達信公司 (TXT) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen.

Thank you for standing by.

Welcome to the Textron first-quarter earnings 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 Mr. Doug Wilburne, Vice President Investor Relations.

Please go ahead.

Thank you and good morning everyone and welcome to our first-quarter conference call.

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

Before we begin today's discussion, let me remind you that we will 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.

Moving now to our results for the first quarter, revenues were at $2.6 billion up $362 million from last year representing an increase of 15.9%.

Earnings per share from continuing operations for the first quarter were $1.19 compared to $0.61 a year ago.

Let me make two comments about the $1.19 result which was $0.09 above the top end of our outlook range.

First, profit was negatively impacted by $0.07 for incremental costs at Bell for Lot 1 of the H-1 program associated with resources we've added to meet customer schedule requirements.

While a portion of the cost will be incurred over the next several quarters, the full impact of our revised estimate was recorded in Q1 because the current contract is in a loss position.

Second, our first-quarter tax rate was lower than guidance due to resolution of a tax matter which led to a per-share benefit of about $0.06.

We had anticipated this would happen some time during the year but we did not expect that this resolution would occur in the first quarter so it wasn't reflected in our first-quarter guidance.

However, it was incorporated into our full-year tax rate guidance so this was just a timing matter and therefore not accretive to our outlook for the full year.

With that, I will turn the call over to Lewis.

Thank you, Doug, and good morning everyone.

We had a very strong start on the year with robust revenue growth in the quarter, continued strong aircraft orders and sequential performance improvement at our industrial businesses.

You know the theme of our 2005 annual report growing opportunity was readily apparent in our results.

This is the first quarter in a number of years where every single business experienced positive organic revenue growth.

For example, Greenlee and E-Z-GO exceeded 15% while Fluid and Power and Jake posted low single growth.

Even Kautex saw a slight organic growth which is encouraging versus our previous expectation.

So our outlook for industrial is somewhat improved from where we saw things at the beginning of this year.

At finance we grew our portfolio by about $980 million from a year ago adding about $350 million in the first quarter of 2006 as we leveraged our workforce and capabilities at TFC.

We're targeting to grow the portfolio by about 10% this year so we have an excellent start.

At Cessna we saw strong order activity once again in spite of a limited near-term availability as we received 111 Citation orders.

This 111 order intake included 41 from two large fleet operators which of course doesn't occur every quarter.

Nonetheless, the 70 remaining orders were more than we had expected so the demand environment remains robust.

Looking forward we continue the process of analyzing the marketplace and working with our suppliers to plan for 2007 production schedule and we expect deliveries will be going up again next year.

Of course our '07 production also includes about 40 to 50 of our new Mustangs on top of the growth of our existing models.

Mustang development, by the way, continues on track and we expect FAA certification by year end with first customer delivery early next year.

Also on the new product development front, last month we successfully completed first flight of the Citation Encore+ right on schedule.

This is a significant step toward certification of the airplane in the fourth quarter with initial delivery plan for the first quarter next year.

At Bell demand for commercial aircraft was also extremely strong and reflects our renewed strategy for product innovation.

Over the past several years we've invested in upgrades and new product offerings actually just in time to capitalize on expanding market demand which is driven by new requirements, such as Homeland Security, new markets such as Africa and the Asia-Pacific area and an emerging replacement demand to modernize existing fleets.

At February's HAI show we officially unveiled our newest helicopter, the 417.

Within days we had 117 orders.

We also took additional orders for legacy models as well as the new 429 GlobalRanger which you recall we introduced at last year's HAI show.

As a reminder, the 417 and the 429 orders are not recorded in backlog and will not be until development reaches full specification status.

You know we probably won't see many additional new orders for these two aircraft for a while as open delivery slots are not available until 2010.

And in case it isn't obvious, having this kind of visibility at Bell is unprecedented.

In addition to product innovation, our commercial strategy is also squarely focused on leveraging our superior brand position with our customer.

To that point this past February Professional Pilot Magazine announced the results of their annual helicopter product support survey.

For the 12th straight year we were named number one in customer satisfaction.

Now moving to the U.S. government side of the business let me start with the H-1 program, which by the way is the top delivery agenda item for Bell and Textron.

As most of you are aware, the H-1 program calls for 100 utility and 180 attack helicopters for the Marine Corps, using a design that creates an 84% commonality in parts between the two models.

This provides very attractive operating costs for our customer.

What you may not realize is that this program has changed significantly since its inception due for the most part to our customers request for enhanced performance and operational effectiveness.

Specifically the program that exists today includes a cockpit upgrade for both aircraft, much improved reliability, maintainability and supportability, training systems compatible with the U.S.

Marine Corps training vision and significant improvements in performance, payload and war fighting capability well beyond original specifications.

These additional capabilities have contributed to an increase in the overall cost of the program.

However, the Marines continue to value the additional capabilities as well as the greatly reduced total lifecycle costs that the H-1 represents.

We're currently in a low rate initial production or LRIP, and we plan to deliver the first four LRIP aircraft this year.

Originally it was thought that the remanufacturing -- sorry, let me go over it again.

Originally it was thought that remanufacturing existing Huey and Super Cobra airframes would lead to lower unit production costs.

However, the amount of engineering and assembly line work required to adapt and integrate the older airframes has been much higher than estimated and the modifications are to some degree unique to each individual airframe.

This is causing production delays and higher costs for the initial ramp up and as a result, we and the Marines have agreed that the utility aircraft will become new build versus remanufacture beginning in 2008.

And we're currently studying the benefits of doing the same thing for the attack version.

As for the approval status of the program, operational evaluation aircraft have been delivered to the customer and the testing process is scheduled to begin in early May.

There is a Defense Acquisition Board meeting scheduled for the end of May.

In the meantime we made significant commitments related to our customers' specific concerns to improve program performance and get delivery schedule back on track by next year.

To support these commitments we've invested in the resources required to get the job done as evidenced by the costs we recognized during Q1 as Doug just highlighted.

Obviously we can't guarantee -- give a guarantee on any government program but we are confident that we can meet our customers' requirements.

Elsewhere Bell, lets talk about the Armed Reconnaissance Helicopter programs for which we have begun in earnest the systems development and demonstration stage.

First flight of the ARH is scheduled for this quarter with initial user testing beginning by early fall.

Then delivery of the first four LRIP units is scheduled to occur next year.

On the V-22, the program remains slightly ahead of schedule as we delivered four new aircraft during the quarter and for the year we plan to deliver a total of 16 units.

And in a development related to our aftermarket business, we opened a new repair in overhaul center about a month ago to support our growing U.S. military requirements.

This new 82,000 square foot facility located in Roanoke Texas which incidentally is adjacent to our logistics center, will perform maintenance on transmissions, rotating controls, rotor hubs, gear boxes and other rotor blades for all of Bell's U.S. military customers.

Moving to Textron Systems, we're on schedule to meet our target of producing 48 ASVs per month by August which means we will deliver at least 450 total units compared to 168 units last year.

Good job to systems.

A growing opportunity annual report theme is indeed evident in our top-line results and customer order activity but you know it also reflects our continued commitment to Textron's transformation strategy.

In addition to a focus on the customer and new product development this strategy calls for continuous improvement in operations which also contributed to our solid first quarter.

For example, in spite of only partial recovery of commodity inflation at Kautex, industrial showed good progress on margins from last year's third and fourth quarters.

Furthermore, continuous operational improvement around the Enterprise is giving us maximum opportunity to invest in new products and program ramp ups well meeting and exceeding our overall financial targets.

The other side of our transformation strategy is portfolio management.

And I am able to report that we continue to make steady progress with the sale of our TFS business.

As we said last year we expect to announce something during the first half and we're still right on track to do just that.

Before I turn the call over to Ted, I'll end with a comment on our transformation strategy.

Five years ago we said we would invest in enterprise-wide systems and world-class processes.

We would strive to optimize our portfolio and we would move toward becoming the premier multi-industry Company.

We've made a lot of progress, no doubt about it, but let me be clear.

We understand we have a long way to go to reach that goal.

We need to further intensify our focus on customers, new products and growth as well as superior performance through operational improvements.

In closing, the first quarter validates our transformation strategy and our long-term outlook for double-digit revenue growth driven by our investments in new products, the ramp up of military programs and our strong end markets.

Ted?

Thank you, Lewis and good morning to all of you.

I'll begin with our usual analysis of the quarter's results.

EPS from continuing operations was $1.19, that's an increase of $0.58 from a year ago; $0.31 of that increase was related to last year's C&A investment impairment charge including the impact of taxes.

That leaves a $0.27 improvement in business fundamentals.

Of those, pricing was a positive $0.26 or about a 2.1% increase which nearly offset inflation of $0.27 and that represents an inflation rate of about 2.7%.

Volume and mix contributed $0.25 a share;

Textron financial was a positive $0.08; improvement in the underlying tax rate including the impact of the one timer that Doug discussed yielded $0.06; and miscellaneous items including the impact of our share repurchase program contributed $0.02.

On the negative side, pension expenses were $0.05 higher and increased R&D was $0.03.

Performance was a negative $0.05 which included the impact of additional resources at Bell for the H-1.

Let me recap those items for you starting with the positives.

C&A was $0.31; pricing $0.26; volume and mix, plus $0.25;

Textron Financial, up $0.08; taxes a favorable $0.06; and miscellaneous $0.02.

The negative items were inflation of $0.27; higher pension expense of $0.05; cost performance of $0.05; and research and development cost of $0.03.

Now let me move to a review of the segments and I will start with Bell.

Bell segment revenues increased $167 million while profit was down $6 million.

Within Bell, U.S. government revenue was up $177 million reflecting higher V-22 revenues, increased deliveries of ASVs and the ramp up of ARH development activities.

Commercial revenues decreased $10 million due to lower international military sales this year even though we shipped 33 total commercial units which was the same as last year.

Segment profit for the U.S. government business was up $10 million due to higher V-22 volume, higher ASV activity and favorable sales mix partially offset by the H-1 impact.

On the commercial side, profits decreased $16 million primarily due to the lower international military component and higher research and development expenses.

Bell's backlog increased to $3 billion up about $200 million from year end.

Moving to Cessna, revenues were up $156 million primarily the result of shipping 67 jets this year compared to 55 last year.

Higher used aircraft sales and pricing also contributed to Cessna's revenue rise.

Profit was up $30 million reflecting higher pricing and volume.

These increases were partially offset by inflation and capabilities investments.

With the 111 new jet orders, Cessna's backlog continued to grow ending the quarter at $6.9 billion up $600 million from year end.

We also have $525 million in open orders from Citation shares which as you know are not included in the official backlog.

At industrial, revenues declined by $2 million in spite of higher volume and positive pricing in the segment.

The decline resulted from the negative impact of foreign exchange and divested operations which totaled $56 million.

Profit decreased $6 million primarily due to inflation partially offset by the impact of higher volume and pricing.

Finance segment revenue and profit increased $41 million and $16 million respectively.

The revenue increase was due to higher interest rates and higher average finance receivables.

Segment profit increased primarily due to the growth in core receivables and a decrease in provisions for loan losses as a result of sustained improvement in credit quality.

Nonperforming assets were 1.55% of the portfolio and 60 day plus delinquencies were 0.7%.

Turning our attention to cash, manufacturing cash flow from continuing ops was $128 million;

CapEx during the quarter was $57 million; and free cash flow from continuing ops then came in at $68 million.

And we spent about $225 million during the quarter to repurchase 2.6 million shares of our stock.

Now let's shift to our revised outlook.

Based on the strength of our markets and continued progress with transformation we now anticipate full-year earnings per share from continuing operations will come in in the range of for $4.95 to $5.15 a share, up $0.05 from our previous outlook.

And for the second quarter we still expect EPS from continuing ops to be between $1.15 and $1.25.

In closing, we had a strong quarter and we're expecting a stronger year.

We're carefully managing the execution of a significant ramp up of production of new technologies at Bell and managing growth in all of our businesses.

Be reassured that our growing opportunities theme reflects our continued commitment to Textron's transformation and our shareholders are realizing the benefits as we leverage this growth to improve profitability, cash flow and shareholder value.

And now I'm going to turn the call back over two Doug and Doug will give you some further details on our outlook.

Thank you, Ted.

Starting with the Bell segment we expect to second-quarter revenues of about $700 million and margins of about 9%.

With the impact of ramp activity underway at Bell, we are now expecting full-year margins to be between 9% and 9.5%.

The lower Bell outlook will be more than offset with higher expected performance at industrial, finance and Cessna.

At Cessna we're projecting second-quarter revenues of about $1 billion with 70 to 75 jet deliveries and margins of about 14%.

We expect industrial revenues will be about $800 million with margins again around 6%.

At our finance segment we're projecting second-quarter revenues of about $190 million and segment profit between 45 and $50 million.

Finally, we still expect a full-year tax rate of 29% to 30% which means that for the balance of the year we will be between 30% and 31%.

With that, that concludes our prepared remarks.

So, operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS) Nicole Parent from Credit Suisse.

Good morning, guys.

For a numbers geek like myself, could you just elaborate the nuances between I guess a remanufactured helicopter verses new and manufacturing operational terms?

Sure, I can.

It's pretty easy, Nicole.

But we sling those words around so I understand your question totally.

When we say remanufactured, it literally means you bring a helicopter out of the field; you disassemble all the hardware, the engines, the transmissions and basically take it down to a skeleton or what we refer to as an airframe.

And then you remove the portions of the airframe under a remanufactured concept, you remove the portions of the airframe primarily in the front or in the back of the aircraft that changed significantly and the roof and then you remanufacture those components to the best you can without producing all new sheet metal.

When you go as new obviously you then just produce new airframes.

And that eliminates this remanufacture and rework.

If you think about it since we're talking about an H-1 model that has been in existence for decades, the number of changes that have gone into these airframes is fairly significant.

And so that is why we've now taken a decision for the utility helicopter and we might do the same thing for the attack, to go with primarily new airframes or major portions of new airframe components because we don't have to do the rework.

And it actually saves us a lot of money, time and effort.

So it is a good cost savings project for us.

And we weren't, Nicole, using very much of the old airframe to begin with.

So there is not really a material difference.

It will reduce cost to the customer in the end we believe to go new.

Okay, great.

And with respect to Cessna, it looked like the mix definitely was helpful in terms of margins in the quarter.

Could you just update us on the supply chain issues as you see kind of -- I mean I think it's pretty consistent with most of commercial aerospace [line], what we're hearing on the supply chain.

If you guys are seeing anything in particular?

We have a challenge every quarter and throughout the year to continue to have everyone keep up.

But I think we're doing well, we're working well with our suppliers to execute against the plans that we have in place and to meet our customers' delivery requirements.

But there is not a quarter that goes by that we don't have a shortage issue here or a shortage issue there.

And frankly they are at the stage right now where it is never the same one twice.

It is just a little bit tight out there.

I think the Cessna team knows how to get this job done and executes well.

Could we ever have a little hiccup because we miss a part here or there for a quarter end?

Yes, it could happen.

But I think we are feeling okay about it.

We wish it was easier but we are getting the job done.

Great.

And just the last one on Cessna.

Could you distinguish between the price realization on units delivered verses orders taken?

Well units delivered are -- and what we talk about in our causal analysis is still on a lag.

So I think it is fair to say that we've moved into a positive position on price verses inflation at Cessna really starting it late last year.

This year we will realize more price than inflation.

But again, those are on units that were priced, one, two and maybe even longer years ago.

So I think it is fair to say that we're getting better pricing on order intake than on units delivered.

Super.

Thank you.

Jeffrey Sprague from Citigroup.

Thanks, good morning.

A little bit of clarification around the Bell margin outlook.

First I didn't totally understand, to Doug's comment, about the $7 million in H-1.

If that trues up, what do you think the loss is for the year?

I guess I will just stop there.

Yes, Jeff, that is a -- first of all that is a new item for the year above our prior expectation.

And that is an item that will impact the year since this is a little complicated and we spent one minute on program accounting.

The way that program accounting works in government contracting if you have a contract that is a breakeven contract which this was, and that contract then moves into a loss position, we estimate the entire cost, and again, don't think of this as the H-1 program.

This is the nine helicopter Lot 1 contract for H-1.

So it is one contract.

And the way that the accounting works is we take a forward view of what we call an EAC, an estimate at completion, of the entire cost that we expect to incur against -- this is a fixed-price contract -- so against the price the customer is going to pay.

And if it's in a profit position you constantly just adjust your forward booking margin on that program.

But if it's in a loss position you take the entire increase in cost that you expect for the balance of that contract and you book it immediately in the quarter in which you make the determination that your cost is going to be higher.

So this Lot 1 LRIP program will run for several more quarters into the first quarter or so of 2007.

So this incremental expense, it's about $13 million or $0.07 a share, is the higher cost we expect to spend over this next 12-month period of time all put into Q1 in order to make the program then go back to breakeven in each of the contract, not the program (multiple speakers) that lot.

Go back to breakeven for the subsequent quarters.

And what is happening here is I think Lewis went through it in a lot of detail, I won't repeat what he said around some of the challenges on assembling the first units.

But in order to meet customer requirements, we have put somewhere north of 100 incremental engineers on the floor in this facility in order to be able to problem solve more rapidly, in order to get back on schedule and meet our customers' requirements.

So what we've done in the first quarter is we've estimated how many of those engineers are going to be there, for how many months each through the balance of this contract and then booked all of that expense in Q1.

And again, it is to our best estimate.

So if we are correct, then that contract would go to breakeven for the remaining life of that contract.

That is not to say we couldn't have a positive or a negative adjustment.

We try to book it to the middle of the road of what all of our reasonable expectations are.

I hope that helps.

That does help.

And then just thinking about the complexion of the rest of the margin dynamic then in Bell, I mean we all understand it's ramping up and there is cost associated with that.

Can you give us though just some feeling -- I guess we've got H-1 revenues that obviously now will carry no margin, and weren't expected to, but won't.

And I think ARH revenues, development revenues at little or no margin, so that is blending against you.

But a sense of the actual true ramp cost, whether it is higher depreciation on higher CapEx or more bodies or just how we think about the change in the full year margins for '06 versus '05?

I think the revised guidance reflects the combination of the specifics around the H-1.

And then some additional cost, and let's just called it pennies, but several pennies, of additional costs that is related to overhead infrastructure and the like.

We're in a really unique period at Bell right now.

We just are moving into full rate production and still in ramp up on V-22.

We're in the first lot of LRIP on H-1.

We just launched into SDD, systems design and development, for the ARH, so we have a period of the next call it 8 quarters or so where we're going to be doing an unprecedented amount of new program launch at Bell.

We've taken a hard look at that.

We continue to and we've made a few adjustments, not radical adjustments but a few adjustments to our expectations based on what we think we need to do to keep our customers happy, frankly, around each of these programs.

And we think we've got it correctly into the guidance now.

We think we've got it correctly into what we booked in Q1.

But I don't want to make any mistake about it, we will do what it takes to satisfy our customer.

And if it takes us doing something more we will do some more.

But we think we have got it right.

And just two other quick Bell questions and then I will pass it on.

I guess these program decisions take different forms at times.

But it appears that Op Eval and DAB are right on top of each other.

Wouldn't you normally put the airplane through its paces and then make a decision?

Or is there some other dynamic here around the cost overrun regardless of whose fault it was or whatever but just because budgets are tight that a decision will be made before the helicopter is really put through the paces?

Well, as I tried to explain the program definition and content has changed a lot, number one.

Number two, the war fighter really needs these two ships because they have such an advantage of having 84% commonality.

So if you think about going to anyplace in the world to fight with a utility helicopter and what arguably is the most effective attack helicopter in the world, the Zulu of the H-1 model, this is a ship they badly need.

On the other hand, because of these changes we got further behind than we'd like to get.

And so we are now in the phase of kind of catching back up from a ramp standpoint.

And it would not be unusual to have a DAB to be able to confirm that we can continue to ramp at the rate we said and they could get the ships they need in the time they need them.

So that's what's going on.

On starting Op Eval, it basically is starting one month late due to no fault of anybody's including ours.

And it is happening kind of when it needs to happen.

So those are kind of two discrete events.

I wouldn't read too much into that one way or the other.

Okay, and then just last thing.

What is kind of the notional size of the non-backlog 417s and 429 orders at this point?

We have that number don't we?

Yes.

We'll get that.

Let me give you one more thing on margins just for a minute on Bell while we're doing that.

Think about this for a minute.

Doug just gave you I think he said 9 to 9.5 margins for year-end for Bell.

And if you take out that big high margin order we had to Pakistan last year, so just take that out for a minute so you can do a clean year-to-year.

And then think about the fact we are ramping V-22, although we're not slightly ahead of schedule on it, we are ramping H-1 and we're to starting development on ARH and we are putting pretty good dollars, I think we put about $5.3 million in R&D this quarter in additional R&D this quarter for commercial.

And still seeing profits that are almost inside the guidance range we said long-term 10 to 11.

I read that as pretty darned good actually because we have -- we're increasing our guidance for the year at Textron.

We have a very strong topline growth outlook with almost 16% topline this quarter for the Company.

And we've had the room, if you will, or we've had the luxury because of the strong performance of the rest of the Company to be able to invest in the long-term profitability of Bell.

And so I kind of see the margins a little bit differently.

I think with all that development and investment in the future going on and still running over 9% margins, that is pretty good business.

And we still feel very good about our long-term outlook for Bell margins once we -- when we get all these programs into a more steady-state production mode we're going to see some nice lift in the margin.

Thanks a lot.

Wait a minute, do have the 417?

I don't have it yet.

We're trying to get it.

If we get it we will just --

Thanks a lot.

Jack Kelly from Goldman Sachs.

Good morning.

Lewis, can you give us a little bit of a feel in terms of 111 new orders at Cessna I guess the last uptake for next year was 240 jets and 50 Mustangs.

Of that 111, how much falls next year and maybe in the out years?

Total orders right now for '07 is a little over 230, 235, somewhere in that range.

That includes a little under 50 for Mustangs.

Excuse me, I said that wrong. 330.

No I thought -- 330, yes.

330 -- 335, sorry.

335, so that number previously was 290?

I thought the previous number was 240 plus 50 -- that was a total of 290?

That is correct.

So now 320, 325 and I think it's about -- that's a little less than 50 Mustangs, call 45-ish.

So the bulk of the increase -- well all the increase then from 290 to 325 was in Citation jets rather than Mustangs?

That is correct.

A little more than all.

Yes, a little more than all.

You can't get anymore on Mustang.

I mean I'm looking for my sheet but I think the next Mustang you get the order is Q3 2009.

So we're kind of locked and loaded on that program.

Got it, okay.

And also, Ted, on the inflation versus price increases it was kind of a push for the quarter.

Clearly at Cessna it was maybe it was more negative then that in the sense that you indicated this stuff as being -- jets being delivered were priced a couple of years ago --

No, that is not correct.

Cessna was -- they are still very positive.

Is still very positive?

Yes, I mean we are still selling jets that were priced a few years ago, but in the quarter, Cessna's pricing versus inflation was a positive number.

Okay.

So then that number as we go out into subsequent quarters, we even get more positive.

That is correct.

Okay.

And then just finally on Bell, just coming back to the H-1 for a minute, for the next 12 months or so, assuming the assumptions are correct it's going to be a breakeven contract.

Could you then on Lot 2 or Lot 3, when would that pick up and how many helicopters are associated?

I'm trying to get a sense of when the margins in that program begin and what the magnitude might be?

Well, Lot 2 starts while Lot 1 is still going on, so later in this year.

Lot 2 is very small; it's only seven helicopters, and right now Lot 2 is slightly profitable; not a big number, but slightly profitable.

And then we are still in negotiations.

We have not signed.

We are looking at a longer-term contract starting with the third lot, but that is still under negotiation.

We would anticipate that that will be profitable, at a nice profit rate, a normal profit rate.

Just to be clear on one thing, the Lot 2's don't begin shipping until next year, so they don't affect our financials.

Have started production.

And then Lot 3 wouldn't be delivered next year; that would be the following year?

Lot 3 begins in '08.

When you finely get ramped up, I think the revenues get up to about what, 300 million?

350, yes.

Okay.

And yet you're going to have probably, if all things being equal at that point in 2010, you'd have high single digits margins.

So let's say it's, I don't know, 9 times 350 or whatever number you want to use.

And the full ramp doesn't occur until like 2013.

By 2010, it's about 300.

Yes, correct.

So this is a very good strong program for us.

And like any other new helicopter program, it begins to bring in much higher percentage profit dollars and larger quantities of profits as it gets later in the period.

So that is why this program is so nice for us for five years after 2010.

Now we are in the early stages.

And we are in the early stages with so many programs that, as Lewis' comment earlier was right on, we're still doing pretty well at Bell for having as much launch as we have going on.

Good.

So the 2010 number somewhere around 300 million revs and 9% margin.

Well, I said high single, it's 8 or 9.

I don't recall, but it is not 10.

Okay, good deal.

Thank you.

David Bleustein from UBS.

Good morning.

Just a quick follow-up on the Cessna pricing.

What was it up gross in the quarter?

What do you expect it to be up gross for the year?

And then in the backlog that you took in the quarter, how much stronger is pricing?

Oh, I'm just going to guess.

I can't really give you a specific but I would say on a year-over-year basis, we're probably getting somewhere between 3% and 4% price.

And assuming that the deliveries were -- you got to figure out hold how old they were.

Assuming the deliveries were from prices one year plus ago, it could be a number north of 4.

But I don't know that specifically, David, I'm guessing.

But if you're booking jets now for delivery in 2007 and 2008 are you looking for 5% to 10% price increases versus today's levels one and two years out?

Versus today's deliveries?

Yes.

Okay, traffic.

And then in the industrial businesses which of your businesses had price versus inflation which was negative?

Where are not you able to keep up with inflation?

Let's see.

E-Z-GO pretty much broke even.

In fluid and power we were a little negative, that has to do with some specific orders though and I think that is more of a transient affect.

Greenlee was a touch positive, Jacobsen was a touch positive and Kautex, as you would normally expect, was the most negative.

Kautex had inflation and had some net negative price.

That's all I needed.

Ted, thanks a bunch.

Operator, before we go to the next call I just want to jump in with the backlog information on the 429 and the 417.

We've got about 200 units in backlog for the 429 and that comes out to about $900 million.

And we have 117 units as we talked about on the call in backlog and that works out to about $260 million in backlog.

But of course that is not in backlog but (multiple speakers) virtual backlog, yes.

And remember Citation shares isn't in backlog.

You know, let's talk about backlog one more minute because I think it is worth noting how strong the backlog is because it gives you visibility into the next two or three years.

If you just take the Bell and Cessna backlog and if you included Citation shares, which you really can't include, but they will eventually sell through.

So if you include the Citation shares orders, we have more backlog, we have as much backlog if not slightly more in just those two units than the entire revenues projected for the Company in '06.

That is about as strong as I can remember we've ever been.

So if you think about the strength of our going forward numbers and the visibility we have so we can plan for it and increase production accordingly, etc., it is pretty good.

Cai Von Rumohr of Cowen & Co.

Yes.

Thanks an awful lot.

Not to beat a dead horse but each one -- two questions, if it makes sense to reman -- to go new on the utilities why are you still considering at all doing reman on the attack?

And secondly does the customer have any priced options for Lots 3, 4 and 5 to which he could hold you and therefore cause weaker profitability than you are looking for?

Well, okay, let's deal with both those one at a time.

More than likely we will end up going new on the attack.

We just haven't made that decision get.

And we haven't built that many units.

We've delivered the five Op Eval aircraft.

We'll deliver I believe it four this year on LRIP.

And so we haven't really built that many aircraft.

So we haven't really taken that decision get.

We haven't even, on LRIP we haven't even completed our first attack helicopter get.

So it is a bit early to make that decision.

But we aren't behind the power curve timewise.

And if I were to bet it is better than 50% probability that we will.

And of course that will just make our profits to where we look even better.

What was your other question again?

On the out year contracts.

We have some indicative pricing that we've given the customer and we're still in the process of negotiating.

But right now we are fairly optimistic about where we're going to end up from a cost standpoint.

The challenge that we have on the H-1 frankly is we have a steeper than normal learning curve driven by the fact that all these airframes are coming in kind of unique and causing a lot of effort.

So we were way behind the power curve on hours on Unit 1, had a dramatic improvement in Unit 2.

We're having a dramatic improvement in Unit 3.

But it is a steeper than normal because of the uniqueness of this reman process.

Steeper than normal learning curve which we need to get a few more units under our belt if we can keep seeing the performance go up unit by unit like we've been seeing it then we should be in pretty good shape to hit our margin objectives.

Right.

But just to make clear, Lots 3 and 4, the customer does not have any commitments to which he can hold you on price?

You are negotiating that?

Yes, we'd be negotiating it but we have an expected price that we think we can get and we've communicated that to the customer.

And also by the way in today's world the customer doesn't really want you to quote a job and lose money.

So they hold us just as tight, our feet to the fire saying, hey prove to us you can make ex percent because they don't want us quoting a loss contract.

They see through those numbers.

Let's make no mistake they would not be happy if the price changed.

No.

But we plan to do pretty well with the H-1 program price versus cost.

Okay --

-- helicopter extreme, we've been producing variations of it for over twenty years.

Quick switch to the industrial sector.

Profitability looked pretty good there.

Could you give us some color on which businesses are doing better, which businesses are doing worse?

And do we have any opportunity to outperform there over the remainder of the year?

Well, I think it was a great quarter for our industrial businesses.

And I've got to give everyone of them credit for more than -- and I say great in a couple of respects.

Absolute performance is still obviously not the level that we would like to see out of these businesses.

But I think it was a tremendous quarter in their ability to project their performance and to do what they said they were going to do.

And we've had challenges with that as you know in the past.

Every one of the businesses was better year-over-year except Kautex and a lot of the Kautex year-over-year performance was driven some unique items, some onetime items that were a positive for Kautex in the first quarter of last year.

And then a little bit of a gap in Kautex between resin cost increases and the ability to pass resin costs through to the customer.

And that is still in process.

We feel pretty good about getting some price concessions out of the customer base for the impact of resin cost.

But those haven't fully manifested themselves yet in Q1.

We hope to get most of those resolved some time during Q2 and be into the revenue stream fully in the third quarter of the year.

So it was a good strong performance against all the businesses.

We had a lot of things that were just oneoff oddballs in the second half and particularly in the fourth quarter.

Those didn't continue and some of our more problemed operations like the Windsor facility at Kautex, performance has improved significantly.

Thank you.

Tony Boase from A. G. Edwards.

Good morning.

Just a question on Citation.

You gave your second-quarter expectation for deliveries of 70 to 75.

How should we think about deliveries over the course of the second half of '06?

We don't know yet.

It depends on where we come out on the second quarter.

But we will give you third quarter at the end of the second quarter.

Okay, but you know if we --.

We said we're going to do around 300 for the year.

We've got to average about 80 per quarter, correct?

Well, something of that magnitude in the third and fourth quarter to hit 300?

We're obviously going to be stepping up each quarter of small amount.

Okay.

On the $13 million loss that you booked.

Do have an opportunity to recover that or is that completely on your shoulders?

No, that is a firm fixed-price contract and that is an expense that we undertook to satisfy our customer.

The only way you could recover it technically is if you didn't need all the horses for the next three quarters.

If we guess -- (multiple speakers)

Let's be clearer on something.

We think we're going to spend every penny of it because that's a pretty formal accounting study that you undertake.

And it is a no kidding estimate.

You have to do your very, very best to estimate so that goes to break even --

By person by day.

Yes.

But if you saw extraordinary improvement and you didn't need all the people for all the year since that is what we -- well some number of people for all the year which we assume we'd be in there then technically you could pick up.

On the other hand if it gets a little worse we could spend a little worse.

It is not our customers' issue; it's our issue.

We're going to get this program back on track and whatever it takes to do we're going to do it.

And I would wouldn't expect that to affect Textron's numbers.

Tony, I'd make one common going back to the quarterly question on Citation.

We did say earlier that you would not expect to see this year a big bump up in deliveries in the fourth quarter that we had a more level load through the year than we've had historically in the past.

So as you think about the third and the fourth quarter, they are not going to be radically different one and the other.

But we're not going to declare exactly where one comes out or the other at this point until we get the second quarter behind us.

That is fair enough.

One last question on Bell.

Again, you've got a number of programs ramping up, the V-22, H-1 and the Armed Recon and in your commercial business too.

Can you quantify the kind of CapEx you're going to -- and R&D and so fourth that you are going to have to spend over the next two to three years so that you can meet the customer requirements?

I think we were pretty clear on that when we gave out the CapEx numbers early in the year.

The Bell numbers are up dramatically.

But heavily this year and maybe rolling over into '07 we went -- just give you a little historical perspective -- the first few years I was here up through the early part of this decade, Bell was spending 30, $40 million a year on CapEx.

Last year we spent over $100 million, this year we're going to spend probably at or north of $200 million.

And next year that will probably moderate a little bit.

And then it should come back down after that.

Okay, thanks very much for your time.

That is all consistent with the guidance that we've given.

Bell could go a little over their CapEx number this year.

We're having conversations about that and about when does it make sense to outsource versus capitalizing internally, etc.

But we are in investing for organic growth in that business unquestionably.

Great.

Thanks a lot.

Steve Tusa from JPMorgan.

Good morning.

Just a question on Cessna.

How do we think about the annual margin there?

You said that it was -- the weakness at Bell was going to be offset by Cessna and industrial.

I know you have a second-quarter number.

Can you just update us on the annual number of the margin at Cessna?

We're still looking at about a 14% number at Cessna for the year.

Okay.

And then the other question is you delivered you said 30 commercial units at Bell for the quarter.

But you're looking for a number that is pretty high here I think around the 180, 190 mark I think initially you guys said for this year?

Yes, that is right. (multiple speakers) 33 in the first quarter and we're targeting -- it moves around a little bit you know.

In fact we've never had such a strong order backlog at Bell so we are kind of trying to understand what all that means.

But we are somewhere between let's say we'd be 180, maybe a little north of that.

We've taken such strong order intake that we feel good about this year and next.

So if your sales are going to be down in the second quarter at Bell from last year and with everything else kind of ramping in the second half you should see a -- its relatively more back end loaded from a revenue perspective?

Yes, Steve, just to clarify.

The revenues being done in the second quarter are primarily driven by V-22 shipments while we have I think it's four total shipments in the second quarter, only one of those is on an as delivered basis and the all the other three are on a cost to cost basis.

So I think we're losing like $68 million.

We had three revenue V-22s in the first quarter --

It's an accounting timing --

Yes, it's just accounting timing.

And then with respect to commercial, when you think about it, overall at Bell we did 24% of our revenue forecast.

So the mix of revenues we're not really worried about commercial deliveries with respect to that.

We're even less worried about profits because as you know the margins on commercial OE are less than segment average.

So the amount of risk that is in the Bell plan relative to our ability to deliver 180 to 190 commercial helicopters is not at the top of our radar screen.

Okay.

And then lastly on industrial, any update to the March target there for they year?

Yes, we're still looking at about a 6% margin at industrial, a little bit less than that.

Okay, great.

Thanks.

Shannon O'Callaghan from Lehman Brothers.

Good morning, guys.

So the second quarter, you're talking about the timing being down on the Bell revenues.

What about the full-year outlook for Bell revenues?

I'm not sure if you -- I know you updated the margin there but is there any change to the full-year Bell revenue expectation?

They are not appreciably different.

We're looking at about $3.2 billion on the year total Bell revenue.

Okay.

And then just how about foreign military sales?

I mean you had a couple in the quarter I think originally there were none in the plan but are you expecting any more?

No, and we talked about this at the end of the first quarter we got that question.

Actually Tony asked if there was any foreign military in the mix and we said no there is none in there but that is likely going to change because you can't really predict those onesies and twosies.

So we have no more in our outlook but that is not to say a onesie or a twosie won't come in there.

But there is no Pakistani 412 mega order that is going to drive results one way or another.

Okay.

And then just lastly just any update on the CSRX or the LUH?

Yes, CSRX we are still in the process of bidding the best and final is due I believe it is next month, our best and final offer which obviously you know it is Lockheed led but Bell and AugustaWestland on the U.S. 101 and we're in the hunt.

And probably we'd know something about that in Q3.

So, stay tuned.

And the LUH.

LUH is pretty much the same situation.

We have a darn good offering so do some others. (multiple speakers) It is almost right on top.

It all depends on how fast a government customer wants to finalize those two.

It's kind of interesting, we are still in the hunt on both.

We'll probably know for both of them in the third quarter though?

That is what I would guess really.

You know it can move a little bit.

It certainly isn't going to move because of us.

It will move because they just always tend to move a little bit to the right.

Certainly we'll know by year end and if you made us say when you think it will happen, I think it will be Q3 for both.

Okay, thanks a lot.

Brian Langenberg from Foresight.

Hey, guys.

Thanks, great quarter.

On the industrial side can you get a little bit more --

Hey, Brian, can you speak up a little bit?

I don't think everybody --

Why don't I go to a headset.

Is that better?

Much.

How about now?

That is great.

Sorry about that.

Let's just go through industrial and maybe take the (indiscernible), just kind of give us the year-over-year and talk about them a little bit?

And if you wouldn't mind actually going a little bit into Golf and Turf and spring those two out and talking about those.

My father just came back from Florida and tells me they have stretch golf carts down there.

I wanted to see if you are leveraging that opportunity?

Seriously though, I do want to go through the pieces of industrial.

What do you want to know?

Kautex, just year-on-year change in revenue, profits?

We know there are some bits and takes that you've really split out in the past in terms of wins or what have you.

Just if you give us the year-on-year dynamics there, that is probably the biggest one.

All right, Brian.

Let me kind of go through it.

This is year-over-year of course we had some great sequential improvement but that is not the case in every circumstance year-over-year.

But starting with Greenlee, revenues were up and a small amount and profits were up just slightly.

Fluid and power --

Mid single digit, maybe?

I'm sorry?

On sales, maybe up mid single digits?

Yes.

All right.

Thanks.

Fluid and power is essentially flat but significantly improved on profits from a year ago.

Jacobsen was down a little bit primarily due to FX on sales but they improved profitability. (multiple speakers) And we sold (inaudible) I'm sorry, yes.

We sold our consumer lawn care business and that is about down about $17 million of revenue year-over-year.

For the quarter?

For the quarter, yes.

Jacobsen revenues would have been positive but for FX and for the sale of (indiscernible).

Got it, thanks.

And then E-Z-GO was up both topline and op-wise in margins.

And then Kautex was down slightly on the revenue line.

That was not a volume issue again that was primarily foreign exchange and also a small divestiture --

(multiple speakers) -- Micromatic.

About a $12 million divestiture impact there also.

Okay.

And op and margins were down there and that reflects the lag and recovery from commodity costs through to our prices.

And the onetime.

We had some onetime gains last year in the first quarter on some customer tooling that were fairly significant that just didn't repeat.

Okay, thank you very much.

I appreciated it.

Ron Epstein from Merrill Lynch.

Good morning.

I'm concerned about something.

Maybe we can talk about it a bit.

It seems like the last time we spoke everything was good at Bell.

There are some issues now.

What is in place that to flat these red programs sooner?

I mean what has changed in terms of -- I guess the infrastructure or the reporting structure so you guys know quicker when there is a red flag on a program?

Well I think we know very quickly.

We are all over these programs and review them with the Bell guys every single month.

They are all over them.

But we're in a lot of complicated ramp ups right now.

And when we need to make changes in order to meet customer requirements we're going to have to do that.

But there is nothing much we could have done any sooner with this program.

We had to get into the first build.

We had to get into the first unit to really understand what the reman frames were going to do to us from a labor requirement standpoint on the assembly.

We learned that as soon as we started putting it together and we took action.

What of all the military programs you guys have, what percentage of them are a firm fixed price?

Pieces of different contracts.

I don't know if I can give you a percentage.

Well, when I say the ones that are bigger than a breadbox.

Let's do V-22, okay?

Yes.

You do that lot by lot and just wait a minute I will get the exec to deal here for you.

Lot 10 has just been fully executed for 11 aircraft.

You've got to really feel good about Bell because let's do V-22 for a minute.

Go back a year and a half on this call when everyone was worried about V-22 and we were behind schedule.

There was so much more complicated than the H-1, it is not even comparable.

I mean okay H-1 is complicated and ARH is even less complicated.

But Bell is really good at doing what they do best and that is launching new helicopters and taking them into the customer's hands as quickly as possible.

The V-22 is now slightly ahead of schedule and we are also slightly ahead of schedule on our long-range cost commitments.

Three years ago we met with a government customer and they said in 2010 we expect your cost to be X. And in 2010 our costs are better than X. And that is a downward sloping curve which they needed to meet their unit requirements which means they'd like to buy more units at less dollars.

And so when we quoted Lot 10, we quoted at the profit dollars we expected to make.

And we beat their cost estimates of what they would be willing to buy that quantity for.

So that is a very good thing.

So we don't really have to my knowledge any inherent risk in any fixed-price contracts that I'm aware of.

By the way, you know you do them lot by lot.

So that allows the government and yourself to take a look at what has changed.

And sometimes program content changes, see?

And when that changes then the expectation of cost changes up or down.

So I don't think we're carrying any contract concerns that I'm aware of on any fixed-price contracts.

Okay.

And then I guess changing gears here a little bit to the Cessna.

I think on the last call or maybe it was at the investor meeting we talked about new product development at Cessna.

Can you kind of give us an update on what is going on there?

I know you can't give specifics for competitive reasons.

But kind of broadly speaking what is going on at Cessna and what are you guys thinking in terms of future product development?

Well we launched or not launched we had first flight on the recent Encore+ and of course the Mustang is doing very well.

You know about all those.

We have one more variant of one of our models that we're going to do pretty quickly which makes sense to us which modernizes another piece of our fleet.

And then as I said before I know I've personally reviewed, and I think Ted has too, I've seen the models and the model remodelization plan, if you will, or remodernization plan, if you will, for the entire fleet.

And as we watch our competitors and also understand what our customers need the most then we make either changes to existing aircraft or decide to launch all new.

And we've got some of both in our next five-year product development plans.

We actually have a party good plan out with visibility for a decade that includes a number of aircraft that we are fairly firmly committed to.

And some aircraft that we are still doing a lot of research and development on to determine whether we are committed to them.

We are looking at everything from smaller to bigger and if we can generate intrinsic value for our shareholders, we're going to do them.

And Cessna has got a heck of a track record of bringing the right products to market that win in the marketplace.

So I think you can expect to see continued product development at Cessna and continued new models introduced for the next ten years.

But we're not going to preannounce too many of them.

No, sure you can't.

And I guess one more question for Lewis.

We haven't talked about that yet on this call.

On the M&A front, at the investor you brought out how there is a shift now in strategy and you guys may be open to doing more M&A.

Can you just kind of broadly talk about what you are seeing there, what you are thinking in your strategy?

Well, I try to say the same thing I guess maybe using different words each quarter for probably the last couple of years.

First of all we obviously as a multiindustry company, we always have been looking for opportunities that we could possibly bring into the company ideally that would be very similar to what we already own.

That would help us achieve our goal which is the driving factor at Textron and that is doubling intrinsic value every five years.

That being said, with the money out there trying to buy up precious few assets we haven't seen any valuation of any product of any assets that we've looked at that might be interesting to us that are value accretive.

So we've kind of stayed on the sidelines.

And I don't have an expectation of anything large anytime soon.

And the great thing about it is we are five years down the road on transformation and maybe 20 yards down, a 100 yard football field concerning the cost we intend to take out of this company and the effectiveness we intend to improve this company to.

So we've got a great set of things to work on that drives strong organic growth and strong productivity improvement without acquiring anything.

If the right thing comes along we of course look at it, do it.

But I wouldn't expect anything soon.

Great, thank you very much.

Operator, I think that we're a bit over time here.

So we will conclude the call and thank everybody for joining us today.

Thank you everyone.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

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

You may now disconnect.