $0.09, fourth quarter this year $0.07, next year is $0.05.

Right.

I was saying in terms of a quarterly breakout into '06.

For '06?

First half -- Some of it -- about half of that is housing costs, and that will probably be smooth.

Yes, about half of the $0.05 will be spread out smoothly over the year, the other half would be all kind of front-end loaded.

First two quarters.

Okay, thank you very much.

All right, that concludes our call, ladies and gentlemen, I'll turn it back to the operator.

Thank you very much.

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