達信公司 (TXT) 2006 Q3 法說會逐字稿

Welcome to the Textron third quarter earnings call. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded.

I would now like to turn the call over to our host, Vice President of Investor Relations, Mr. Doug Wilburne, please go ahead, sir.

Good morning, everyone.

And thanks for joining us our call this morning.

In just a moment I will be turning the call over to Lewis Campbell, Textron's Chief Executive Officer, and Ted French, Textron's Chief Financial Officer.

Our discussion today will include remarks about future estimates and expectations.

These 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 third quarter, revenues were $2.8 billion, up 18% on an absolute and organic basis.

Earnings per share from continuing operations for the third quarter were $1.36, compared to $1.07 a year ago, and our guidance of $1.15 to $1.25.

Year to date manufacturing cash flow was $636 million, resulting in free cash flow of 410 million.

Before we move to Lewis, I have two quick clarifications to make.

First, on Monday, we announced that we received 70 orders for our new CJ4 business jet as a result of premarketing efforts we made in advance of the official debut at MBAA this week. 25 of these orders were included in our third quarter backlog as these contracts were completed during September.

The remaining 45 orders will be completed during October and therefore will go into backlog during the fourth quarter.

Second, with respect to our $1.36 earnings per share, I want to point out that $0.04 related to an asset sale of TFC that we had targeted for the fourth quarter but completed in the third quarter.

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

Thank you, Doug.

And good morning, everyone.

We had another very good quarter.

Once again, we exceeded our earnings target in the quarter and we generated good cash flow.

Very strong performance at Cessna, and Textron financial allowed us to overcome lower margin at Bell, as we continue to incur a launch and development costs preparing Bell for future growth.

And we expect to continue to make these further investments at Bell next quarter and through 2007.

But again, stronger performance in the rest of our businesses will keep us on track with targeted financial objectives.

Ted will comment more specifically on this later, but let me add a little more to what is happening at Bell.

I think you will find this interesting.

First of all the near term lower Bell margins reflect the growth costs we're incurring as well as a significant amount of zero profit development and initial production contracts in the mix.

If you just take out the impact of the H1 and ARH development programs, just pull those two out for a minute, Bell margins in the quarter would have been 10.8%.

And because government development programs for the most part are customer funded, we are generating returns well above our cost of capital including these programs.

Bottom line?

We remain committed to making these investments at Bell because they will support growth at Textron through the end of the decade and for years beyond.

And these are very valuable long-term programs well worth the early investment.

Looking forward, as we move past this heavy development and early launch stage, we expect Bell margins will expand again beginning in '08, reaching double digits in '09.

Okay, returning to the quarter, demand was exceptional across our aerospace, defense, and finance businesses, with solid revenue growth in the industrial segment.

Commodity inflation moderated during the quarter and price increases approximately offset total inflation which actually including labor.

Overall, the world economy remains robust, as it appears that lower commodity prices, particularly oil, are offsetting the impact of slightly higher interest rates.

Let me emphasize that the benefits of our transformation strategy, including our focus on the customer through product development investments are directly contributing to the growth that we're seeing today, and preparing for in the future.

The results of this focus on the customer is most visible in our current commercial aircraft businesses.

For example, even with limited availability of near term delivery slots, order activity assessment continues to be extremely strong, and is showing no signs of abatement any time soon.

During the quarter, we received 100 new business jet orders, about a third of those are for next year's delivery, which fills 100% of our 2000 delivery plan of 370 jets.

So our sales force is now fully engaged in selling jets for delivery in '08, '09 and 2010.

On our last call, we said we expected a significant increase in deliveries in 2008.

And it is safe to say that our view for '08 is even stronger now than last quarter, given the sustained heavy order environment.

The combination of strong global economy and our new product strategy are fueling this demand for sure.

As Doug mentioned our recent new introduction is a CJ4, this aircraft will occupy a new niche in our company's product range for a larger longer range version of the popular CJ line and it will have an introductory price of about $8 million.

As of last night, we now have an additional 28 customer orders or indications of interest for the CJ4 and that actually brings our total CJ4 book to 98, almost 100.

Now here is the kicker.

Because the CJ4 doesn't begin shipping until 2010, the orders we're taking are filling our 2010, 2011, 2012 order book.

So order demand is still very strong.

We're sold out in 2007.

We've got an excellent start in 2008.

And with the CJ4 and Mustang, we're already working on 2009 and beyond.

Now, speaking of the Mustang, let me give you a quick update on this industry-leading innovation.

Something of which we're extremely proud.

We introduced the Mustang at the September 2002 MBAA convention.

Now, keep in mind, we weren't the first to announce the so-called very light jet.

There were several others that had already done so.

One as early as the late '90s.

Nevertheless, this past September 8, the Mustang received full type certification from the FAA and became the industry's first fully certified jet in this new class of products.

New product introductions are critical to being competitive in the business jet market and Cessna has a superior competency in this key area, which differentiates us from our competitors.

Our superior capability was demonstrated with yet another new introduction at this year' MBAA, our new XLS plus.

This new model adds the latest capabilities and technologies to the XLS, currently the worlds best selling business jet.

Prices about 11.6 million, the XLS plus will continue the XL tradition of being the most affordable standup cabin jet.

So far, we received 42 orders or indications of interest for this aircraft.

So I mentioned strong order activity.

Well, including MBAA activity for the CJ4, the XLS plus and orders for other models, we already have a total of 142 orders for the fourth quarter, an excellent start.

To conclude my remarks about Cessna, demand is certainly strong, performance is even stronger, we're entering a sustained era of product deliveries, revenues, and record profits.

An unprecedented quarter.

And unprecedented order visibility.

Okay, moving to Bell.

Commercial demand is also very strong, as helicopter orders are up about 30% this year so far.

Frankly, we're not keeping up with this accelerated pace of demand in terms of our ability to ramp up commercial production.

We have had to bring a lot of new employees on line and they take time to become fully trained.

Therefore, we've moderated our commercial delivery outlook for the remainder of this year and next, we're now expecting to deliver about 160 commercial units this year.

By the way, that's up about 30% from last year, and we're looking to increase deliveries to about 180 units in '07.

On the military side, strong volume increases are being driven by growth in helicopter spheres, and support.

And the ramp-up of our armored security vehicle and its variants.

We've reached our regional target run rate and expect to produce -- deliver about 460 ASVs this year and we are currently projecting to deliver about the same number next year.

However, the Army may fund additional units in 2007.

And there may be a much larger opportunity over the next four to five years if the DOD funds an interim armored vehicle to fill the gap until they're able to launch their joint light tactical vehicle strategy probably at the end of the decade.

Furthermore, we have begun to market our reconnaissance surveillance target acquisition, ASV, which we debuted at this month's Army show.

Finally, long term, we expect there will be significant after market revenues as well as international demand for the ASV and its variants.

On the portfolio front, during the quarter, we acquired innovative survivability technologies or IST.

They are actually a developer of detection and battlefield protection solutions for military and homeland security applications.

Now, we acquired IST because its capabilities are very complementary to our precision engagement and military vehicle station at Textron Systems.

For example, IST has just introduced a product which is directly related to battlefield vehicle survivability.

It has a to long name, it is called the Tactical Rocket propelled grenade Air bag Protection System, or TRAPS.

Many of you saw this system on display at AUSA.

And just like the ASV, we've demonstrated that TRAPS as a product can save soldier's lives and at a very reasonable acquisition cost, somewhere around 30,000 per vehicle.

So while we're just beginning to market this new product, we believe it has significant potential.

The IST acquisition, while small, is a great example of our portfolio's transformation strategy in action.

Okay, turning to CFC.

Growth was very apparent there, as well.

So far this year, we've grown the portfolio by $1.4 billion, up 20% from year end.

The upshot is that this growth is leveraging our organization and investment, and contributing to an improvement in ROIC at TFC this year of at least 150 basis points.

At industrial, growth is more modest, but still solid, and we're steadily improving margins and returns there as well.

It looks like we turned the corner in industrial and I expect a continued steady climb in margins going forward.

Okay, in conclusion, we continue to deliver near-term results in excess of targets, and expectations.

At the same time, we're maintaining our commitment to our transformation strategy, which includes investing in our people, our products, our customers, and our future.

Against this backdrop, we have the right products, we're in the right markets, we have the right people, to sustain above average growth rates for at least the rest of the decade.

Coupling the benefits of our transformation strategy with the power of our networked multiindustry model positions us to generate significant growth in earnings, cash flow, and shareholder value, well into the future.

Ted?

Thank you, Lewis.

Good morning, everyone.

Thanks for being here with us.

I want to start with our customary analysis of results.

EPS for the continuing ops was $1.36.

That's an increase of $0.29 a share versus last year.

Volume and mix provided $0.23.

As Lewis mentioned pricing and inflation for the quarter essentially washed, with pricing worth $0.36 a share, or 2.6% increase, and inflation was a negative $0.35, reflecting an inflation rate of about 3.1%.

The reduction of shares from our buyback program contributed $0..07.

Performance was a positive $0.06 primarily driven by cost reductions including Textron's six sigma benefits.

Textron financial was up $0.05.

And there was a positive $0.02 in miscellaneous items including lower corporate expenses.

Increased R&D, reduced earnings by $0.08.

Higher pension expense cost $0.05.

And taxes cost $0.02.

Let me recap those again for you.

I will start with the positive items.

Pricing, $0.36.

Volume and mix, $0.23.

A reduction in share count, $0.07.

Cost performance, $0.06.

Textron financial, $0.05.

And all other, $0.02.

And the negative items once again were inflation, $0.35, R&D, $0.08, pension, $0.05, and taxes, $0.02.

Now, let's move on to a review of our business segments and I will start with Cessna.

Cessna revenues increased by 18%, or $160 million.

Reflecting higher volume, of Citation business jets and favorable pricing.

Segment profit increased 45 million due to higher pricing, higher volumes, and lower warranty costs, and these were partially offset by inflation and 12 million in higher R&D costs.

Moving to backlog, with the 100 orders, backlog reached $7.2 billion at the end of the third quarter, that's up from 6.3 billion at the end of '05, and is another all-time record.

In addition, we have over $500 million worth of outstanding orders for Citation shares.

For the fourth quarter, we expect Cessna revenues to be about 1.2 billion, with margins coming in between 15.5 and 16%, reflecting the delivery of about 85 jets.

Looking to '07, we still anticipate revenue growth of about 15% at Cessna, but with even higher full-year margins coming in at about that same 15.5 to 16% on a full-year basis in 2007.

Moving to Bell, segment revenue increased 181 million during the quarter.

The U.S. government revenues were up 145 million, due to higher volume of ASVs and V22s and higher development revenue for the ARH program.

On the commercial side, revenues increased $36 million as a result of higher volumes and pricing.

Segment profit was lower, by $22 million, reflecting a $14 million increase in the U.S. government business, offset by a $36 million decrease in commercial profits.

The U.S. government profits increased due to favorable cost performance, and higher ASV volume.

Partially offset by inflation.

The favorable cost performance reflected $7 million in lower costs related to Hurricane Katrina from last year, and 6 million in improved program performance.

The 6 million of improved program performance was achieved in spite of negative year-over-year performance of 6 million on the H1 program, and 6 million in the ARH program.

On the commercial side, profits were down 36 million in the quarter, primarily due to a $13 million one-time benefit last year, related to a collaborative research and development contract, and the remainder of the decrease was caused by higher overhead costs, and higher research and development, while inflation essentially offset pricing.

Bell helicopters total backlog was 3.3 billion at the end of the quarter, and that compares to 2.8 billion at the end of '05.

Now, looking to the fourth quarter, we expect Bell segment revenues will be between 925 and 975 million.

And operating profits will be between 70 and 75 million.

And then looking at 2007, we're still estimating a 3% growth in revenues, we're now expecting '07 margin to be about flat with the expected '06 level of around 8%.

To be clear, we still have the same positive outlook for Textron earnings growth next year, because the lighter expected contribution from Bell will be fully made up by stronger performance at Cessna.

At the industrial segment, revenues increased $34 million, due to higher volume, favorable foreign exchange, and higher pricing.

Partially offset by the divestiture of some noncore product lines.

Industrial segment profit increased 7 million, as a result of improved cost performance and higher pricing, partially offset by inflation.

For the fourth quarter, industrial segment revenues are expected to be about $750 million, with margins somewhere between 4 and 5%.

For '07, we still expect about 3% overall growth in revenues, with margins improving to about 6%.

Lastly, finance segment revenues increased $57 million, due to higher average finance receivables, and a higher interest rate environment.

Finance segment profit increased 10 million, due to an increase in net interest margin, largely attributable to the growth in core receivables and that was partially offset by an increase in the provision for loan losses.

On the credit performance front, portfolio quality continues to be just excellent.

Nonperforming assets were 1.3 -- excuse me, 1.43% of the portfolio.

And 60-day plus delinquencies were 0.76%.

Finance revenues for the fourth quarter are expected to be about 210 million, with segment profit of about 45 million.

Next year, revenues are anticipated to grow by about 8%, with segment profit of about 215 million.

Now, let's shift back to our '06 outlook for Textron.

We remain on track to deliver full-year manufacturing cash flow from continuing ops of about $1 billion and free cash flow in the range of 550 to 600 million.

We expect earnings per share from continuing ops will be about -- between $1.35 and $1.45 in the fourth quarter, and that results in a full-year EPS range of 5.25 to 5.35.

As you think about the fourth quarter, remember that our third quarter tax rate benefited from a one-time change in functional currency at one of our businesses in Canada which we talked about on our last conference call.

Therefore, we expect our tax rate will be about 31% in the fourth quarter, and then the '07 rate will be somewhere in the range of 31 to 32%, as we anticipate fewer one-time benefits.

So, in conclusion, we're on track for another very strong year.

With solid cash flow, expected EPS growth of about 40%, and a 300 basis point improvement in our return on invested capital, all while making significant investments in future growth.

Now, that concludes our prepared remarks so operator, we will turn it back to you to start the Q&A session.

Thank you, sir. [OPERATOR INSTRUCTIONS] We have a question from the lane of David Bleustein.

Please go ahead.

Good morning.

Good morning.

Two questions.

The first is at TFC, can you walk us through what the actual loss provision was at TFC, and what it was last year?

And then give us some sense for what the write-offs were in the quarter and the size of the receivable portfolio?

Okay, let me start with the portfolio.

Because we did pass a milestone in this quarter.

Our total managed receivables, which includes things that are in securitizations, for the first time ever passed the $10 billion mark, it was 10.1, of which, on book receivables will be about 8.1 billion.

Provision for losses during the quarter was $10 million versus 4 million last year, last year was obviously very, very low. 10 million would be more normal.

On a nine-month basis, loss provisions are running 18 million this year, versus 17 last year.

And then you said, what, charge-offs?

The actual charge-offs.

Yes, actual charge-offs were 9 this quarter versus 7 last year.

And 21 million year to date versus 20 last year.

Okay.

And then shifting gears, in a related question, the business jet orders that you booked in the quarter, and have mentioned for the fourth quarter, what is the geographic revenue breakdown of those?

Are they primarily U.S. or are you seeing more out of Asia?

No, if you look at -- I'm not sure I can do that.

Yes, I can here, actually.

On orders, year to date, we're about 55% North America, and 45% international.

And that's a little tough to get down precisely right, because we don't always know where the net jet units end up going but plus or minus a percent, about 55/45, and Europe is certainly by far the largest piece of that but we're seeing decent order intake from Latin America, Middle East, and Africa, and then Asia following that.

Hey, David, this is Lewis.

It does move around a bit though because when we ended Q3, before the big order run-up, at MBAA in just the fourth, when we end Q3, it was interesting, we were 40% U.S., 41% international, and then we took in all of these orders, which you can see primarily must have been U.S., because that sagged the percent up.

But it is clearly, I mean we've gone from 20% non-U.S. in the -- non-North America, I should say, in the early part of this decade, to consistently north of 40%. and certainly all of last year, and that seems to be trending somewhat up again this year.

Terrific.

Thanks a bunch.

Sure.

And we have a question from the line of Jeffrey Sprague with Citigroup.

Please go ahead.

Hi, Jeffrey.

Thanks, good morning, everybody.

I wonder if we could just dig into Bell a little deeper.

I guess I kind of understand some of the margin pressure.

It sounds like the unit ramp into '07 given where your backlog is, is fairly muted.

So it sounds like you're dealing with some bottleneck issues, or something beyond just labor.

Am I correct there?

I mean given the backlog, I would have thought you would have wanted to push those volumes a little bit harder next year.

We would sure like to.

And the team is working very hard on that.

And I have had several discussions over the last few days to see if we can't get some more throughput.

But we've seen both a combination of our own internal issues with all of the new hires at [Maribell] as well as with some supply chain issues which have caused some inefficiencies that we're working to get out of the system.

So right now, this is the proposed production level for Maribell for next year, but we're certainly having a lot of conversations about getting more units out without having to add more bodies in to get their efficiency levels back up.

We've slipped about 3 points of efficiency for each of the last two years up there as we've just seen so much growth and had to hire so many people, and then had some supply chain issues at the same time.

So we are working very hard on trying to make that a better answer but that's what we're ready to sign up for right now.

You don't think about it, but if you just stop and look at the numbers, we've actually just about been up about 80% since '03, which is, even though the numbers are low, 180 sounds like a low number of units, if you think about a helicopter and how complex it is, 80% increase in a couple of years is pretty big.

So -- and we're trying to get Lean in place and like Ted said increasing the volume without increasing the head.

So it's a nice problem to have.

The conversation I was having with him yesterday, in the third quarter, we took 79 new orders at Bell and we're thinking about building 180 next year so think about that.

Obviously, we need to try to get more product through that factory, but we're still working on that.

And let me clarify one thing on next year.

We would like to think that that number might be conservative, but in any event, it is not going to drive a lot of change in earnings per share.

It would affect cash to the extent that we can do better than that, but margins on OE are low and I just want to make that clarification.

Sure.

And we'll -- I mean as you try to kind of uncork this backlog, I mean the capital requirements in the business actually go higher than you thought?

I don't think so.

I mean we had kind of a -- this will be our peak year I believe at Bell for capital and we expect it to moderate a little bit for next year so we have already been pouring quite a bit of capital in the business.

I think it is people, training, and supply chain issues that I think we really need to get behind us in order to get that production level up.

And then just flipping over to Cessna, so if we think about base Cessna doing 330 next year as part of getting to that 370 number, so you're now edging above where you were historically on the legacy manufacturing footprint, now that we've gotten on top of that, I mean what is your view on how far you go there, or can go there, without a lot more capital or other changes to how you're manufacturing airplanes?

We are making some -- Bell's capital is going to come down next year, Cessna's is going to go up so we are busting a few incremental constraints at Cessna, but we have the wherewithal to take that number higher.

David, or Jeff, one thing that we need to kind of put in the process of discussing capital is return on invested capital, because historically, manufacturing outfit, when they put capital in the ground, they have to work hard to earn against it.

You've got so much leverage going on at Cessna right now, given their aggressive stance on implementing Lean and other transformational strategies that we have in place, it is really doing an amazing job, that they're leveraging their volume at a much higher rate than they've ever done historically.

Their return on invested capital this year will probably turn out to be double 2001, pretty close.

Double.

And it was already over 20 back then.

So this is a good problem to have.

But again, we're leaning out as fast as we can go there, too.

So what we're trying to do is make room to make more planes without putting more capital in the ground.

We will have to do something though, paint job probably, something like that.

That is not something I would worry too much about.

Then just maybe a little bit more clarity on the Bell margins.

So if we think about Bell next year, we have the absence of the Q1, H1 charge the H1 and ARH development ramp issues, I would think, would be subsiding, but maybe not.

So I mean where really are the pressure points on the margins in '07 if we think about a flat performance year-over-year?

Well, I think that the best way to think about that is we just continue to ramp up in revenues that don't have margins and that's the mix issue that we're seeing right now.

We really have two businesses.

We have a core Bell business, if you pull H1 and ARH away, that as Lewis mentioned, earned 10.8% margins in the third quarter, we just have something close to 8 to 9% of our revenues this year, and maybe a little bit higher next year, that are no margin businesses.

And that's really what is going to pull us down for another year or so, and then we will start to see it tick up, and we expect that we can get the total business to 10% kind of margin level by '09.

I want to add one more thing on that.

The way we take in orders on the government business is by lots.

And when a lot is released, you have a cost estimate, and a profit estimate, and then as you learn how to build the aircraft, you finally get your costs in line, obviously ours are not quite in line yet, because we're, like I said, they're zero profit contracts, so -- and we had to take a few hits, as you properly called out.

So the bottom line here, in my view, is pretty clear, and that is we have our arms around what it takes to put the H1 into a steady state production mode, and we are going to be back on track schedule-wise by about Q3 of next year, to the original H1 schedule.

ARH is going to take a little bit longer because it is further back in the development.

And we just don't have good enough visibility in our other earnings streams and our other profit streams that we know we can carry these investments as we forecast them, as far as we need to, because the programs are so valuable to us.

I mean we're still producing parts for the H1, which is 30 years old.

And has been a great profit potential for us.

So I'm talking about the original Cobra and Huey.

So these are well worth doing, I will tell you that.

And I want to point out one other thing, too, margins are going to bounce around because have you this large component that doesn't have earnings, but as much as we did slip as a percent margins in the third quarter, we only missed our not number at Bell by $0.02 and that's why I chose to give you a not target for the fourth quarter this time instead of a percent because it is hard to predict where those margins are going to come in when you've got these big disparities between some very high margins businesses and some zero margin businesses.

And then one more number to clarify on what Lewis had said in his prepared remarks about return on capital, although we're running in the 8% area in margins because of the customer funding we're still a good 300 basis points above our cost of capital at the returns there.

So very EVA positive.

Thanks a lot.

And our next question is from the line of Shannon O'Callaghan with Lehman Brothers.

Good morning, guys.

Just to follow on the Bell, '09 margin comment, and talking about getting to 10% in '09 once these -- obviously these programs ramp up from the development phase, and I think Lewis said that currently they're running 10.8%, if you just take out the H1 and the ARH, and you also have no foreign military sales right now which tend to be higher margin, so could that 10% target for '09 be conservative?

I mean where do you think it could go?

I guess the answer is it could be conservative, but it is too far out there, and there is still the VH 71 coming behind here, and other new programs, so we said double digits.

I guess that's the best way to say it.

I guess some of the upside also would come on the systems side of the Bell segment also.

We mentioned some potential for additional ASVs if that would come to be, then there could be some upside to there, but the one thing that we just want to be very careful about, as we look through Bell's future, is that we're really carrying for the difficulty of growing this business by the amount that we're growing it.

And so I think it is very prudent for all of us to not get ahead of the Bell story until it develops and as Lewis has said, once we get this behind us, it is going to be a potential for upside from there.

And if you understand the long-term opportunity presented here, the bottom line is, we're going to do what it takes to make these programs successful.

And then in terms of the ramp, I guess generally, but also on commercial, I mean it sounds like given the strength at Cessna, you sort of have the luxury of slowing things down there, I mean if you -- you know, you could go out and hire a lot of people and do it less efficiently but maybe given the strength at Cessna, you're focusing more on Lean at the cost of some near-term upside?

I mean is that a way to think about it?

Well, here is how I look at the -- we're spending a lot of time on Bell and it is kind of curious to me but I understand that--.

Cessna is coming next, Lewis.

I know, I know.

Look, here is how we look at it.

We thought carefully about each of the bids we made.

And of course the V22 we've been in for a long time, we bid and won of course the H1 contract and the upgrade there and we kept the funding and then we bid aggressively to get the ARH, and we're talking about some zero profit years as we bring these into production which is quite standard for any boat, plane, car, it is somewhat normal, these launches, not giving that as an excuse, but it is something we're trying to get fixed using Textron's Six Sigma, but we will have created a company -- we will have doubled the size of Bell in about five years based on adding H1, V22 and ARH, and we will be doing that by investing in organic growth as opposed to acquisitive growth which is far, far safer, more sure, and more certain and we will be creating -- we will be continuing to deliver very strong EPS for the balance of the decade, and now, we also have -- you have visibilities now that these follow-on orders for these ships will power growth for another 5 to 10 years once we turn the corner.

So I for one think I'm excited about Bell, Bell's future, and I think we have it well understood and we know what we need to do.

And Cessna is providing us the balance that we've always said is important, and one advantage of a multiindustry company is if you're in the right segments you can often carry something like this and still dramatically improve EPS and the Cessna story if anything just underscored that in spades with -- we have got over 400 orders now and the year is not over.

So we're filling slots in '07, '08, '09, '010, '011, that is a pretty good story and pretty exciting, I think.

Definitely.

I mean so on -- that was my next sort of question, on '06, now you are going to do about 304 deliveries and next year you sold out at 370, what's the tone from customers in terms of the pressure on getting more in '07 rather than pushing out to '08?

And then just you said that last quarter, basically implied number was about 430 in '08 or more than that, and you said it is even stronger now.

I mean can you quantify that or give some more color on that view?

Well, it is something we're always working on.

Nobody has brought up supply chain yet and supply chain has not hurt us any on deliveries obviously, because we are going to deliver what we said we are going to deliver but it is costing us some efficiency, and our suppliers are having to get up to speed to these new numbers, too.

They're looking at these orders just about realtime like you are and they have to do their own planning to increase their own production rates.

So could we do more next year?

Maybe.

Are we going to try to?

Yes.

How about '08?

Ditto.

But it is a careful balance.

We do that by model.

So we model every model of volume out to the years and we predict when we have to do block point changes, et cetera, and the cumulative number is what we try to set for our production rate.

And since we're taking orders at this high rate, customers tend to be satisfied to wait for our product because it is the best in the industry.

And we can get almost every model available to people by -- within the next 18 to 20 months.

There are a few exceptions to that, obviously.

Yes.

Okay.

Thanks a lot, guys.

And our next question is from the line of Ron Epstein with Merrill Lynch.

Please go ahead.

Good morning, guys.

Just a couple of questions.

On the supply chain issues at Bell, can you go into more color what is going on there?

Because we've heard that same thing from some other helicopter OEMs.

It is not easy to answer the question because it is a moving target.

It is not that we're having one particular commodity that is perpetually the problem.

It is just a general tightness across the entirety of the supply chain, and one month, you're chasing part A, and the next month, you're chasing part B, and that has been kind of the same thing at both Bell and Cessna.

The industry has just taken up so much new growth, and we lost some capacity post 9/11 and we don't want to paint this as a dire situation, it is not, I mean we're getting the job done, we're just not getting the job done with a lot of extra cushion.

Titanium would be one, too.

That's probably more universal.

That's one you could hear about quite a bit.

The Barry amendment has put some constraints on titanium by forcing us to source domestically in a lot of cases.

Now, on the military side though. at Bell, when you look at the ASV production, are you seeing any supply chain constraints there?

Particularly if you get that option for 1700 more ASVs.

No, we're good there.

It is mostly automotive -- it is Cummins engines and Dana axles and a variety of things of that nature that we believe we can ramp up significantly there, if we get the opportunity to.

A question for Lewis.

I had the opportunity to walk through the large cabin concept airplane down at MBAA, can you just give us your thoughts on that?

Well, I can only say so much on that.

And here is all I'm going to say.

Sure.

I think -- I'm a big supporter of Cessna, obviously and we've invested in new products year after year after year and that is something we will always be doing, but on the large cabin jet, we just don't know enough to even comment really.

We knew that going in we were going to put a great model on the floor at MBAA, which we did, and it looks like it is almost ready to fly, which it isn't.

We are studying customer requirements and feasibility really carefully.

It is a big move for us to make and one we would like to make and the decision on whether to proceed will be made at the end of 2007 and that's about all we know.

That's about all the data I got on that one and we are going to get more and more as the year goes through and through 2007 but we will make that decision at the end of next year.

And then just two more quick questions.

The H1 is up for another Defense Acquisition Board review soon, I believe, right?

Any thoughts on that?

They have put that off.

They are going to wait until next year.

Okay.

So they are going to wait until next year for that.

Go ahead.

No, no, go ahead.

The H1, you probably saw the press that came out of the last visit by Dr. Delores Edder, the Systems Secretary of Acquisitions for the Navy, and she was down there with [Inaudible] and they pretty much gave a green light to what they saw at Bell and the ramp there.

So H1 is in pretty good shape right now.

Great.

And then just one last question for Ted.

When we think about R&D as a percent of sales, and maybe just the aerospace businesses, so we throw Bell and Cessna together, what should that be when we think about 2007 and going out?

It is in the 5 or 6% range, but I don't have a number yet.

We're just about to start our planning process and the bidding is just going to come in in the next week or two.

We have not -- we have not agreed on that for '07 yet.

Okay.

But that 5 or 6% range, that would be company investment or does that include also government funded investment?

That includes government investment, also.

It is a net 6% at Cessna and a little bit lower at Bell.

Those are net numbers.

Okay.

Thanks a lot.

And our next question is from the line of Nicole Parent with Credit Suisse.

Please go ahead.

I guess I was just wondering, this might be a redundant question, but Lewis you noted what margins at Bell would have been ex ARH and H1 and I just want to make sure that the difference between the expectations between the Q2 guidance and the Q3 actuals is just a productivity issue you were talking about.

Can you think of anything else, Ted?

We had some incremental charges in there year-over-year both for H1 and ARH that were a little higher than what we had expected initially and then we had more revenue than we expected.

Okay.

That's it.

Okay.

And Ted, could you give us some color within finance on the sub segments where you saw strength?

We really have had tremendous growth, kind of around all of the portfolio, we're up 1.4 billion year to date, distribution finance is up, number one, 586 million, and aircraft is up 439, and golf is up 224, asset-based lending is up 115, and resorts is up 85, and structured capital is up 40, and then the other segment that we're exiting out of is down 115.

For that net of 1.3, right?

For a net of 1.4.

And just one other, you don't really feel comfortable talking much about the large cabin construct.

When you think about other clean sheet developments from an R&D perspective that you've had, can you give us a perspective, maybe, I don't know what the sovereign costs or some other, CJ1, when you first introduced it?

Sovereign would be our most recent one.

And I think somewhere between 250, 300, somewhere in that range, the large cabin would be more than that mostly.

Great.

Thank you very much.

And our next question is from the line of Steve Tusa with JP Morgan.

Please go ahead.

Good morning.

Good morning.

Just to use some rough numbers, if I'm looking at last year and I'm just trying to recall what happened, you guys beat the third quarter by I think like $0.10 and then you reaffirmed the annual number.

You're kind of doing the same thing here except you're actually raising the annual number.

I'm just wondering, is there anything fundamentally in the trends that makes you more cautious, other than what's been talked about obviously in the aerospace and defense side, the mix there, like is there anything in industrial within the trends that makes you incrementally cautious on the earnings stream there?

No, this is just random noise. we had a transaction for about $0.04 at TFC that we thought -- we had it in the last guidance in the fourth quarter, we actually did it in the third quarter, and there is lots of other little just timing issues back and forth between quarters that is perfectly natural and normal.

Nothing in the trends.

Okay.

Got you.

Because the backlogs look pretty strong, so I'm just -- and the organic growth remains very strong.

So I'm just trying to get a gauge on how aggressive the number is for the fourth quarter.

It is our best guidance.

Okay.

Great.

And that's it.

Thanks a lot.

Good quarter.

Thanks, Steve.

And our next question is from the line of Jack Kelly with Goldman Sachs.

Please go ahead.

Good morning.

Ted, as we look out to next year, with regard to Bell, it sounds like the earnings numbers will be relatively flat.

If we looked at the mix on commercial versus military, how would that be?

I mean it almost sounds like with the lack of negatives on the military, that the military side of Bell should be up, and maybe commercial still burdened by some development costs, and that's down and the result of that is flat.

I don't really know the answer to that yet, Jack, till we go through their planning process, but yes, clearly, we are ramping up development costs on the 417 and the 429 next year in commercial, and clearly we've taken some hits this year on some of these lost contracts on ARH and H1 that, as I -- I tell you two things, every time we take one, we say it is supposed to be the last one, right?

Because it is supposed to be our best estimate, but they're always within ranges, but I guess our expectations would be that we would have that all behind us, and certainly the H1, on an STD contract, is running down, so there is less exposure there next year, so I would say conceptually, your points are correct, but I just don't have the data yet, because we haven't sat down with them on their plan.

And just moving over to Cessna, given the 100 orders that you received in the third quarter, you mentioned at least I guess 142 in the fourth quarter, and so it is a total of 242, how many of those aircrafts will fall into '08, and can you give us a sense where the orders are for '08?

Well, a lot of the hundred from the third quarter, if you take the 100 in the third quarter, 25 of those were CJ4s so those are way out.

The other 75 were kind of across all of the product lines, and a lot of those would fall into the '08 time frame.

I mean there were a few, I think there were two or three Mustangs in there that obviously are way out and there may have been some Sovereigns in there that are way out, but a lot of those would have fallen in the '08 time frame.

Of the 142 orders quarter to date in the fourth quarter, those are typically much further out.

There is probably 28 orders that were on kind of all of the standard models, maybe it is even a little higher than that, that would fall into '08 and '09 but obviously there is a lot of CJ4's in there, 75, or more than that, I guess, and close to 75 CJ4's in there, those would be further out 2010 kind of time frame, so there is a mix.

But '08 is in a very nice shape.

Filling up nicely.

And we do have, other than Sovereign, Mustang, CJ4, we do have product availability in the back half of '08 for all other models.

Okay.

So basically for the first half of '08, you're fairly -- you're fully booked is what you're saying.

We're pretty close.

Jack, the way to think about this is kind of interesting in that the human dynamics here work really in our favor, because a lot of our sales are on commission, and they're planning on having a pretty good salary next year and this year and they need to sell planes and planes sell easier if you can deliver them short term versus long term and so it is pretty nice to be able to work basically the rest of this year and all of next year to fill up '08 and '09.

So I tell you, you've been with us a long, long time.

We've never been as strong as we are now on order visibility for as many years out as we have.

It is really a remarkable story.

And people that really know us and think about what we're saying today will realize this is one powerful growth engine, and you would say, well, yes, Lewis, but how about leverage and you remember that ROIC comment I gave you and the margins numbers you guys know we are going to hit, this is one powerful story over the next two or three or four years.

Kind of in a similar vein on the ASD side you're currently producing at 48 and listening to some of your folks last week in Washington that is kind of your budget for '07, subsequent we get the armored Knight contract for a number of vehicles, plus some behind that, plus whatever might come out in maybe late November, early December.

It sounds like you have capacity to go to 60.

As you think about it Lewis, are we going to be there at that rate in January?

And then maybe ramp up from that throughout '07?

Well, I talked with [Dick Melman] here recently to really get a good handle on this before we got on the call because I knew this was going to come up.

You got to kind of think about this in three different chunks.

The first piece is what you already know about.

Our current plan is to produce the same number, roughly deliver the same number next year as this year.

But our current ASV contract, which is just now being finalized for next year's production, is going to have in it at their request a price option for almost 1700 additional vehicles.

So if they decide to pull the trigger on, that which they could, I personally think there is a high probability, but that is only a thought, I'm not tipping my hand here because nobody knows, because we have to decide what the Army decides to budget and they have got a lot of budgetary needs, not the least of which is this product.

So there is another large number, 1694, that is roughly 3.5 or 4 times next year's production, and we are making provisions to be able to ramp up very quickly in larger numbers if we have, to because we have already done this once, so we know exactly how to add another 48, if we had to, and then I mentioned this light tactical vehicle, armored tactical vehicle that is on the drawing boards.

It doesn't really probably come out until -- it doesn't come out until 2010, 2011.

If they decide -- they have not decided, but if they decide to go forward with something to fill that space because they want the ability to have an armored vehicle, more of them out there, that is 7, 8, 9, 10,000 vehicles.

So this is only an upside story.

We have not even talked much about international yet.

And that is coming.

So it is -- I think we're looking at probably the bottom end of what could happen over the next two or three years by just looking at next year but we don't know yet.

That is all we know.

And finally, just on Cal/Tex, given all that is happening in the auto industry and I know a significant amount of what they do is overseas, but can you give a sense of how they did in the quarter and what you guys think might be happening in the subsequent quarters her.

Cal/Texas has continued to see some operational improvements and the good news this year is we have not ended up, and I don't think we are going to end up seeing the big downdraft in volume that we had predicted.

At the beginning of the year, you might remember we thought we might drop about 100 million in revenues at Cal/Texas.

I think the answer is that is likely to be closer to zero.

Some of that is foreign exchange.

But at least half of that difference is real volume that we're getting.

And we've managed to get of our kind of two plants that were causing us a lot of trouble, I would say that one of them is pretty well fixed, we're not -- it is no longer on the watch list, where we're looking at that plant every month, we still have a plant in Mexico that is not performing as well as we would like it.

But we've got the same team that fixed Canada down there working on Mexico, so I think Cal/Texas is doing well.

We see a little bit of growth next year and then we start to see some decent growth when we get out into the 2008 time frame.

So the cut-backs by the 3M's, excuse me, the big threes as well as others in the last couple of months, maybe it was offset by other things or it didn't impact you?

It had some impact but we're not -- GM being the biggest one, we don't have a lot of Ford North America, and Cal/Texas is very diversified, and we've got a lot of growth in Asia, particularly in China, right now, so yes, they've been able to kind of hold their own, but obviously they're impacted, the GM in North America is probably the biggest one.

Okay good.

Thank you.

And operator we're coming up to close to the end of the hour so we will take one more call.

Thank you, sir.

And that question will be from the line of Cai von Rumohr with Cowen and Company.

One moment, please.

Good morning, Cai.

Yes.

Good morning.

A quick follow-up on Bell.

I mean by your numbers, you're kind of intimating that you lost, 22, 23 million, something like that.

H1 and ARH in the quarter.

Could you walk through the charges, and kind of -- if you are going to have the same kind of margin in the fourth quarter, what is the assumption about what happens on those two programs?

And you said you expected to be kind of out of the woods on H1 by the third quarter of '07, so as we look at next year, what are the potentials for those programs on the bottom line?

Well, the charges during the quarter, the losses on the programs, were about 17 million.

So I'm not sure where you got 22.

It was about 17 million.

And again, in each case, we do the best we can, on an estimate to completion basis, to book the entire future cost for each of those programs.

And I actually had dinner with the H1 program manager a week ago down in Fort Worth and we went through all of the possibilities and the answer is, we're booked to a middle of a range, and we're booked to a number that -- and he looked me in the eye and said I can do that, but there is still the possibility of some additional good news or bad news around a range of possible outcomes on those programs.

But bottom line is we think that that is all that we need for the balance of those contracts.

But again, we said all along, this is going to be bumpy, as we go through these development programs.

I guess my question is, if in fact, you know, your best estimate, you booked it all, so does that mean if there are more losses, you come in below your guidance?

And if in fact we're expunging 17 million in charges in the third quarter, and the fourth quarter is it all -- back to the earlier question, commercial R&D that is keeping the margin below 8% in the fourth quarter and still at kind of sub par levels next year?

It is overhead rates, it is 429 and 417 development.

We basically have zero in for these programs for next year, but we have a range of possibilities for the next lots that are coming on.

So I think our guidance encompasses all of the possible pluses and minuses on a variety of different programs and products.

But just -- Cai, just to make a comment on the overhead, by that, we're staffing up and putting people and costs on the payroll for future revenues, basically.

So until -- on a commercial, that comes sooner but as we're putting costs into the infrastructure there now, it is for the future revenues, as we ramp up both on a commercial military sides.

And we will have, between the 429 and the 417, we have a run rate of R&D costs there that is in the $40 million kind of range, and obviously there is no revenues that come on those products until a ways out.

Let me add one more thing, because you said -- you mentioned the guidance and risk thing.

The way we do this and we've done it this way for a long, long time and that is, we know how to kind of cover the down side, and our guidance understands that, and so if some bad things happen, don't worry about that.

We're going to cover that one way or the other because we have got a lot of upside in our other businesses.

On the other hand, we're not smart enough to know how to capture any upside.

For example, if the customer on either one of these programs, I'm just using an if, but this is actually the case, if they change the scope of the program, we have the right to go back in and try to renegotiate a cost situation.

Will we be successful?

Don't know.

We don't put those in our numbers.

So , as Ted said, I think we've got everything pretty much understood and our guidance stands.

There are lots of pluses and minuses in our business and one thing going left or right doesn't necessarily mean we can't still achieve what we're trying to achieve.

Last one.

Could you comment on how many shares did you buy in the quarter?

And now that you have the proceeds from Fasteners, what is the approach on share buyback going to be going forward?

Do I know how many we bought in the quarter?

I know we bought 8.3 million shares year to date.

I can figure it out.

I'm not sure I have -- wait a minute.

Current quarter -- no that's not.

I don't have the quarter.

I can figure it out.

We can figure it out with that.

We got ahead of the Fasteners sales quite obviously when we saw some opportunity tactically with the stock price we liked in the second quarter.

So we've managed to spend quite a bit of that cash, our cash balance is about the same now, as it was a year ago, after the proceeds, because we have invested organically in our businesses, with a lot of CapEx of late, but also quite a bit of it against share repurchase, and our philosophy going forward is the same old broken record story, it depends on what opportunities we find out there to acquire businesses that would strengthen our company, and if we don't find those, we are going to continue to target a capital structure for our current ratings, and deploy whatever available cash is left over into share repurchases.

It is that simple.

Okay.

Thank you.

Okay.

Cai, best to you.

Ladies and gentlemen, that concludes our call for today.

We really appreciate you spending time with us.

If there are any follow-up questions, please give us a call in the office.

And have a good day.

Good day.

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