達信公司 (TXT) 2005 Q4 法說會逐字稿

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

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Doug Wilburne, Vice President Investor Relations, please go ahead, sir.

Good morning, and welcome to our fourth quarter conference call.

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

Before we start, let me add that over the course of today's discussion 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 return on invested capital and pre-cash flow metrics.

Calculations of these metrics have been provided as an attachment to our press release and can also be found on the investor relation's section at our Company's website at www.Textron.com.

On December 7th Textron's board of directors approved a plan to sell the Fastening Systems business.

Accordingly. results of this segment are reported as a discontinued operation.

Historical results from '01 through 2005 have been recast to reflect this reclassification and are available for downloading from Textron's investor relation's home page.

During the quarter, we recorded $53 million in after tax charges or $0.39 per share in discontinued operations related to Fastening Systems primarily for deferred foreign translation losses, employee retirement curtailment losses, and deal related costs.

Results from TFS operations were also reflected in discontinued operations, but the netted to zero during the fourth quarter.

There were also two other items in discontinued operations, the first a $0.04 per share benefit primarily related to utilization of a prior tax loss associated with a previously disposed industrial business, and the second was a loss from TFC's discontinued small business direct division worth $0.02 per share.

All in our total charge from discontinued operation was $0.37 per share.

Throughout today's call, when we talk about '05 results or our '06 outlook, we'll be speaking to continuing operations, unless otherwise indicated.

Moving then to total company results.

Revenues for the fourth quarter were $2.7 billion, up $347 million or 14.7% from last year.

Fourth quarter earnings per share from continued operations were $1.25, compared to $0.86 in the fourth quarter of '04.

For the year, revenues were just about $10 billion, up from $8.3 billion a year-ago.

Full year segment profit was,a $1.146 billion, a 35% increase over '04.

Earnings per share from continuing operations for the full year were $3.78, up from $2.68 a year ago.

Now I will turn the call over to Lewis.

Thank you, Doug and good morning everyone.

Textron had an outstanding year.

We had a host of significant operational improvements, strategic accomplishments, customer wins and new product introductions.

Looking at 2005, the cumulative benefits of our transformation strategy are readily apparent.

Especially when considered that we generated 20% growth in revenues, and achieved a return on invested capital of 13.2%, which, by the way is a improvement of 260 basis points over 2004.

2005 was also a busy and significant year on the portfolio management front.

For example, in June we acquired U.S.

Helicopter an Alabama based maintenance and overhaul business.

This acquisition advances Bell's strategy to strengthen it's aftermarket service and support offerings for both our military and Homeland Security customers.

In November, we restructured our partnership with Augusta Westland, we monetized our interest in the and AB-139 while strengthening support from our partner in the future development of the BA609 Civilian Tilt-rotor.

We also announced a joint venture with Rothenberger to sell professional plumbing tools in North America, which was a strategy to broaden Greenlee's product offering and also and leverage their domestic distribution network.

Last summer we purchased our partners 35% interest in Keylex a Japanese joint venture with Caltex.

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

At Caltex we also completed the sale of our micromatic business through a series of transactions during the year.

We also continued the orderly liquidation of Textron Financial's non-core receivables and now only about 300 million remain which we expect to substantially liquidate over the next few years.

Of course the most significant portfolio decisions during the year came last month when he announced our plan to sell Fastening Systems business.

While it was clearly not be in our shareholder's interest to discuss any specifics, we're happy to report the process is proceeding according to plan.

Now in concert with this portfolio decision, our board has approved a new 12 million share repurchase authorization which replaces ours previous authorization that exhausted earlier this month.

The sale of fasteners in conjunction with share repurchases will provide a significant boost to our capital efficiency at Textron and will be reflected in even higher returns.

2005 was an excellent year for Textron's enterprise management strategy as well.

In the four years since we launched Textron's Six Sigma, we have trained nearly 1,000 black belts and over 4,000 green belts.

This initiative not only has enhanced the problem solving and design skills of literally thousands of our engineers, managers and leaders, but it's also created a new performance culture that expands our entire enterprise.

In 2005 we also accelerated the development and implementation of Lean which is a key element of Textron's Six Sigma.

This was part of the 2005 growth and capabilities investment that we made throughout the year.

A key step in the Lean program last year was the development and implementation of what we call a Lean accelerator.

The Lean accelerator method starts with a comprehensive redesign of the entire value change around a manufacturing process and then it culminates with an accelerated reconfiguration of the shop floor and all of its inner related processes.

We're now redeploying--deploying Lean accelerator projects across all our business.

We're starting at Cessna, which launched a major accelerator earlier this month, then Bell launches one before the end of the quarter, and additionally the remainder of our businesses are cadence to launch Lean accelerators throughout 2006.

Our 2005 Growth In Capabilities Initiative also included a step up in R&D spending to afford future growth.

Textron's [inaudible] throughout transformation to invest in R&D paid off last year with 19.2% organic growth, significant new product introductions and rising customer orders.

At Bell we introduced the new 429 Global Ranger at HAI in February and already we have 149 orders for this new model that will begin shipping at the end of 2007.

With upgrades, we have been making to our existing fleet and an improvement in market demand, commercial shipments and orders have been on the rise at Bell.

But equipment alone is not only what our verticle lift customers need, they also require world class aftermark support and Bell really shines here too.

We are extremely proud to be ranked first again in Propilot's customer service and support category for the 11th year in a row.

Customer success was equally evident on the military side of Bell's business last year.

We had three major wins.

First an entirely new program.

We were selected to build the Army's armed reconnaissance helicopters.

As you recall the Army has requested us--that we deliver 368 militarized versions of our model 407 over the next ten years, with after market support to follow.

We also won the presidential helicopter, as part of the Lockheed Augusta Westland team and finally in September the V-22 Tilt-roter was approved for full rate production.

The current V-22 program with 458 aircraft over its life represents $19 billion in revenues for Bell.

And actually we believe that longer term there will be additional demand for the V-22from other U.S. military branches and foreign allies plus demand for other military Tilt-rotor variance throughout the end of the decade and next.

The V-22 represents the type of innovative products born from our continued investment and research development.

At Textron Systems, part of our Bell segment, innovation is the keystone of our strategy there too.

Certainly the success of armed security vehicle clearly affects our ability to translate the customer's needs into a valued product.

The aggressive ASV ramp up or recovery actually from the Katrina disruption is a good example of the power of transformation, where we brought concepts, such as integrated supply change management, Textron's Six Sigma ,and the pooling of human resources from across the entire enterprise.

Due to the interruption we only delivered about 168 vehicles last year, but we're on track with our new production ramp schedule to produce about 450 in '06.

At Cessna, 2005 was also an exceptional year on many fronts.

First, Cessna received Propilot's No. 1 rating for customer service among business jet providers.

We achieved record margins and returns even though jet volumes were still below previous peak levels.

We also saw and continued to see strong customer demand for our jets, reflecting the attractiveness of our new products such as the CJ-3, XLS, and Sovereign.

In total we booked 100 new orders in the quarter, bringing the order intake for the full year at 329 jets.

We made good progress with our supply change and now we believe we'll be able to deliver between 295 and 300 jets in 2006, that is slightly higher than our previous guidance of 290.

This represents about 19% increase over the 249 jets delivered in 2005.

Actually, at this point we're essential sold out for 2006 with a little over 290 orders in hand.

Encouragingly, we also have a nearly identical numeric of orders for 2007 delivery, so about 290. 50 of those are from Mustangs and 240 for all our other models.

In my history this represent ours strongest order position yet for two years out.

So we have an excellent start for '07.

This continued strong order intake at both Cessna and Bell has led to another record level of combined aircraft backlog for the Company.

We actually now have over $9 billion at year and.

If we add the orders for jets from Citation shares and orders for the Bell 429, neither of which are officially in backlog, we ended the year with $10.4 billion in aircraft orders.

As part of our enterprise management strategy our focus on customer intimacy and new product development were also factors in revitalizing revenue growth at Greenlee, Fluid and Power, and E-Z-Go during the year.

At Jacobsen we've made significant progress revamping the supply chain and reducing field inventories.

At Caltex, we're making the appropriate investments to expand in China and with Toyota here in North America which will contribute to a restoration of growth for Caltex in '07.

Textron Financial also sharpened its focus on the customer, resulting in another solid year.

We grew receivables by $925 million and achieved a level of credit quality that resulted in much lower charge-offs which contributed to an increase in profits.

Looking ahead, 2005 was indeed a very strong performance year for Textron, but more importantly, our transformation strategy proved itself to be value, creating, and enduring as we put into place many building blocks that will help secure our future.

Our jet business continues expand, our commercial helicopter business is growing, our military business is growing, our financial business is solid and growing, and with the further efforts of transformation, our industrial businesses will begin to grow in '07.

Because of these significant opportunities for organic growth, we're stepping up our R&D program again in '06 and making the capital investments required to support this expansion.

We are focused possible growth and improved performance and will continue to search for strategic acquisitions that strengthen our business.

The board's confidence in our strategy and our ability to execute is reflected in their decision to increase the Company's annual dividend by $0.15.

In summary, as we look toward the second-half of this decade, we expect to deliver double digit earnings growth and a significant expansion in RLIC.

Accordingly we are doubling our target for average business cycle returns, over cost of capital from 400 basis points to premier level of 800 basis points over the weighted average cost and capital.

In closing the future benefits of our transformation strategy combined with strong growth will generate increasingly improved profitability, cash flow and shareholder returns.

Ted.

Thank you, Lewis.

Good morning everyone, thanks for being with us.

I'm going start off with our customary review of results in the quarter.

EPS from continuing operations was $1.25, an increase of $0.39 per share from one year ago.

First, pricing was a positive $0.24 or 2.1% increase while inflation was a negative $0.24 or 2.9% increase, so for the first time in a long time pricing and inflation were a wash in the quarter.

Other positive factors in the quarter were cost improvements contributing $0.25, beneficial taxes of $0.16 and I will come back to that momentarily.

A gain on the sale of our AB-139 for $0.15, volume and mix of $0.04. and Textron Financial contributed a positive $0.03.

On the negative side we had $0.10 in special charges for lease impairment and environmental cost related to a business that we previously sold.

Increased pension expense was $0.09 and we had a $0.05 charge at Lycoming which I will also address a little bit later.

Let me recap those items for you.

Pricing and inflation, a wash at $0.24 each.

Positive items $0.25 for cost improvement, $0.16 for tax, $0.15 for the 139 sale, $0.04 from volume and mix and $0.03 from Textron Financial.

The negative items $0.10 in special charges, $0.09 pension expense and $0.05 for the Lycoming charge.

As I mentioned earlier, our lower effective tax rate contributed $0.16 to the increase in earnings per share. $0.08 of that was related to an abnormally high tax rate last year when we booked additional taxes in anticipation of the repatriation of non-U.S. cash under the American Jobs Creation Act.

And this year we have a net $0.08 benefit related to the utilization of a prior tax loss associated with the previously disposed industrial business, partially offset by evaluation reserve taken against the Augusta Westland transaction.

This year's fourth quarter rate did come in a little bit worse than what we gave you in our November update, principally due to lower than anticipated utilization of foreign tax credits.

Now let's go through how our businesses performed during the quarter.

At Bell, revenues increased $215 million and profits were up $53.

Bell's revenue increases--on increased on the government side of the business primarily due to higher V-22 revenue, the benefit of the U.S. helicopter acquisition, higher after market volume and revenue from our armed reconnaissance helicopter program.

On the commercial side revenues were down slightly as a result of lower international military sales.

The international military sales which are classified under commercial decreased from lower helicopter volumes partially offset by increases in armored security vehicles.

Operating profits increased in both the government and commercial businesses.

Government business profits increased largely from the increased V-22 volume.

By the way, as a point of reference, profits on ARH during the development phase will be minimal so they weren't a significant contributor in the quarter.

Commercial profits grew from the gain on the AB-139 transaction and higher R&D cost sharing programs.

However, commercial profits increases were partially offset by the $10 million charge at Lycoming for a program to retire additional crank shafts that we have chosen to implement as a precautionary measure.

Government backlog at Bell was lower by $275 million from the end of last year, largely due to the deliveries of V-22s, while commercial backlog increased $244 million or 70%.

Ending backlog then totaled $2.8 billion, essentially flat with a year ago, and as a reminder commercial backlog doesn't yet include the Bell 4-29, which is worth about $685 million.

At Cessna revenues increased $111 million and profits were up $13.

Cessna's revenue and profit increases reflect higher citation deliveries, pricing and growth in aftermarket revenues we delivered 66 jets, 3 more than last year's solid fourth quarter.

Backlog from customers reached $6.3 billion up from $5.4 billion a year ago.

Additionally Citation shares at $571 million on order at year-end up about $74 million since last December.

In the industrial segment, revenues were down by $19 million and profits decreased $31 million.

Revenues decreased primarily as a result of lower volume at E-Z-Go and Jacobsen and unfavorable foreign exchange, which were partially offset by higher volumes at Greenlee and pricing.

Profits declined as a result of inflation exceeding price increases, unfavorable cost performance, and lower volume.

We recognize that this quarter's performance was disappointing and won't provide a bunch of excuses for the miss because frankly we still have some performance issues that we're addressing.

However, we do want to explain a number of specific events that occurred during the quarter which affected profitability.

These items include restructuring projects in three businesses undertaken to drive future cost reductions that ran through our operating results worth about $7 million.

We had a resin supplier impacted by the hurricanes that resulted in us having to buy more expensive resin in Europe and then airfreight it to the U.S. for five weeks at a cost about $4 million.

We also have a product recall related to a supplier defect that hit us for about $6 million and finally we had a fire in one our plants that shutdown production for a week that cost us about $2 million.

We expect margins to return to the mid-single digit level in the first quarter with some slight improvement throughout the balance of the year.

We then anticipate more meaningful improvement in '07, when volumes return at Caltex and more importantly, as continuing Lean accelerator cost improvements throughout industrial take hold.

At Textron Financial, revenues increased by $40 million while profits were up $7.

The increase in revenues is attributable to higher finance charges largely a result of a higher interest rate environment and higher average finance receivables.

Profits increased from higher interest margin, from the higher average receivables and improved portfolio performance, partially offset by higher selling and administrative expenses.

TFC's portfolio quality at year end remains exceptional.

Non-performing assets decreased to 1.53% of the portfolio and 60-day plus delinquencies were 0.79%.

Turning our attention to cash for the year, manufacturing cash flow from continuing operations was $894 million, capital expenditures were $356 million and free cash flow from continuing ops was $546 million.

We also generated $73 million in cash during the year at Fasteners, including some asset sales and deal cost.

A key use of cash last year was our share repurchase program which as Lewis mentioned was fully executed earlier this month.

Over the course of that authorization, we repurchased 12 million shares at a total cost of about $89 5 million.

Now, let's shift to outlook and I would like to remind everyone again that we're talking about continuing operations. 2006 will be another very strong earnings growth year for Textron as the mid point of our outlook represents an approximately 32% growth in earnings.

Specifically we're forecasting our earnings per share from continuing ops to be between $4.90 and $5.10 on an approximate 8% growth in revenues.

First-quarter earnings between $1.00 and $1.10.

Our full year outlook reflects a 2 to 4 percentage point dilution in earnings per share, resulting from the move of Fastening Systems into discontinued operations, partially offset by the assumed impact to share repurchases from the proceeds of the sale.

The dilution calculation was based on estimate of $40 to $50 million of '06 Fastening Systems pre-tax profit.

It was also based on a share repurchase assumption that would result in an average share count for '06 of about 131 million shares.

Obviously the exact dilutive impact will be dependent upon the ultimate sales price of fasteners and a pacing of our share repurchase program.

Moving on to cash flow, 2006 manufacturing cash flow from continuing ops is expected to be about $1 billion.

We're increasing our capital expenditures to $410 million in '06 primarily to support additional growth at Bell Helicopter and Systems.

Free cash flow therefore, is expected to between $550 and $600 million.

To close I would like to comment on return on capital and shareholder value.

First, the 13.2% return we achieved last year generated a value creation spread of 400 basis points as our cost to capital averages around 9%.

This year we expect to increase our rate of return to about 15.5%.

Then as we move through the remaining half of this decade and continue to increase our returns towards our premiere goal, Lewis mentioned earlier, we should see shareholder value grow significantly as well.

Now I want to pass the call over to Doug for some additional color on guidance.

Okay, thanks, Ted.

I'll begin with our full year guidance items starting with Bell.

Revenues are expected to be approximately $3.2 billion about a 9.5% increase over '05.

Margins of Bell then are anticipated to be just north of 10%, down from last year reflecting a mixed change with less foreign military business and the impact of last year's positive one-timers.

At Cessna with the increase in Citation volume, revenues are expected to be up by about 15.5% to 4 billion with margins nearing 14%.

At Industrial, revenues are anticipated to be down year-over-year at about $2.9 billion, reflecting a 10% decline in Caltex with high single digit growth at Greenlee and low-single digit growth at E-Z-Go, Jacobsen, and Fuel and Power.

Margins are expected to improve to about 5.5%.

Textron Financial's revenues are expected to be about $685 million with operating profit of about $180 million.

We're forecasting the corporate expense line to be approximately flat year-over-year.

Interest expense will be about $90 million and we anticipate our tax rate to be between 29% and 30%.

Now I'd like to share with you a few head winds affecting our '06 plan.

First, as Lewis alluded to, we're increasing our R&D budget to the tune of about $78 million, which is worth $0.40 per share.

Pension expense will increase by $0.28 per share.

We'll have an incremental $0.08 for other post retirement benefits.

Higher depreciation will cost an additional $0.07 and finally as a reminder we began expensing options last year so it has an insignificant incremental impact on '06.

Now moving to the first quarter.

Bell revenues are expected to be about $750 million with a margin just under 11%.

At Cessna we expect revenues of about $850 million with a first quarter margin around 13%.

Industrial revenues are expected to be just north of $750 million with margins of about 4.5% and finally finance revenues for the quarter are expected to be about $170 million, with operating profits of about $45 million.

One final comment about our outlook before we go to questions.

As Ted just explained, our guidance reflects our best estimate of a range of possible outcomes for the TFS sale and redeployment of proceeds.

It would not be in our shareholder's best interest to discuss any further specifics while we're still in negotiations with potential buyers.

Therefore, we'd appreciate your respect by refraining from asking for additional dilution estimate details or questions about the negotiation's process itself.

With that, that concludes our prepared remarks and we'll be glad to take your questions now.

So operator, please get us started on that.

[OPERATOR INSTRUCTIONS] Our first question is from Nicole Parent with Credit Suisse, please go ahead.

Morning, guys.

I guess the first question would just be on the incremental R&D spend of $0.40 year-over-year could you give us a split by business and then I guess a question that would be implicit in that is it a conscious choice to invest internally versus going outside the Company in terms of M&A?

As to the second part we're obviously looking for all possible ways to increase value, but I think right now we're blessed with a lot of wonderful internal organic growth opportunities.

So we clearly are putting cash in the form of more R&D and also capital spending into our businesses where we see such strong growth opportunities.

The Increases are spread really across all of our businesses, but the largest piece on a net basis is in Cessna, but followed closely by Bell and Systems.

Now, they are a little bit less on net basis, because we get some government sharing against some of that R&D, so we're actually spending more than the $78 million of increase on a gross basis, but there is also increases, it's less so in the industrial businesses, but there are increases in our number of businesses.

Okay, thanks, with respect to Bell in the quarter it looked like for the full year commercial came in and deliveries came in a little bit lighter than what you thought.

Could you talk about the next shift going on there in the quarter?

Yeah, Nicole, Doug here, basically that is a mix shift with what is going on in the world these days we had some military demands that we shipped to production over to take care of, so , that is what happened there.

We'll probably pick up a few additional commercial ships.

That is reflected our guidance and I think the last time we said it would be about 185 and we're looking at maybe about 10 more in '06.

Okay, thank you, and on the industrial profitability in the quarter, you noted three restructuring actions with facilities, could you give us some color and timing of that and how we should think about the industrial profitability ramp in 2006.

Well, the timing on those particular restructuring is pretty darn quick.

Most of those were head count reductions and mostly administrative head count reductions.

So a lot of them are largely executed.

There are some that are at Caltex in their European headquarters operations and those, because of the European environment, take a little longer to execute.

But in the next two or three months, it will all be done.

And just the last one on the tax rate in the quarter it looked like it was higher than what I was modelling, could you just talk about the puts [inaudible] and what you absorbed?

It came in higher than what we had in our guidance for--when we came out in November with our mid-quarter update and largely, it had to do with where foreign profits settled down by tax jurisdiction.

There was no one big item, but just the ability to benefit foreign taxes in some places and some very complicated calculations around what goes with Fastening Systems and what goes with the rest of the business.

So no one major item, but it did come in worse than what we were anticipating.

Great, thank you.

Your next question is from Jack Kelly with Goldman Sachs, please go ahead.

Good morning, Ted, could you just update us on the ASD outlook?

You gave some pretty specific numbers in the third quarter of last year in terms of the drag it would represent in the quarter.

How did that turn out and I think for '06 you were talking about a drag of $0.05 or $0.06 and then maybe if you could just give us some production numbers or what you might ramp up?

Net the fourth-quarter turned out a little bit better than what we had anticipated by the time we settled out with everyone.

We're on track right now to meet our customers--our commitment to our customers to ramp up which is to get back up to the 48 units a month level by late in the summertime.

We had an internal plan to beat that by a couple of months and that is becoming a challenge, frankly, and the real challenge is head count.

We had about 1,150 employees down there when the hurricane hit.

We're at about 1,100 today.

So we lost some, we have been hiring.

We need to get to a little over 1,500 employees by the August timeframe and it's been a challenge.

I mean we had a pretty good month, we hired 89 people in January, but we have got to keep that pace up in order to get the head count up.

Everything else is flowing.

We're working on some outsourcing alternatives and the like, so it's tight, but we think we're still on target to get 450 units out this year and our estimate for what the impact will be on us for '06 I think, remains unchanged.

Jack, this is Lewis, let me just add one thing there.

We're going to ramp up to 48 a month by about the August timeframe and I think that is the commitment we have to our military customer and I think we'll do that.

That will be a run rate of 48 and if you say what kind of orders do we have, we're expecting a total order about 3,000 ASVs against which we'll have only shipped about 610 or something like that.

So once we get to 48, unless something in the world changes we'll be pretty solid there for a couple of years and then we're starting to get some interest from the Israelis and others so more to come on that story, pretty good story.

On the ramp, it's difficult given the Katrina impact, but when you get to the 48, do you think the cost estimates that you had previously will be still valid that the point?

A lot of moving parts here.

We think we'll be on our cost targets once we get ramped back up.

We got pushed back because we have more learning curve costs that should have been behind us already.

So in the interim period we suffer a little bit of learning curve and we're out working hard to negotiate some of the into the next contract that we're working to finalize right now and we hope we got a little bit of help out of U.S.

Congress on offsetting some of that, but we still believe that when we get to the rate of 48, we'll be back at levels of cost and profitability that we would have been at otherwise.

One follow-up only on Cessna.

Lewis, this is kind of a nice problem, but to the extent that you are virtually sold out for this year and orders for 240 jets next year, are you seeing any instances where customers are going elsewhere or trying to come up with other alternative?

We keep interesting that question internally ourselves because we are pushing our suppliers pretty darn hard to give us more capability and they are kind of inching up and I would have to say the answer is no and I will tell you why.

There have been a few new jets that have come into the our market space over the last four or five years, but basically we have really commanded the new jet introduction opportunities across all of the rest of our competitors.

So really people are ordering things that they can't get someplace else, and there are three or four models that are sold out through '08 already and everything is sold out until you get into '07 obviously because we're filled up in '06.

We really scrubbed that pretty hard and so far our new models and the offerings that we have can't get someplace else.

Great problem to have.

Jack one more comment on that.

If think about it about 3/4 of our sales are to an existing customer so it's typically a step-up situation.

It's not always a situation where there is an ultimate exigence to get a plane sold in a particular year.

It's not quite the same as another demand situation and then when we do have a situation where a customer wants a particular shipment in a particular timeframe and we don't have it available, we can look for alternatives either a used aircraft for a period of time or a temporary lease or sale of a demo.

So we find ways.

But you're basically saying that of the 70% who are stepping up of Cessna's customers they are happy in some cases to sit tight, because that is what you are telling me?

They would rather not, but their preference is to sit tight rather than to go to a non-Cessna product.

Let's think about something for a minute, whether you have one or three or seven jets in your fleet , you are used to Cessna, you're used to Cessna service.

Obviously, they've really--Jack Pelton, the guy running Cessna has really stepped up the customer focus.

We've always been strong, I think we're the strongest we have ever been.

We won the Propilot award for customer service, so if you think about it, if you are happy with the jets you have and you want to step up to the next new offering, you can't get it for a year and a half.

You say, okay, I'm willing to wait because I really like what I have, it's dependable, reliable, and the value I get when a trade in is real high, that is another real important point is that you don't have a big value falloff by waiting the year.

You are not really losing money waiting and of course we try to get it to you as quick as we can.

The bottom line is the proof is in the numbers and orders are still coming in.

Yeah, it was just a matter of what might be what would be walking away obviously your numbers look great.

Thanks.

We'll now go to Dan Whang with Lehman Brothers, go ahead please.

Good morning, my question was on the Cessna, could you talk about your discussions ongoing with suppliers and what are you hearing back about their ability to ramp up, as you see your jet deliveries ramp up, and also commentary around component and raw material cost.

Well, component and raw material costs are going up somewhat, but the markets are allowing some pricing.

So basically that is really not affecting our profitability.

If you combine that with our improvements in Textron Six Sigma and supply chains so forth, you are seeing higher margins than our current volumes historically would have generated.

If you think about the tightness in the market, it's pretty tight across the entire group of component parts.

Engines are tight.

AP user tight, we are seeing a pretty good supply of electronics and avionics so there is no real one thing we're particularly worried about.

It's just a general buildup of our capability from a component supply point.

Our guys continue to work to try to get a little more capacity here and a little more capacity there to satisfy customer requirements and we have been able to get a few more jets in the '06 schedule than what we originally anticipated.

They will keep working on it, they're working '07 pretty hard now and we have got a lot more visibility into '07 which I think is going to help us break some of those constraints.

Bottom line, Dan, is we feel pretty confident we'll be able to deliver our '06 guidance and we feel pretty confident that we'll be able to accommodate an increase from there the following year.

Of course we haven't given guidance that on yet, but it looks pretty good.

How about, maybe commentary about the Cessna plant and infrastructure capacity, as well as the skilled labor pool that is required to ramp up and issues around there?

Well, if you separate Mustang from our conventional business yet or the rest of the models, I should put it that way.

First of all, the Mustang is built in Independence.

That is new capacity.

That is new capacity, actually it's kind of some new, some borrowed because we leaned out the single-engine piston aircraft line, made room for just a slight addition to allow the assembly of the Mustang, by the way, the Mustang is going to be a totally lean line as well.

We did have to add paint facilities to be able to paint the Mustang.

So, the good thing about this story and I think it's really kind of makes you rest easy is the launch of the Mustang is an entirely different labor pool.

It's got a good skilled work force base.

They have been building single-engine and now can migrate over to some extent to help build Mustang, so it launches in Independence and that is a good thing.

And then if you think about the rest our jet line it's capable of producing 300 that's what we plan do this year, somewhere between 295 and 300.

So we have got pretty much all the capacity and capability we need.

So I don't anticipate a labor problem, at least that is what we're thinking.

And as we continue to push on lean, we free up the work force to be able to work on new models and build new volume.

So we're generating our own skilled labor by the way we're approaching our Lean manufacturing concepts.

I think the labor market in Wichita has been one reasonably characterized where other manufacturers have been closing down operations.

So we're in pretty good shape and one final point Lewis made on Lean with people, it also applies to the infrastructure capacity.

Pelton and team have been leaning out that so while our previous peak capability through the Wichita plant was 313, it's higher than that because of Lean and some additions that we have done.

We did add substantial paint capacity at Wichita also when the Sovereign came on board because of the larger size of that aircraft required it.

Okay, great and final question you mentioned continue to look at strategic acquisitions and I think at least in the past or recent past you have looked at adding on to the Bell business and the refurbishment of helicopters and could you comment on what particular areas of the company you might consider for acquisitions and would you consider larger acquisitions at this point?

Well, we tend to touch on this subject about every time we get together, which is a logical subject to tough on and our story is pretty much the same as it's been each quarter last year..

If we had a good solid large strategic acquisition that made a lot of good sense that really fit with our business going forward, we would have to consider it.

I have kind of said that every quarter, but things are expensive out there right now.

You read the papers as much as we do and probably have as good sense as we do on what is out there.

There doesn't appear to be anything that fits that large bucket that you just referred to.

I would love to add more U.S. helicopter opportunities, I'd love to add more overhaul repair.

I'd love to add in the Bell business or the Cessna business.

I think we'll continue to invest with our customers at Caltex, that would be more organic plants and expansions there.

We have done the Rothenberger thing Greenlee.

Greenlee has a great opportunity to use its great brand name and its distribution system to add products into, so far we haven't been able to do anything big there.

Systems, we have always said we'd add to that capability.

Things are pretty expensive out there so we have been sifting and sorting through a lot opportunities, but nothing has really fit us.

It has to be something that made a good strategic difference that was worth stepping up to.

But I hope we find some things that we can add to systems in the tool area would be good, Bell would be good, Cessna would be good.

That about covers it.

Very well that is well helpful, thank you very much.

Thank you, our next question is from Jeffrey Sprague with Citigroup.

Go ahead, please.

Thanks and good morning.

Hey Jeff.

Just a couple of things, I guess first back on the R&D, Lewis, should we view that as kind of more, kind of incremental changes in aircraft like you did the pluses on CJ-1, 2's and 3's.

Is there an element of the leading edge of a new airplane in that spin, could you just characterize that a little bit where we're going?

Sure, well, I have personally reviewed the plan through 2015 and I came in '92 and at that time we had three models and now I think we're up to nine or ten.

So it's a combination of things, we're always looking at where with can we make a different product offerings below our low-end, Mustang.

We're also looking at where can we do product offerings above our high end, which would be a Citation 10, and I don't think there is much room for another G5 Global Express offering in the world today.

So I would say more of our capital spending has do with adding some really good enhancements across all aspects of all of our models and I would say that over the next 8 to 10 years there won't be a single model flying like the one we have today, it will be enhanced somewhat.

I don't think we're going to do-- well, I know we're not going to do all new skins and bodies for every plane, but we've got a lot of opportunity to improve a variety of the different elements of each one of our models.

So look for more speed out of all of our models, look for more safety features, look for more avionics, look for more creature comforts for the passenger.

Pretty exciting stuff.

We expect to see this R&D spending to continue to grow in the few years.

Terrific and then on price and cost and in particular as it relates to Cessna, but maybe across the entire business and that kind of to Jack's question, given that the order book is so full, are you having to modulate the volume intake here a little bit more with price and should price cost be clearly favorable in '06?

We do expect to see '06 become a year when pricing costs get better in line.

The fourth quarter was the first quarter where we broke even in a long time and as we go into '06--Cessna is a good example, remember we sell airplanes a long time before we deliver them so we tend to be selling off a price from a ways back and in '06 we'll start to see much stronger pricing at a number of our businesses.

So the balance is coming back.

I mean, we still see some commodities that are a little bit of out of control here and there that we are always scrambling to get back through marketplace in price.

So it's not to say it's a sure thing, but right now that balance looks much nicer for '06.

Yeah.

Can you give us a little color on, we are all expecting the AB 139 gain in Bell, but what was the magnitude of the reimbursement on risk sharing and what was that all about?

We also had some settlements with a number of our partners.

We have a lot of risk sharing agreements where various partners reimburse us for portions of R&D spend during the course of the quarter and I don't remember how much that number was specifically in the fourth-quarter, but let's see if we can dig that up.

But part of that was also with Augusta, but also with some of our other international partners.

And I'm just wondering and I think if I recall Mustang, you're into '09 for delivery slot, but as we are now getting a little closer to the launch of airplane, are you seeing some more orders there are people willing to take slots out that far or are we still in a holding pattern there?

I can't speak to order intake on Mustang, can you?

On mustang?

We have taken some new the orders.

It's dribs and drabs, Jeff, at this point until we get into production and get a little closer to '09, we're not really spending a lot of effort on selling Mustangs.

With your sales force, you want to put them where the returns are.

You shouldn't expect a lot of orders coming in for that.

Let's do something here for a minute--we've already said--but let's kind of review the bidding, because we can kind of figure that out and I'm not looking at the end result and trying to show you how smart I am, but we're going to do 50, 100, and 150 Mustangs '07, '08, '09 deliveries. 50, 100, 150, that's 300 total.

We're sold out Mustang through Q3 2009, so half of that 150 in '09 is let's say 75, so basically you are at 225 at least, and more orders coming in.

So this would not be unusual by the way, let's think about this for a minute, the Mustang was such an unusually attractive aircraft from almost every aspect of any product offering you could imagine.

Low cost, high performance, strong reliability, world's best manufacturer in that segment.

And a cabin that nobody is going to be able to beat, I guarantee you in a long time for what you get in that jet.

And so it's not unusual, like the Sovereign for people to get their order in and wait two or three or four years, because it's an unequaled product.

So, I would say in balance that I would be surprise is we don't exceed the 150 by the time we get to 2010 and maybe a little earlier as far as deliveries are concerned.

I don't think we have seen the big the orders on Mustang, we'll see once we get that into production, but time will tell.

Actually, through the year we added several net orders to the Mustang backlog, but within that when we went to first flight, a big down positive became due from customers and so that sorts a few people out and in a blink of an eye, we had those slots resold.

Thanks a lot.

Thank you, next we have a question from Tony Boase with A.G.

Edwards, please, go ahead.

Thanks.

Pretty great quarter today, gentlemen.

On a question though, can you talk a little bit about what the shipment levels is going to look like through 2006 for Citation?

What do you think the first quarter starts out at and how does that kind of look through the rest year.

I don't need precise numbers, but just a bit of a feel?

Tony, I'm almost laughing that you don't need precise numbers, but we'll leave it at that.

First, let me make a comment, the number of ships that we would deliver in any particular quarter can vary plus or minus 5 and it relates to a lot of things from customer not wanting to take the airplane to the weather on the last day when we had to do the flight test was not conducive to the test, et cetera.

But right now our plan for the first-quarter is about 65 and let's just not say anything about the rest of the quarters, because if I give you second quarter now and I'm over or under on the first quarter, that will affect the second quarter.

Yeah, I appreciate the comment.

Look, I think at least I recognize and probably other investors recognize that you are going to have some lumpiness here and plus or minus 5 planes isn't going to sway me one way or the other.

I like to hear that.

But that also leads to your fourth quarter, and of course deliveries were better than expected and was that a case where you just had a number of good things go your way at the end of the quarter?

I would say that is a good conclusion.

We usually have an interesting fourth-quarter and as long as we don't get weathered out, we usually get a heck of a lot of pressure from customers to get their plane by year-end, and from a tax planning standpoint it's the best time to get it.

So every customer has their own financial thinking and planning and so forth, so if the weather permits we usually can surprise ourselves on the upside.

Although there have been a few years since I've been here that we have delivered not quite as many as we want to, but it's usually an up.

I will make one final comment about [inaudible] for the year, Cessna has finally reached a point where they had not been before and that is their delivery plan is flatter quarter-over-quarter this year than it's ever been.

We don't have a spike in the quarter.

Just kind of a question, I know we're not really talking about '07 and I wouldn't expect you to say anything too concrete, but clearly, 240 planes or orders for '07, I mean at this juncture, that probably means that '07 is going to beat '06 by a significant amount.

Is that a reasonable expectation?

We would expect to see growth.

We have 290 orders by the way so we shouldn't separate Mustangs, including Mustangs, but I think we expect that we will have growth in '07 and how much growth will be a combination of how many of customer demand is out there, so that we don't have them walk down the street to someone else, so we don't lose share and we can satisfy those customer, combined with our desire to also try to manage the growth to be sustainable and smooth for a number of years.

So we would clearly expect to see, right now, knowing what we know, a nice step-up in '07, but not necessarily grabbing every unit out there trying to convince some customers to build a strong '08.

And lastly, just on Bell Commercial and foreign military sales for next year of 195, what is the split between commercial and foreign military on that 195?

100% commercial.

No foreign military next year?

Not in our plan, but it will probably come out differently.

Okay, thanks a lot.

Thank you our next question is from Brian Langenberg with foresight, please go ahead.

Thank you very much, a couple of things and this is the question Jeff asked before, on Bell, if you could come back to us or have in that operating profit number, breakout what was the year to year impact from AB-139, it sounds like $30 million pre-tax and $20 million after-tax in round figures, but after that, how much of the profit was a swing in V-22 and how much was risk sharing, what have you, I just want to get the unusuals in that number?

I'm not sure you could call any of those "Unusual."

All I know is I looked at 132 and I though great number and most of it's is recurring.

Well the AB-139, you got the numbers right, it's about $30 million in the Bell number for the AB-139 sale.

And even after that though, it was a great quarter.

I actually gained $20 million after taxes is always a great quarter, so just trying to get the other pieces that made that segment unusually--really good.

I know the risk sharing income piece was about $20 million, but I don't how much spend was against that.

That is a pre-tax number?

That is pre-tax, but don't know what the net is.

The V-22 part went up about $15 million.

Okay.

Not sure net.

Quarter to quarter.

I hate to do this to you guys as great as Cessna--but with industrial, could you just kind of walk us through maybe the degree of year in year change by business unit, at least break out contacts versus the golf and turf businesses and that way we can just kind of get through that.

I can start with Caltex for a moment while we're look for the rest.

Although Caltex volumes will be down pretty close to 100 million, which is the same number we gave a year-ago for '06 so it's not a surprise, we're really not losing any tank volume.

That is basically made up of about $22 million in foreign exchange and $22 million in the fact we divested micromatic.

I'm sorry I'm a little confused, we're just talking about fourth quarter right now.

Oh, I beg your pardon, I was going to '06.

Just trying to get the what happened last 90 days part.

Greenlee was up double-digit.

Fluid and Power double-digit.

Slower, Fluid and Power plus 10 plus, okay.

Greenlee up double digit, Fluid and Power double digit, Jake dow, E-Z-Go down just slightly, and that reflected the issues that --

The fire and the recall, two big hits.

Sure, and going back to the big one, Caltex?

They would be the balance of the down.

Okay, so Caltex year in year was were off in percentage terms roughly?

If you model all the previous things I said, the balance that would contribute to the reported decrease of industrial would fit that slot.

I didn't calculate it here and I don't have a percentage in front of me, but roughly it's not that much.

On an absolute basis it was about $15 million.

Okay and I suspect that the mix there was the volume was probably down more and you probably got some price there.

The biggest restructuring pieces were in Caltex too.

Right.

For the profit side.

How about on the revenues?

I'm not sure that volumes were off that much.

Let's come back to you on that

That's okay, we'll follow-up on that later.

Thank you very much gentlemen.

Thank you, our next question is from Ron Epstein with Merrill Lynch, please go ahead.

Hey, good morning, guys.

Just some broad strategic stuff, I think all the details were covered m encouraged by the investment in R&D and CapEx, so Lewis if you could just talk, broadly, what you are thinking in terms of strategy and I know you can't give out any of the details at Cessna because of a competitive nature, but the kind of investments that you are thinking of making there.

Well, how about let me just do the Company a little bit.

First of all, we have a really good--our planning process is so much better and we really improved over the last two or three years and we're going to be together, some of us on the 6th I think in New York, we're going talk more about it, but we have created a process that basically now kind of puts the budget debate and discussion and confrontation for '06, '07, '08 kind of puts that in a different place because we are really demanding that each one of our businesses, whether it's Caltex, Greenlee, Bell, Cessna, continue to improve the economic value, if you want to say that, we call it intrinsic value of their forward business plans, each year, by somewhere between 10%-15% and we're actually shooting for 15.

So when Cessna comes in with a redo of three of their models in this year's business plan that stretches over the next five years, next year they have got to come in with some more good ideas to add to the intrinsic value in the plan, or they basically have the same value next year as they have this year.

That being said, our focus is on each business and asking each business to look into their markets, into their products, into their services, into adjacent markets that fit like I mentioned overhaul repair, maintenance, service, et cetera.

For Bell and Cessna for example.

And where are opportunities that we can invest in ideally internally, in order to improve long-term organic growth, and so if you said where do I think we're going?

I think the Bell and Cessna and System's story will migrate us into a slightly higher percentage over the next four or five years of business into the military and aircraft world and I kind of think that's good thing, because broad offering in the military space, those are transformational products for the most part.

They are needed by the government, so they are not discretionary to a great extent.

They're something a war fighter has to have.

If you look on the Cessna side, it's been a great modulator of economic variability because it pretty much tracks corporate profits and of course government spending doesn't track corporate profits.

I think your going to see continued focus on the businesses and the brands we have in industrial.

Caltex really should continue to--should pick up growth because of the investments we're making for Toyota in the United States, China and other places, they should pick up their growth going into the back half of the decade.

I don't expect us to go out and buy Caltex 2, but I was willing to buy out our partner in Asia, because quite frankly they couldn't keep up with our investment spending to put the products--our plants in place in order to keep up with our customer's demands, so we got that behind us.

I would love to find something to fit into Greenlee's portfolio, that's a darn good management team and it's got a great brand name.

We haven't been able to find too much, we may be able to get a lot more out Rothenberger deal than we currently have, we may be able to convince them to let us have more of their products, I'm hoping.

We've got good product development coming at E-Z-Go and we've turned that wick up at Jake.

TFC's going to continue to be the kind of contributor they are now and I don't see us changing the mix of TFC versus the balance of our business.

Don't look for us to double that in the next five years that's not our game plan.

It's really a consistent march that we've announced four or five years ago which is the focus on real smart portfolio management in and out and extremely strong focus on enterprise management and I think we're about a third of the way down the road on enterprise management.

We have a lot more do yet, we've got a lot more waste to get out of system.

We had a big meeting literally starting this coming Sunday with our top 170 and we're going to turn the wick up and as if we hadn't even started transformation.

So we're pretty geared up.

That is great and maybe a little more detailed question, when we look at Cessna the pistons were up a lot?

Yes.

What--A1. what are you guys expecting out of pistons next year and 2. there is a new competitor on the piston front, I guess Cirrus and can you speak about anything that Cessna would be doing to counter the threat from Cirrus?

Well, we have some good plans, but I can't tell you about them.

Fair enough.

The single-engine is a pretty good story because we remodeled the interior of that to put the new avionics package in and that really took off big time.

We are going to break a thousand.

Next year?

This year, '06.

We'll break a thousand in '06 and of course as we think about it and put Mustang into Independence and we've Leaned out the production facility of the different models of single-engine piston, than the overhead associated with both of those aircrafts get spread across more volume so that is more help to us, either we make more profit or keep our price lower or we have a nice way to decide that based on what the competition's doing.

Cirrus will come in there, but I think there is a growing demand now for that entry-level piston aircraft and bring them on.

Great, thank you very much.

Operator, before we take our last call, let me circle back on Brian's question about Caltex.

As I started to indicate the issue there is not volume and in fact, volumes were up just slightly.

It was primarily a reduction of foreign exchange.

So their revenues were down about 3.5% and they got net just a slight bit of price with recovery of higher resin cost, et cetera partially in the equation.

We didn't have full recovery of those issues, but enough recovery that it gave us a positive price.

We have one more question, I believe operator.

Yes that is from Steve Tusa with J.P.

Morgan, please go ahead.

Good morning.

Hello?

Good morning.

Sorry about that.

Looks like a lot of incremental hits in industrial, but a great quarter in aerospace, obviously.

On the aerospace side with Cessna, what about this cycle is turning out to be different and by just the feel of the pace of orders, obviously you guys have put out the numbers, but Lewis, I'm just interested in your personal take on why this just seems to be pretty strong even this deep into the cycle?

Well, there are a number of things that I would call out that seem to be noteworthy versus history.

I would have to say that--we talk about this and I tell you what, I'm really proud of this from a Cessna point of view.

These guys had the courage to keep investing in new products in the '01-'02 time frame and '03 and those were tough years for tech strong.

Our earnings per share was taking a hit, we had a bunch of crazy stuff going on and even when their big customer made that big cancellation in '03, we kept our head down and kept charting.

So new products be like no doubt about it.

International is picking up, Europe is picking up and Asia is somewhat picking up, we're up 38% over --

International sales deliveries last year were 38% of total sales versus typically running in the mid to high 20's.

Another factoid if you all want is if you think about our order intake for last year, what I like about it, it's not big customer oriented because if you think about the orders we took in, 329, I think it was, about 10% was net jets, which is really not a big percentage and normally we're a little bit higher and about 4%-5% is Citation share.

So, we have got a nice pacing, it seems like the factional share business has kind of come into a steady pace and so you have got a steady pace for fractionals, you have got more new models than anybody else.

Heck all the rest of the competitors combined.

We have improved about every aspect of our production capabilities so we have a real good delivery performance based on when our customers want them.

I think we can see a pretty long run.

How long it will go?

I don't know.

Feel pretty good on '07 and don't have any visibility on '08 yet, except we have some orders that stretch into '08 and you asked about Cessna and I'm also really excited about Bell.

The greatest thing about Bell right now is we have more orders coming in than we've ever had on commercial and we won more big contracts than we ever really thought we would win, given the big wins we had last year and the V-22 solidified.

So it's really great to plan a forward capital investment strategy against known volumes.

What is your '08 backlog looking like right now?

In which model?

All of Cessna?

That is a stretch number. '08, that is pretty good.

Yeah.

Actually I don't have '08, I have '08 plus.

Do '08 plus.

It's a little over a billion.

As I remember historically pretty dog gone strong.

We were looking at thos forward numbers as a way to think about how should we capitalize and how should we ramp?

Our backlog for '08 would be stronger than normal because we have around 100 Mustangs in there which typically would not be in the two year out historically.

And you have some Sovereigns in there.

But really backlog for '08 at this point in time is not necessarily an indicative thing to rally your flag around.

What is indicative is that corporate profits are still strong, the economy is still strong, international is expanding, and the tender in the market place is very positive and everything from used pricing and pricing on new is just everything in the market right now is positive and that is the best you can do for now for that far out.

Remember used was down to 12% of the backlog -- of the installed fleet is up for sale, but 80% of that is 10 years or older, and it's good time to be in the business if you have new models to sell

Just two very quick questions, is there any chance at all of any kind of maybe this not the right term, but of double ordering to kind of reserve slots?

No, I mean, one thing we know how to do is process orders and we know every plane that is on the ground or in the air and we know a lot about our customers that order and we're really careful about that.

On the Mustangs, there were probably some guys that grabbed slots on the Mustang, but then when we demanded higher deposits, they shook out.

Nothing unusual there though.

And lastly, I'm not sure if you did this throughout this year, but the '07 margin target for Cessna, have you guys updated that and then when we see you guys in February, are you going to update that or just give the '08 view?

The '07 margin, Steve?

For Cessna?

We didn't talk about that.

We're around 14 this year and we expect to see that go up in '07.

Did you hear that, Steve?

I'm sorry, what did he say, about 15-17?

We have laid out a target for 15-17 for Cessna, we are not there yet, but making progress over '06.

They really have a good cadence there, good leadership team.

Okay, great, thanks a lot, guys.

Operator, do we have anymore calls in queue?

Yes, we do I have question from John Bach -- I'm sorry he just took himself out of queue, but we do have have Don MacDougall with Banc of America Securities, please go ahead.

Good morning, guys, very impressive quarter and 2005 results.

I would say they followed a somewhat predictable pattern, however, and really it was Bell and Cessna that did all the heavy lifting and Industrial came up short and just a portfolio question, I know it's something you get from time to time, but given what you're doing with Fastening Systems, Lewis, and your focus on raising return on invested capital, is there a thought maybe that we could turn our attention to Industrial and look to raise return on invested capital by perhaps selling some of those businesses and essentially concentrating your bet on the horses that are really winning the race?

Well, not at this time, we wouldn't.

I mean, there is not enough time on the call, but maybe we could get into it more on the 6th to talk about what we plan to do with each business.

I will give you that we have had quite of a few things happen to us, almost uniquely in each one of the businesses that came together to create a kind of -- well, let's face it a lousy dog gone result in '05 and little bit better in '06, but we have a good visibility and good teams in place, we know what '07, '08 and '09 probably are going to look like.

We feel good about that, we're lucky-- In a multi-industry company, since I have been here, we have always had one of our big segments that's been struggling with something and it just seems like it's a way of life.

We need to have something to improve.

I don't blame you for asking the question and obviously nothing is for sale and everything is for sale always at a multi-industrial company, but I wouldn't expect us to lighten up over there anytime soon, we're going fix that rascal and get it moving in the right direction.

Thanks and maybe we could talk more about that on the 6th.

Yea, we will.

Very impressive results.

Thanks Don.

Best to you.

All right, operator, that concludes our call and thanks to everybody for joining us.

We apologize for running over a little bit, but we did want to answer your questions.

Thanks again.

Thanks everyone.

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