達信公司 (TXT) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Textron fourth quarter earnings call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

I would like to now turn the conference over to your host today, the VP of Investor Relations, Mr. Doug Wilburne.

Thank you Keilly, and good afternoon everyone.

Joining me today are 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.

Before we begin, I'd like to mention that we prepared a package containing key data that we will be covering on our call today.

You can find the package in the IR section of our website.

And if you scroll down to the conference calls, webcasts and presentations box, there's a link there that says read more, and you will find our presentation in that area.

Moving now to our results for the fourth quarter.

Revenues were $3.2 billion, up 18.5%.

Earnings per share from continuing operations for the fourth quarter were $1.54, up 23% from $1.25 a year ago, and compared to our guidance of $1.35 to $1.45.

This result includes $50 million or $0.25 per share in charges related to the H-1 program recorded at Bell in the quarter.

Our tax rate of 26% was 5 percentage points below guidance, primarily related to favorable settlement of a foreign tax audit.

The impact of the lower rate benefited EPS by about $0.10 per share.

On the cash front, full year manufacturing cash flow from operations was $1.1 billion with free cash flow of $691 million.

We had been expecting manufacturing cash flow for the year of about $1 billion dollars, and free cash flow in a range of 550 to $600 million.

I would like to point out that while we're pleased that we were able to exceed our expectations, our over achievement primarily reflects earlier than planned cash receipts, which will impact reported cash flow in '07.

One final point before we move on: the end of the year we made a $590 million net adjustment to equity, consistent with the new pension accounting rules which we adopted at the end of the year.

With that I'll turn the call over to Lewis.

Thank you Doug and good afternoon everyone.

Once again we exceeded our quarterly earnings target as strong performance at Cessna Systems and Textron Financial more than offset the cost we incurred at Bell Helicopter.

Let me say a little more about Bell before I continue my discussion.

During the third quarter, we discussed additional launch risk at Bell on the call.

However, at that time, we thought we would deliver the first H-1 units last quarter, in other words, in Q4.

Unfortunately, flight testing revealed a number of issues that had to be addressed.

They had to be addressed because we have to make that aircraft compliant with program requirements, which in turn caused us to miss our delivery date and incur additional costs.

We believe the major design issues are behind us now as we have delivered the first Yankee, that's the transport helicopter, earlier this month, and the final customer acceptance of the first attack helicopter, the Zulu, is literally imminent.

Customer acceptance will mean that H-1 production can now proceed down the learning curve without major design changes interrupting productivity, as the basic configuration has been locked down, so to speak.

Now we still have to clear operation evaluation and resolve technical issues that remain on the helmet and achieve a full rate production decision.

But, the customer is very anxious to get these units into service as operations in Afghanistan and Iraq are taking their toll on the existing helicopter fleet.

Now, let me shift to the Armed Reconnaissance Helicopter.

As you're aware, the ARH, which is in the systems development and demonstration phase, or SDD, is behind schedule.

The delay is primarily a result of changes made to the original design, therefore there is an ARH cost risk for us this year.

Ted will discuss the Bell issues on our outlook in more detail later.

In the meantime, you should just know we had a laser focus on execution at Bell.

Over the past several years, as I think about it, we've had notable program wins with our military customer.

We have regained confidence from our commercial customers and we have introduced exciting new products.

But what Bell needs right now is to enhance its operational excellence as we enter this phase of heavy launch and ramp up activity.

We're very confident that Dick Millman will make a dramatic improvement in this regard at Bell.

Many of you know Dick from his tenure at Textron Systems and his record of performance there on both execution and growth have been exemplary.

By the way, we are equally confident in Frank Tempesta's ability to successfully continue that great track record in Systems.

He's their new president.

Let me wrap up this discussion by saying we have the leadership, talent, resources, what it takes to get Bell's major programs launched and to grow its production capabilities.

We feel confident that we can accomplish what's ahead of us because we did exactly that with the V-22.

And we're certain that the cost of launching these programs, and this is a key point, the journey is worth the trip.

We are certain the cost of launching these programs is well worth the investment as they will pay off for decades to come, especially when you consider the after market revenue stream and a strong expectation for OEM opportunities that these programs will generate going forward.

Okay, now I would like to widen the lens and look at some of our notable accomplishments across the enterprise in 2006, and what that portends as our ongoing journey of transforming Textron to premiere.

From a numbers perspective, we had a very strong year, 15% organic revenue growth, a significant expansion in EPS from continuing operations, and we generated a return on invested capital of 16.8%.

By the way, that was up 360 basis points over 2005.

Over the year, we completed a number of strategic moves, very significant as a matter of fact.

Introduced many new products, expanded capacity in many locations and advanced our enterprise management capabilities in key areas.

Our most significant strategic move during the year of course was closing the sale of the Fastening Systems business during the third quarter.

We also sold our Jacobsen commercial grounds care business and a non core franchised financing receivables portfolio at TFC.

On the acquisitions front, we purchased a distribution finance business from Electrolux, and we added two important companies to our defense business, Innovative Survivability Technologies and Overwatch Systems.

Going forward we will continue to evaluate our portfolio based on our criteria of being able to double intrinsic value every five years, but also consistent with our goal of creating a simpler portfolio of leading branded businesses in attractive industries.

Likewise, we will continue to seek out opportunities to invest in companies that can add to our core capabilities and contribute to our long-term value growth goal.

But near term, our primary focus will continue to be on generating and supporting organic growth.

For example, last year we invested over $400 million in ER&D.

That by the way was up about $75 million from 2005, so 400 in '06, and we're planning a comparable increase this year in '07.

The result of our focus on innovation has already created a stream of new products that addresses our customers needs and also keeps us ahead of the competition, and also translates into strong revenue growth.

For example, our new product -- Spider product program at Systems will begin production ramp up in '08.

At Bell, our reinvigorated commercial line contributed to a 30% increase in commercial deliveries last year.

In fact, we're optimistic about continued helicopter growth through the end of the decades and beyond, in large part due to the market's enthusiasm for our recently introduced 429 and 417 models.

Together these two new products have over $1 billion in preliminary orders, which represents 325 units, with initial deliveries beginning in late '08 and '09 respectively.

New products at Cessna are also generating extraordinary customer interest and expanding our addressable market.

We had robust demand across our product line during the fourth quarter, including a very strong showing at this this year's NBAA with the introduction of the XLS+ and our new CJ4.

We ended the quarter at Cessna with 231 total orders.

All in for the year, we booked 496 orders, which is clear evidence that the market remains very robust and, more importantly, we had the right products.

Demand is particularly strong in international markets and in our fleet customer segment.

We enter 2007 with an unprecedented situation at Cessna.

We're 100% sold out for this year's delivery plan, which we've increased by five units to 395, which still includes 40 Mustangs by the way, and looking out to '08, we have more good news with over 350 orders already on hand for delivery then.

Speaking of the Mustang, we're proud that we were the first to certified deliver a model in this new entry level jet category.

Ramp up is very much on track in Independence, and customers are anxiously awaiting delivery for the new jets.

We will reengage our Mustang sales activity this year, but earliest availability for new orders is fourth quarter 2009.

Taken together, 2006 was really an incredible year at Cessna.

We ramped production back up over 300 deliveries, we delivered our 100th Sovereign, we grew our backlog by nearly 35%, we expanded margins by 240 basis points, and we achieved an ROIC of 49%.

Okay, turning to Industrial.

Focusing on customer needs also led to many successful product introductions there too, which led to positive organic growth in each of our four businesses.

Greenlee in particular had a solid year, generating growth of over 12%.

So far, the U.S. residential construction slow down has not had a major impact on us, as we, as you know, predominantly serve the non RES market, but we are also keeping a close eye on demand there too.

Turning to Textron Financial, we expanded our portfolio and significantly improved operating efficiency.

All in all, at Textron we believe our committment to our new product introductions and geographic expansion, combined with the continued strong end markets, will allow us to deliver above average organic growth through the rest of the decade and beyond.

So that's the growth story.

And as we continue to advance our enterprise management capabilities, we will be able to drive more of that revenue growth to the bottom line.

Perhaps the most significant of our enterprise management initiatives has been the deployment of Textron Six Sigma.

Six Sigma has improved, has significantly enhanced our problem solving and design skills across the Company, and it has provided a common foundation for a performance improvement culture across Textron.

We continue to emphasize the acceleration of the lien component of this program into all of our processes.

The progress in margins at Industrial, the improvement in operating efficiency at TFC, and the record margin at Cessna are just three examples that are all testimony to the effectiveness of our approach.

I'll conclude by reiterating that 2006 was a very good year, earnings, cash, returns, all up significantly.

We shed non core assets.

We made a number of important acquisitions that were right up our power alley.

And we made investments in ER&D, product launches and operational improvements that will drive future revenue growth and improve margins and returns.

We remain as committed as ever to transforming Textron in our journey to become premiere.

And looking to '07, we will continue to develop exciting new products, win new customers, advance our military programs, expand our output, continue to improve our efficiency, and all the while generating a top quartile ROIC.

Ted?

Okay, thanks Lewis.

Good afternoon everyone.

I get to start by doing something I rarely do, which is correct the boss.

The Cessna production for the year is up five units to 375.

What did I say?

395.

Oops, sorry about that.

Wishful thinking.

Okay.

As usual then, let me start with an analysis of our quarterly results.

Earnings per share from continuing OPS was $1.54, that was an increase of $0.29 versus the prior year.

Volume and mix provided $0.51.

Higher pricing of about 3.2% added $0.49 a share, and inflation, which was also 3.2%, cost $0.38 a share.

So, a great positive relationship there in the quarter.

Lower shares as a result of our buyback program contributed $0.07, and Textron Financial was up $0.01.

Performance was a negative $0.25 a share, primarily driven by the impact of the H-1 charge.

Increased DR&D cost $0.11, higher pension expense reduced earnings by $0.04, and miscellaneous cost $0.01.

Now, I'm not going to do my usual and recap all of those because, as Doug mentioned, a copy of that analysis is available for you on our web site.

So let's move right to the review of segment financial results, and I'll start with Cessna.

Revenues increased $265 million in the fourth quarter of '06, reflecting 91 jet deliveries, up from 69 in '05 and very favorable pricing.

Segment profit increased $81 million due to higher volume in pricing, plus favorable warranty performance, partially offset by inflation and higher engineering and product development cost.

Even with the higher than anticipated deliveries in the quarter, strong order activity led to a $1.3 billion increase in backlog, resulting in another record level, $8.5 billion.

And in addition, we have about $0.5 billion in outstanding orders from Citation shares.

Moving to Bell, revenues increased $160 million in the quarter, while segment profit decreased $73 million.

On the U.S. government side of the business, revenues were up $68 million primarily due to it higher volume and favorable sales mix.

Volume increases included armored security vehicles, Intelligent Battlefield products, and higher development activity on the ARH program.

These increases were partially offset by lower V-22 revenues.

Commercial business revenues increased $92 million due to higher volume and higher pricing.

The higher volume reflects increased aircraft deliveries, higher spares and services, and additional Huey II kits, partially offset by lower international military deliveries.

Profit in the U.S. government business decreased $44 million, primarily due to the H-1 charge and inflation, partially offset by the impact of the higher ASV volumes.

Now I want to discuss the H-1 charge.

During the quarter we had nine units on the production line in Amarillo and five in flight testing.

As Lewis discussed, we had a number of design, production, and customer buyoff issues that had to be rectified prior of transfer of title to the customer.

The charge, then, related to the cost of making these changes across all of the Lot 1 and Lot 2 units, as well as lower productivity estimates for these lots.

The good news is we believe the program will begin generating a modest profit beginning with Lot 3 deliveries in 2008.

Moving to commercial, profit decreased $29 million due to unfavorable cost performance in spite of higher volumes and pricing.

The unfavorable performance reflected an increase in overhead cost in 2006, and a gain in '05 on the sale of our interest in the model AB139, partially offset by a reserve recorded in '05 at Lycoming for our crankshaft retirement program.

Bell Helicopter's backlog was $3.1 billion at the end of the year, compared to $2.8 billion last year.

By the way, Bell actually had a pretty good quarter, margin wise, except for the charge.

Without the impact of that issue, Bell segment margins would have been about 10.2%.

To be complete, I should point out that this level reflects a very good mix of higher margin 412s.

Now for Industrial, revenues increased $48 million in the quarter due to higher volume, favorable foreign exchange and higher pricing, partially offset by the impact of divested product lines.

Segment profit increased $16 million from improved cost performance, primarily the result of cost reduction efforts at Kautex, and higher pricing and volume, partially offset by inflation.

Lastly, Finance segment revenues increased $27 million, while profits were up 1.

The revenue increase resulted from higher finance receivables and a higher interest rate environment.

The segment profit increased as a result of higher receivables, lower loss provisions, and a decrease in operating expenses, largely offset by lower fee income and lower securitization income.

Portfolio quality continues to be excellent.

Nonperforming assets were 1.28% and 60-day plus delinquencies were 0.77%.

Moving to our share repurchasing program.

Last year we ended up buying a total of 8.6 million shares for $751 million.

We have about 4.4 million shares remaining in our current authorization, and we will continue to opportunistically purchase shares consistent with our capital structure target and the availability of cash.

Now let's turn to our '07 outlook.

For the full year, we are forecasting earnings in a range of $5.90 to $6.10.

And for the first quarter we're forecasting $1.15 to $1.25.

Our forecast reflects the higher ER&D that Lewis mentioned earlier, to the tune of about $0.33 a share.

Also, as we said on our last call, we anticipate an '07 tax rate of about 31 to 32%, which compares to last year's rate of 27.6.

That represents a head wind of about $0.30.

And finally, pitching expense is going to be up in '07 by about $0.10.

We're forecasting free cash flow in the range of 500 to $550 million.

This reflects higher than expected payments received in December at Bell and Kautex that were anticipated in early '07, as well as inventory additions, primarily at Cessna, as we ramp up production.

CapEx for the year is expected to be slightly more than $400 million.

Before I conclude, I want to make a couple comments about our '07 outlook.

As you know, there are many factors that go into a Company's forecast, but there are two significant items at the Bell segment that I want to cover with you.

The first is related to the ARH.

We're going to be in the SDD phase of the program throughout the year, generating revenues to cover our development expenses, but no profits.

However, due to product requirement modifications and delays, we're projecting that the average cost per shift for production lots has increased significantly, particularly for the earliest shipments.

Our customer has fixed price options for Lots 1 and Lot 2, which if exercised as currently priced, would result in a lost position on these two lots.

We estimate that the difference between the option prices and the revised cost forecast ranges from 2 to $4 million per ship, depending being on the particular production slot.

We are currently in negotiations to obtain significant and appropriate relief from the customer, relative to the impact of additional cost.

And while we expect to resolve this over the next two to three quarters, it is possible that there could be a charge.

However, the amount and the specific quarter of any potential charge for this program will depend upon the outcome of those negotiations and the progress of the SDD program, as well as the number of units that the customer actually orders.

The other item affecting '07 is a $28 million Hurricane Katrina cost recovery at Textron Systems that we expect to receive in the first quarter.

Now, let me be clear about how these two items are addressed in our guidance.

The Katrina recovery is reflected in both the first quarter and the full year guidance.

The ARH issue, on the other hand, is indeterminable at this time.

However, as we prepared our outlook for the year, we've considered all the known relevant risk and opportunities, including the ARH issue, in arriving at our expected EPS range.

So bottom line, we have taken into account the myriad issues that may present themselves throughout the year, and we feel confident in our '07 overall Textron guidance.

We know that the recent program charges have been troublesome at Bell.

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

Looking forward, as we move past this heavy development and early launch stage, we expect Bell margins will expand again beginning in '08, and reach double digits by 2010 with revenues growing to $4 billion.

In closing, our outlook at Textron remains very positive.

While we have another year of ramp up and launch activity to manage at Bell Helicopter, we still expect year-over-year profit expansion at that unit.

We expect solid profit growth at Systems and Cessna, and steady expansion at Industrial. '07 will be another strong year with solid cash flow and a 200 basis point improvement in our return on invested capital, breaking through 18%.

Most importantly, as we look at next year and beyond, we're on track to double our intrinsic value -- with our intrinsic value strategy, to double value every five years.

Now I'm going to turn it back to Doug to give you some more input on '07 modeling.

Thanks, Ted.

And we will begin with the full year.

For '07 we expect Bell segment revenues will be up about 5%, with margins of about 8%.

Revenues are slightly higher than what we said on our last call, primarily due to the acquisition of Overwatch.

The margin expectation, however, is consistent with our last guidance.

We expect to deliver about 180 commercial units this year, 14 V-22s, 12 H-1s, and about 450 ASVs, while delivery of ARH production units is not scheduled to begin until '08.

At Cessna we're expecting revenue to be about $4.7 billion with margins of about 16%.

Industrial revenue is expected to be up slightly to $3.2 billion with margins improving by about 50 to 60 basis points.

Finance revenues are projected to come in at about $850 million, with segment profit up slightly reflecting narrower margins from increased competition and higher provisions for bad debt.

The corporate level, we're assuming share buybacks to maintain a flat share count at about 128 million shares, and interest expense of about $100 million.

Corporate expenses will be about $220 million, reflecting increased international development efforts and other enterprise activities.

Moving now to the first quarter.

We expect Bell segment revenues will be about $870 million with margins between 10 and 10.5%, reflecting the Katrina settlement.

First quarter revenues at Cessna should be about $900 million, with margins of about 14%.

This reflects delivery of about 65 jets which, by the way, includes only one Mustang.

Industrial segment revenue is expected to be about $825 million in the first quarter, with a margin expectation of about 5.5%.

Finally, Finance revenue should be about $200 million, with profit between 45 and $50 million.

With that, that concludes our prepared remarks, so Keilly, we're ready now to take questions.

Thank you. [OPERATOR INSTRUCTIONS] And first we will go to the line of Cai von Rumohr, of Cowen and Company.

Yes, could you give us some more color on the ARH?

I assume the first lot was exercised, that's for four to 12 units.

And, did you write that down?

Because by my understanding, under accounting convention, you're not allowed to take a charge on the second lot since the option has not been exercised.

A couple of things.

No, no lot option has been exercised.

The first lot option is under an extension right now.

Its date actually passed, but as part of our negotiations, we have for the time being extended that lot.

So, no, nothing has been exercised and no charges have been taken on either of those option lots at this point.

The lots, just to correct what you said, the lots are exercisable independently or skippable, so Lot 1 could either be zero units if not exercised, but if it were to be exercised, it's a minimum of six and a maximum of 12.

And Lot 2, if it were to be exercised, would be a minimum of 18 and a maximum of 36.

And just so I understand, if it's 3 to $4 million, basically we're talking a loss of up to $150 million on these two lots if exercised with no relief.

The math would be correct, but we don't believe that that's a likely scenario.

And have you taken any charge or any provision or anything for ARH, or is this all going to be incremental if it hits?

This will -- we have not taken any charge for these two option lines.

Hey Cai, you mentioned in accounting, since the range goes from zero, then you have to have scenarios that are at least zero if not better than zero.

So it's just hard for us to talk too much about this with the fact that we're negotiating with our customers, so --

Okay.

And then how do you get to your number in the first quarter at Bell if in fact, is it all the Katrina catchup?

That's primarily it, yes.

It's in the forecast.

And there is nothing, while we have factored the potential range of outcomes for ARH into our full year numbers, there's nothing in our first quarter.

Yes, now [inaudible].

Thank you.

Thank you.

And next we will go to the line of Shannon O'Callaghan of Lehman Brothers.

Hi guys.

Can you talk a little bit about, I guess, in the fourth quarter you mentioned the favorable mix from the 412s, but I guess aside from all the problems, that the 10-2 margin Ex, the charge was higher than I would have figured.

I mean, how much is that unusual due to the 412?

What do you think it would have been with a more normal mix?

Well, there's no question, and that's why I wanted to make sure I pointed that out, that we did have a real push, as you know.

We have been struggling to get out units to our customers and to meet the tremendous demand out there.

And we did have a very nice quarter pushing out 412s and some Huey II kits that were kind of on the bubble as to whether they were going to go or not go.

So while we have said it was largely Cessna Systems and Textron Financial that offset the issues at Bell, Bell did contribute to offsetting some of the problem themselves.

I would say that's a strong quarter.

Do you have any visibility into the future outlook for 412s in '07?

I don't have anything here with me.

Okay.

I think the market is strong.

We're going to -- we're able to sell what we can make out of Mirabel in '07.

Okay.

And then maybe Lewis, just in terms of Red leaving, maybe giving an opportunity to address that a little bit.

I mean, what was the, maybe talk a little bit about how that evolved and why you think that bringing Dick in is enough to solve the problem.

Well, I've had to answer this question.

I went down to Bell myself to make sure this question got answered right, because it's not -- I mean, I understand how to talk about things good, bad or indifferent, because I've made a few changes in my tenure here.

Here's what I would love to get across to everybody because it's the truth.

Mike Redenbaugh did a hell of a job bringing a lot of new business into Bell, and starting a great improvement set of processes down there.

But after some really tough thinking on my part, and to some extent his part, we came to the conclusion that his skill set was just not what we needed right now, because right now we're ramping up the V-22, which as I said on the call, the V-22 had problems a year and a half ago, and we were all worried about it.

Now we're -- we basically delivered four units in Q4, and we're going to be over, oh probably on the battlefield before the end of this year.

So we now have H-1, we've got the ARH, we've got the new production models and Dick is -- I've known Dick since 1992 when I came here.

And he's got a real proven track record of focusing on processes, on execution, on operations, and also he is really big on the growth side.

And he knows the military customer.

So we -- I tried to find someone inside the Company that I thought had the best possible skill set for where we are right now.

And I think Dick's skill set was a little bit better than Red 's.

And you said, is it all we're going to need?

Dick and I talk every day just about, and as I did with Red, I spend a lot of time with these guys.

I talked to Pelton here about an hour ago.

I expect, because he's -- I know him like the back of my hand, he's going to pick some other folks he likes, probably, to put in down there.

I wouldn't expect massive changes though, we've got a real strong team at the top.

But I wouldn't be surprised.

I'm not hinting at anything, I just think anybody that goes into a big operation, he might find a production operator over here, or a supply chain person over there, or whatever.

So, we've got good visibility of the talent across the Company, and I expect Dick to use it.

Those were hypothetical examples, by the way.

Yes, they were, because Bell's listening on the call.

We're not aiming at those two titles by the way, but --

Fair enough.

No, I wouldn't read too much into this.

It's just the right move to make at the right time.

We are going to get Bell up to where it needs to be, full stop.

So that's just a fact.

All right.

Last one is just, in terms of the Cessna margin, the rates of gain there have been pretty significant in recent quarters.

I mean, you're exiting the year north of 17%.

Any reason the margin would be 16, you got into 16, obviously that would imply a much slower pace of margin expansion; anything different going on there, any plans for increased R&D or anything like that?

Oh, yes.

It's been kind of continual, we are expecting further increases about, I think Cessna is up about 40 -- another 40 plus million next year in R&D.

I guess in terms of moving to larger models, is there any big leap relative to the ramp you have already been undergoing?

There's some money in there for the research that we're doing on the feasibility of the wide body, but it's not a major jump in that regard.

There's a number of things in there, Shannon, like for example, we have a larger provision for used aircraft loss next year.

In fact we had a little bit of a gain this year on used aircraft.

We're continuing to ramp up production, and you have to to keep in mind that every time you bring new people in the front door, that you do have to bring them down the learning curve, etc.

Okay.

And we are introducing a new line this year, the Mustang, so it will come in below average margin.

Right.

I don't think there's anything to worry about that, I think it's just kind of a normal phase approach.

All right, thanks guys.

Thank you.

And next we will go to the line of Jeffrey Sprague of Citigroup.

Thanks, good afternoon.

Hi Jeff.

Hey, just a few things, I guess starting with Bell.

So if we look at '06 all in, what did you really absorb on cost related overruns or, some of it may be just profit not booked because of the loss position, but we've got 50 million here, we've got 13 million I think it was in the first quarter.

The answer is 86.

86 million.

Between those two programs.

Between the two.

ARH and H-1.

Okay.

Most of that is H-1, though.

71.

And if we think about the complexion of H-1, in '07 should be running break even?

Should, yes, I think.

We may actually make a couple of bucks on some supplementary contracts for trainers and things of that nature.

But essentially on the core program, we should be at break even.

Okay.

Our guidance certainly reflects that.

Yes, it does.

Okay.

And does the modification in any way, I mean, can you give us a little sense of what the modification was?

So there was an issue in flight test, that the lay person out here, that doesn't sound so good.

What does that --

On H-1, you mean the changes to Lots 1 and 2 on the H-1, Jeff?

Yes.

Tons and tons of squawks.

It's -- we got into a situation in the quarter where the customer's expectations around acceptance testing and getting it to the point of what's called a DD 250, where the title passes for this reman helicopter, turned out to just be a lot tougher, number one, than what we typically see for a newly built helicopter.

And then there have been a whole series of design changes and improvements through the manufacturing process.

We have called it our marching army down there, literally a hundred engineers and product support people that are down there helping push all those modifications through the process.

And then we've also reassessed in the charge there how much, what we -- how fast we think we can come back down the learning curve to take a little more conservative view of that.

Now, this idea of margins, Ex the issues, I know you wave off the 10-2 a little bit in the Q4.

But in Q3 we're at 7, 8 and you were talking about 300 bips of related cost there.

So we were 10, 8, 11 in Q3.

I mean, it does look like underlying Bell, Ex these issues, is trying to firmly put its head above 10%.

I mean, is that a fair statement?

As we've said before, we think we are going to face a few bumps in the road for awhile to come.

And there are going to be other issues to deal with.

But yes, there's good underlying strength there, we just have to get through some of this launch.

And I guess the question on the forward guidance, I mean, Ted, you tried to address it, I know you can't address it perfectly, but so in essence, your guidance for Bell just includes a little body English, I guess, on the guesstimate on how the cards fall on this stuff.

I mean, how better could you characterize it?

Let's not use that phrase.

That's not a bad term.

I would tell you, it's -- I feel much stronger about it at the consolidated Textron level.

We could have, we always do, gives and takes here or there.

But it reflects a reasonable range of outcomes.

We have got other risk and other opportunities.

We've tried to assess them all holistically.

And when it's all said and done, last year we sucked up $86 million and made our original guidance, beat our original guidance by quite a bit.

We tried to use the same handicapping system to look at all of our businesses and all the various things that could happen, and come up with the best guidance we know how to give you.

Is the Katrina thing a pretax number or an after tax number?

Pre.

And then I guess just a couple little housekeeping things, then I'll pass the baton.

So, it looks like the below the line guidance doesn't incorporate any cash redeployment.

In other words, your interest expense is actually guided up a little bit, and the share count is guided flat from where we ended the year.

Is there something else going on there we should be aware of?

No, I think we're just being a little conservative.

And is the pension going through corporate or is it laced in the segments?

There's a pretty meaningful increase in corporate.

Doug mentioned some growth spending, but can you give us a little more color there?

Yes, well, total pensions cost is going to be up $0.10 a share year-over-year.

And it really -- it will go through both.

It's probably 75% or so that goes through the business units, and 25% that goes through corporate.

So therefore the corporate increase is actually quite sizable, right?

We're going up 30 million in corporate or so maybe --

No, no.

It's about 20, I think.

Yes, a little less than 20.

20?

And that's all gross spending in systems and things like that?

That's enterprise management initiatives, international development spending, education and training growth around Textron university, a variety of things that are in there.

All right, thanks a lot.

Thank you Jeff.

Thank you.

And next we will go to the line of Nicole Parent of Credit Suisse

Good afternoon.

Hi Nicole.

I guess in the big picture, could you just talk about, I'm looking at the chart on the cost performance, and as we think about the businesses, just kind of ongoing performance cost improvement that you realized in the quarter, and how we should think about all these initiatives, as we go forward?

You're talking about the cost analysis you're looking at, Nicole?

Yes.

That was heavily impacted by Bell and a number of other issues.

I think we expect that that will be a big, major positive contributor next year.

If we stripped out Bell and we looked at underlying improvements, how do you feel about ongoing performance initiatives that you've implemented, and kind of realizing those benefits?

Oh good.

I think cost performance is going to be a positive contributor somewhere north of $0.50 a share next year.

Okay.

I guess, how big could you quantify the warranty reversal at Cessna?

I don't know if -- it's not a reversal per se.

Most of the pickup is coming from a lower point of sale accrual.

So every time we ship an airplane, we set up a warranty reserve for the expected cost for the life of that aircraft on the day it's delivered.

And because of prior history, and those costs coming down, we have reduced that point of sale accrual rate.

There may have also been some other reserve assessments, so I'm going to it say it's 10 to 15.

Yes.

And just for a point of reference, when, just going back to Shannon's question about margins next year, one of the detriments to margin is that, on a bottom line basis, warranty expense will be up next year by 9 or 10 million.

And my 10 to 15 was millions, not pennies, sorry.

But yes, we do expect that that -- we will not see -- we'll see some growth the other direction next year.

Okay.

And I guess, I just want to go back, if we think about the $0.25 negative that you post, and we add back the H-1 charge, we come out at zero.

So are we investing the benefits?

Is that the difference?

Because I would have expected that number in the fourth quarter to be positive.

Yes, that number has -- it still has been positive in most quarters.

To be honest with you I can't -- I don't have a list of specifics that's in there right now.

I mean, there were -- I can think of a few other odd expenses here and there at different businesses, but I just -- I think for the full year next year you can expect something in the $0.50 plus range coming out.

And there's no reason that should, all things being equal, there's no reason that shouldn't continue.

I was trying to make that point during my part of the conversation.

That's the power of transformation.

I mean, we had Womack and some pretty famous guys on Lean visit some of our facilities that are -- we think are really making good progress.

And he signals that we have got all the right resources in place, the right training in place, and we're probably 20 yards down a hundred yard football field as far as the savings to be derived from Lean and other Six Sigma benefits.

So Nicole, I would be shocked if we don't see $0.50 plus a year for the next four or five.

And if the volume stepped the way that we think they can, this is going to be a pretty exciting four year run here.

Okay.

Not to beat a dead horse on the corporate expense line, the year over year deltas, do you have -- that just, that number keeps creeping up and I'm just trying to think about, I guess, given the initiatives that you had, I would have expected it to go down.

Are there any -- I mean, I know you cited leadership development.

Well, I'll do a little bit for you, and then maybe Ted you can add in.

I'm not looking at a schedule here, but I know for a fact that we're increasing our focus on international, because if you were to ding us anywhere on not being as prepared as I would like to take advantage of the emerging helicopter and fixed wing businesses around the world, this is one area I'm willing to put some bucks in, because our planes will be just as well respected over there as they are here.

And so will our helicopters, because we still make the best helicopter in the world, as measured by reliability and ability.

I told you that funny story about in one country, we were quoting helicopters and they said, how many do we need to buy in order to get four up and running every day?

And we did not ask the question.

You only have to buy four.

They're used to buying five or six.

So, I know that's an area for certain.

And the way we do enterprise initiatives is we try to allocate the cost out as best we can, but sometimes we keep the cost internal to the corporate expense line if we think that's the best place to coordinate the resource effort to get the biggest leverage across the entire corporation.

And so enterprise, Ted mentioned --

Particularly for new things.

For new things, yes.

And then we tend to wind that down, as we then kind of had that blended into the fabric of the Company.

So that's my first answer.

Anything else you want to add it?

No.

I would just add one thing.

It's fair to say that the risk of us overspending that number is a lot smaller than the potential that we could underspend it, because you do put things in there, there are certain litigation possibilities that could come out that we budget for that sometimes doesn't come through.

So we will work on that through the year.

Okay, fair enough.

And I guess, just one last one.

As we think about finance in '07, could you give us -- up slightly you have had a heck of a performance, you cleaned up the portfolio, could you just give us a little bit of color when you think about subsegments, how we should look at that business?

Yes, I think we have some upside opportunity there.

It's been a great run, the businesses performed very, very well, the portfolio is in good shape.

We have seen over the last year or so incredibly low loss provisions and some tightening margins as a result of competition out there in the marketplace.

So I think that's a conservative plan.

Okay.

Again now, put all this in the context to what I've said about ARH and the Bell issues and the like.

So we're factoring all the opportunities that are out there with the risk that we see as well, and putting them all together to come up with what we think is an appropriate target.

Great.

And I guess one last one for Lewis, in the context of Overwatch and, kind of, activity in the aerospace and defense world.

Could you just kind of give us your perspective on size of potential deals and areas of opportunity that you might look to fill over the next five year?

Sure.

Well, Overwatch, just to mention that, that has gone -- we closed on 12-01.

So we haven't owned it that long, but I'd tell you we probably underestimated the synergies there.

The guys have already come up with some things that they are getting ready to quote that we didn't even have on the synergy list.

So when you get a lot of smart people together, they come up with good ideas.

And that's going pretty smoothly.

And Tempesta is the guy that kind of brought that in, so it's perfect that he is now running the Company.

But that's just a comment.

We're looking at deals, we're not going to overspend for them.

We're not going to get into a big bidding war for them.

But the deals that are in our space that we like the most, they vary in size from 100ish to 7 or 800ish, kind of.

We do that, but of course the bigger they are the more careful we have to be, because we are pretty -- I really do think we will build this out more, Nicole.

When you said three or four years, that's a long time.

I think we will continue to add to this segment strategically.

There's three or four good things we have got on our watch list right now.

But, I don't -- there's nothing imminent, I guess I couldn't tell you if there was, but there isn't, so --

Great, thanks.

Thank you.

And next we will go to the line of David Bleustein of UBS.

Hey David.

Good afternoon.

Afternoon.

Question on Bell, you gave us the 2007 deliveries; do you have a sense yet for what you plan on shipping in 08?

Bell '08?

Well we will be covering this all on the 5th of February, but --

It's going to ramp up.

You're talking about Bell deliveries for commercial or --

We slowed it down.

The V-22 will be 17 units in '08.

The H-1 is another 12.

And it's really difficult to put a number out there for the ARH until we complete this negotiation.

So we wouldn't even say a number right now.

And I would expect maybe a modest growth again in the commercial side of things.

ASV's, again, would be subject to what the funding kind of works out to be.

We're hoping to deliver more than 450 this year, so it's just kind of difficult to comment about '08 until we get '07 more crystallized.

We can make more ASVs and we have customers that want more, but they don't have money yet.

You just about can write in your book, though, that the Maribel production, which is commercial, will continue to grow, it has to, because you have the 429, the 417, we're not slowing anything down that I can think about, except maybe one model which is a very small volume.

So I think you will see this volume -- first of all the market is real good out there for helicopters, and appears to be way out there.

I expect we will see a continued ramp up of commercial and then a more rapid ramp up of military once we get to the back end of the decade.

And then on ARH, I guess- could I, Ted, could I trouble you to run through Lot 1 and Lot 2 again?

And then could I just trouble you to walk me through how this happens?

I mean, it almost sounds like the customer, you gave the customer an option to buy a helicopter at a fixed price, and then to change the specifications on you.

I know that's not what you meant to say, but can you just walk me through exactly how you found yourself in this bind?

No, you heard right, I mean that is to say, that's not abnormal at all in these kind of contracts.

And now the discussion is about how to resolve that.

But, yes, that it has -- we started off with a product that was to be much more of a COTS, commercial off the shelf product, with some customer supplied sub systems, and it's evolved and that's what we're talking about.

Jeff the other thing I would say is that -- or David, sorry.

Wrong, Bleustein.

Sorry about that.

That's no problem.

He threw me.

I guess what is hard for any of us to realize unless you walk in the Pentagon, I spent a lot of time there, is you know we are a nation at war, and we have been there for some time, and the military is in one hell of a hurry to get the ships they need into the war fighters' hands.

I mean, you just, you go into the Pentagon now and people are wearing, they are wearing, the military is wearing the same uniform they would be wearing if they were on the ground in Iraq.

They could literally get in a plane, fly to Iraq, get off the plane, and they would be suitably dressed, with the right boots and etc.

They just aren't carrying weapons, so it's a big deal.

So my own version of this is, and it's different for different programs is, I have been involved with the H-1 for over ten years and it has changed dramatically as technology has changed.

And it takes time for the procurement process to catch up with the design changes.

And that's true with everything that's major that the government procures.

It's not -- it's true about fighter jets or whatever.

So this is not an unusual phenomena.

And we just have to work our way through it, and we're pretty good at that.

We're getting better at it.

So, such a difficult topic to talk about, because while we're talking to you guys we're also talking to the guys at the Pentagon, and we just can't get too far ahead of ourselves.

But we want to make this work for the government customer, we want to satisfy their needs.

And it's six to 12, Lot 1; and 18 to 36, Lot 2?

Correct.

Okay, terrific.

I think I understand it, thanks.

Thank you.

Our next will go to the line of Jack Kelly of Goldman Sachs.

Good afternoon.

Lewis, just a broader question on Bell.

You mentioned its execution issues, you start with the H-1, and now the ARH.

And Ted, you seemed to allude to there might be some other things to happen later on this year.

I mean, could it not be just execution, but the fact that you have been so successful in winning contracts over the last two years that maybe those bids, in some cases, were a little too skinny and not enough cushion was left for bumps in the road, and that's what we're feeling now?

So I guess the thrust of the question is, do you have any of those kind of worries about other programs, then you'd have yet to start, and while it's small, or the presidential helicopter, etc.?

Well, let's do the presidential helicopter first, because if you read the papers on that one, you'd get a lot -- you won't be worried about us, because we have a small contract that's not under water and can't go under water because we're not the prime on that one.

The presidential helicopter has changed so much you almost wouldn't recognize it because of the phenomenon I tried to explain a minute ago.

I mean, the rotors are changing, the engine power is going up by 30% and the blades are 2 feet more in length.

So that doesn't affect us at all, zero, none, because we're only a small little player in that presidential game.

And when we finally get the final assembly, we get to quote on that, that's yet to come once the design settles up.

Now, no, I don't really buy into your premise, Jack, and I'm not trying to be smart about it, but I don't buy into your premise exactly as I heard it.

The way I would describe the execution problems at Bell are one of we did win a lot of programs.

And so although they are phased with the V-22 much further down the production curve than the H-1, which is much further down the production curve than the ARH, but because each of these programs goes through a lot of interim changes before the first production units are delivered, then you create a lot of turbulence inside the factories.

Not only in the builds factories, but also the component factories.

In addition, the volumes have stayed not too far off of where we thought they were going to be, and so they have crowded our component manufacturing capability both internally and externally.

So we have had to move quicker than we would normally have to move to off ramp some of our component supply, because we would traditionally do it in-house, and we have more volume than our factories will support.

And I for one don't want to put the capital in when we're going to Lean the place out, and then you won't need the capital.

So I would rather off ramp, of course then sometimes you pay a higher price than doing yourself.

So it's not any one single answer.

And I think we were managing it it well, but not well enough.

And I think -- I know Dick will bring a different set of eyes and a different focus on what's happening at Bell.

And I would be happy to take anybody down to Bell that would like to see it, it's not like the place is on fire or something.

It's just a very complicated set of production launches, and I think they're doing a good job, but not a job that I thought was good enough.

And then Ted, on the commercial side of Bell, you had mentioned a couple puts and takes which resulted in a net decline of $29 million, I think, in operating profits.

And one of them was, I guess, a positive a year or so ago.

But can you just zero in on the operational deterioration problems, what was that and what was the cause there and has that issue been resolved?

Yes, it was ramped up overhead cost, really across all of Bell.

I mean, this is all of the things that everyone has been doing to try to get production out and through the component shops and the like, and that overhead works its way into all of the programs, be they military or commercial.

And a lot of that was in direct labor, and we have been monitoring that monthly and it's going the right direction now.

And there's a recovery plan in place and the heads are coming out so far, knock on wood, in accordance with the recovery plan to get that overhead back out of the business.

Okay, and last question, Lewis.

Just going over to Cessna, which has been performing pretty flawlessly, given the high production levels there, I mean, any potential issues with bottlenecks, etc. etc.?

Well, I talked to Jack Pelton this morning, or this afternoon.

It wasn't on that per se, but I was just kind of -- I usually like to kind of link in with these guys before we get on the call.

And I said, well, how are you seeing things?

And he says, well, he says, that as all of us in the industry are producing more than we did last year, delivering more, he said, we will have our periodic outages during a week or a month.

But he said -- I said well, are you worried about missing the numbers?

He says no, I'm not worried about missing the numbers.

He said it seems to us like as we check all of our suppliers, they should be pretty -- I said is there any one supplier you're worried about?

He says, no, not really.

He says, our guys have come up pretty good, and he says, you have to understand, Lewis, we haven't seen these volumes for some time, and they're predicted to go up.

So, he said the one great advantage we have is that we have such high volumes that we get a lot of respect from our suppliers.

So if they have to choose between making our parts and somebody else's, we usually get first dibs, so that doesn't hurt anything.

Good, all right.

Thanks.

It's fair enough, Jack, though, to say that going back to the issue again of incremental margins at Cessna, were we to have a perfectly flowing supply chain next year, we would be able to beat that 16%.

But we're anticipating --

So some of that's built in.

Right, that's built in there.

Got it, thanks.

Thank you.

And next we will go to the line of Ron Epstein of Merrill Lynch.

Yes, good evening guys.

Hey Ron.

We have gone from good afternoon to good evening, and so I will just make an administrative note that we have already gone over an hour, but with Ron and five others on the line, we will just continue.

Okay.

So Q1 we had a $13 million charge, right, if I remember correctly.

Not a big deal, supposed to be just Lot 1.

I guess I'm still at a loss how this could happen.

I mean, we have seen time and time again with the larger defense contractors' bids on fixed price contracts, and then this happens.

I mean, what kind of cost audit function do you have in?

How are you costing out these contracts when you bid them?

And I guess a broader, there's a confidence issue.

I mean how can we be confident that it's going to get back on track?

Well I don't think the H-1 charge has nothing to do with our ability to figure out what something costs.

It has to do with the specific work effort required to get a product to acceptance by the customer.

It's nothing to do with our ability to cost it.

Wouldn't that be part of the cost?

It's part of it.

It's figuring out how many engineering changes, what improvements are going to be made, what customer inspection criteria are going to be applied.

You have to know that you were going to have a whole bunch of little individual small problems, each in their own right not that big of a deal, but many of them, ahead of time.

And in a way what you're doing here, Ron, as you're coming down the production line, you're designing the aircraft.

And you think you have the thing designed right before it it goes down the production line, but as it comes down the production line, it's a whole different ball game, as you know.

That's why the production, the first production units are much different than the prototype type units.

It's building something in the laboratory is a lot different than building it it on the production line.

So in a perfect world you would know these things ahead of time and you would account for them.

But I don't think it's a lack of, it's a lack of capability, it's just a complex program.

And now that we have got the deliveries all but behind us, we think this stabilizes quite a bit on the H-1.

In a perfect world you wouldn't take -- you wouldn't have a design contract and a production contract concurrently.

But let me, hey Ron, let me -- I'm an engineer and a -- also, an operating guy background too, so let me tell you kind of, let me take you through a couple things to give you some examples of why we're not a bunch of guys that don't know what we're doing down there.

Any time we find a change when you're getting very near production -- sorry, near delivery, if you find something at the last station, for example, or in flight tests that has to be changed, that change ripples through every damn production unit all the way back to the one you're just loading the picture in, potentially.

If you find the change at station number two early in the process, it only affects two models, station number one, station number two.

So changes can ripple all the way back.

Sometimes you have to unbuild the aircraft in three stations back, make the change and then rebuild it.

Not a good thing.

But that's all part of launching these things, because they're very complicated.

Number two, although it sounds like it's just us, it isn't just us because sometimes we get equipment furnished by the government, from a supplier the government furnishes, shipped to us from that supplier, that's wrong.

But guess what, you can't tell it till you get it in the airplane and get ready to fly it.

Now think of the cost involved with that.

You bring the aircraft back down, unbuild it, ship it out, find out what is wrong with it, clock is ticking, clock is ticking, people still on the payroll, so that is all part of launching these ships.

So, I don't want you to think that we don't know how to estimate or -- this is a very, very complicated bird and we had to follow accounting principles and we did.

Ted said what he said about looking forward into '07, and he wouldn't have said it if we didn't believe it, so --

What impact, Lewis, do you think this will have?

I mean, the Defense Acquisition Board review was pushed out, right?

Oh, yes.

I can explain that.

I am in direct contact with all the decision makers myself, as you would expect me to be.

And as I said in my prepared remarks, the war fighter really needs these ships.

So we're in a hurry to get them certified and through [aquaval] and into the hands of the war fighter, beginning actually in '08 is the first deliveries, as I recall.

The reason the DAB is delayed has nothing to do with them being mad at us or something like that.

It's because the Defense Acquisition Board, when it it meets, would like to have as much data as possible, and given the fact that we have now delivered the first H-1, the utility helicopter, and we're getting ready to deliver the attack helicopter within days, it is truly imminent, we have never used that phase before, then they want to have us -- a few deliveries under their belt and get as much experience as they can so that the Navy, who goes in, and the Marine Corps who go into the DAB, they can say we have enough experience now to know that this is going to be the delivery rate and this is this and this is that.

So, there is nothing to read into the DAB that I know about, nor have I seen written about it in any of the rags out there.

Okay.

And I guess, just one last question for you, Lewis.

Yes.

With Bell trying to right itself here, does it make you any more cautious on how you would deploy capital with regard to R&D in other divisions and products in other divisions, just to give yourself some sort of buffer in case this lasts longer than you might think, or not?

No, not -- I mean, no, I can't think of a reason why, what I mean, I wouldn't slow Cessna down for all the tea in China.

We basically make our capital expenditure decision based on intrinsic value generation.

We make our engineering decision based on product development plans that have growth trajectories that are proven.

And then we understand the intrinsic value on those, too.

And basically, the engineering expense associated with doing all the products out there in non Bell areas, I mean, we could cut that back, but it would have to be something a lot more serious than what we think we're seeing at Bell, because our numbers are what they're going to be this year.

Are you suggesting, are we diverting money away from Bell to other areas, because --

No, no, just that you might be more careful, be it that --

More what?

Careful, we're --

More cautious with how you're going to deploy capital, because maybe, what am I thinking?

If you were to take a larger R&D hit to your earnings per share because of an investment in another division, well maybe you don't want to do that now because Bell is a little less certain.

We're always careful and we always invest our money to grow intrinsic value.

Yes, I mean, I don't think -- well, I have to -- you might not like my answer here, but I tell you what, if we have a division that has a track record of knowing how to spend their money to produce good organic growth going forward, we didn't get that 15% this year accidentally.

You just have to go forward and do it.

Now, we also have an obligation to everybody on this call and everybody else that owns a share of our stock, that when we give you a number, we intend to meet it it or beat it.

We don't intend to miss it.

And I don't mean that smart at all, it's just a statement of fact.

And when we put a range out there, we understand what we have to think about before we put that range out there, whether it's for the quarter or the year.

And I feel very good about that range, truthfully.

So I don't want you to leave the call, and I don't know whether you're this way, and I'm not trying to [inaudible] you on it.

I don't want you to leave the call with this pending doom that might happen, etc., etc.

We try to take into account all the factors that we're able to take into account.

Ted has been here six, almost seven years, and I've been here 14.

We think we know what we've done here, I mean, we feel pretty darn good about it.

Okay, well thank you.

I'll move on to the next person, thanks.

Have a good night.

Yes, you too.

Thank you.

And next we will take a question from the line of Robert Stallard of Banc of America.

Good evening.

Hey, Rob.

Just a couple of quick questions.

Have you got any clarity yet from the FY '07 bridge supplemental about ASV funding?

Say it again?

I just didn't quite understand you.

I think I can answer your question, go ahead.

I'll say it again.

Have you got any clarity yet within the FY '07 bridge supplemental ASV funding?

Let me see.

Well, first of all it's going to be in the presidential budget which gets approved in congress by May, June time frame.

He submits it in end of February, if I believe I'm right.

And if you look at what's been written out there, the rumor is there's some things in there for ASV, which wouldn't surprise me because we are trying to field ASV in this country as well as other places, and we'll just have to stay tuned, but I would say I'm cautiously optimistic there that we will get what we need there.

That vehicle is really performing well, and it's intended to bring it home and deploy here.

And secondly, you made a couple of disposals in 2006.

Can we expect any further disposals to come through in 2007?

No, it's not something we telegraph.

We have continued to push our businesses to improve their intrinsic value generation year over year of their plans.

And we work with those that are having troubles.

And when the time comes, we let you know when the time comes, but no, nothing is planned as far as I'm concerned right now.

Okay, thank you.

Thank you.

And next we will go to the line of Byron Callan of Prudential Equity Group.

Yes, good evening gentlemen.

Hey, how are you?

I wonder on the Armed Reconnaissance Helicopter, how are you going to communicate when this whole thing comes to resolution?

Are there kind of externals we should look for?

This is really just going to come down to price negotiation on the lots, and you'll put a press release out, and we have this thing resolved.

Is that kind of the way to think about it, or are there externals we should be looking for?

No, that's probably the right way to think about it.

As soon as we have something resolved and we reach an agreement, and we understand the implications of that, we will communicate it.

Okay.

And then maybe following up on Rob's question on the supplemental, are you guys in on the MRAV program, on the source selects, or we're talking about ASV's that are completely separate from --

What is MRAV?

It's the Mine, oh, MRAV, Mine Ambush Vehicle, it's a Marine program, I think they want to make a decision by the end of the month on this.

Oh that -- we don't know the answer to that, Byron, because there's different points of view on that from different service elements of the DOD, so jury is out on that one.

If it goes forward as a Marine only program, no.

Yes, okay, understood.

It might not, though.

Yes, no -- it's supposed to be a Marine/Army program, and that Marines --

And it will be a different vehicle.

Okay.

And I know maybe we've kind of beaten this one to death, but what do you think Dick is really going to do differently?

I mean, is there anything you can point to specifically that you think he's going to change at Bell?

You talked about people, but I mean, he has got to bring a certain perspective or certain -- you talked about different skill sets, I mean, would you just kind of hone this a little bit further?

Okay, I'll do you a couple of this, right.

One of the things I think we need down there, and I was talking to the Commandant at the Marine Corps about this, and he said the same thing, unsolicited.

It appears to us, given the highly technical nature of these ships, I mean, we are dealing with a couple real technical issues on the V-22 still.

You don't get much publicity about it, and we are still going to go into combat this year, but man, these babies are really, these are very technical machines.

Truthfully, right now I would rather have a damn good engineering mind at the top of the shop.

Because I think when you're trying to solve some of these problems, I don't mind it at all if the top guy really has a MIT degree in electrical engineering and a bachelor's in electrical engineering -- or a master's in electrical engineering from Columbia.

I think that's a positive.

Because you're dealing with a lot of different solutions and sometimes there's two or three alternatives, and I think the top guy ought to be able to contribute to that.

Secondly, Dick has been doing Lean manufacturing since, he told me, since 1977.

He's participated in the Lean, some of the real heavy duty Lean thinking and conferences with NASA and other places, and I think he will take a slightly different, but in my view, once we talked about it, a more, probably a more, let's see, how do I want to say this, more -- probably a more effective approach to implementing Lean.

I like his approach better.

Third, he didn't create a lot of these problems and sometimes when you create a problem and you don't like to get off of something that you laid out as an order when right now that order probably was the wrong way to go looking back, so he -- I think I would suspect him to change some of the way we are organized in some of the departments.

I think we will see him change the way we have approached some of the problems.

I think he will be more likely to not do it the old way just for the sake that we have always done it that way.

He got rave reviews from the employees, I was right down there.

And they love the fact he's there.

I think he will be probably a little more, I got to be careful saying this, I think he will be a little more shrewd with the government customer, he'll be dealing with them a long time.

And that wasn't -- we have got some strong guys down there, but any more the government wants to see the top guy.

I think Dick will be, maybe just a -- and he is a senior guy, maybe just a little more savvy which will be good for us.

But he is very customer focused, the government likes him, Army customer really thinks he's fabulous, and those that know him in the Air Force do too.

So, those are the skill sets that come to my mind.

He's a very cautious man.

I know one thing, he has been delivering, he's meet or beat every plan Textron Systems for eight straight years, so I expect he is going to figure out how to turn the crank down there.

Great, thanks a lot guys.

Thank you.

And next we will go to the line of Joe San Pietro of Wachovia.

High guys.

Hey Joe.

A couple questions.

One, back at the analyst meeting at AUSA, you were speaking to potentially additional ASVs that were being negotiated, and I'm not exactly sure how you reconcile that with the expectations, perhaps, out of the supplemental budget, that's the first question.

And I guess, in fact, I mean, do you expect that to come along in 07?

We have customers that would like a lot more units.

And they have been very clear about it, and they have had a number of conversations with us about our ability to ramp production up to higher levels, but we don't have an order or funding from anyone yet.

This is international?

I thought it was domestic that we were talking about.

These are domestic.

It is domestic, got it.

Okay.

Part number two, I'm circling back to Byron's question regarding the MRAV.

My understanding is that the ASV is actually going to be a suitable candidate for the first version of that program, it is going to be, the Marines are going to be -- do the ordering, but the Army is going to receive the majority of the procurement.

There's definitely going to be more than one player and I know there's going to be different iterations of everything that falls within the interim vehicle procurement.

So I guess the question is, if ASV would be a suitable contender for the MRAV, then that would by definition provide additional upside to the calendar '07, because it's obviously, as you know, it's a quick procurement.

And then if not, if it was to fall later on within the interim vehicle procurement, when do you think those competitions might come up given your conversations with the Army?

Joe, I think anything that we could say it at this time would be speculative.

Certainly we don't have enough confidence in the outcome of those to have included it in our guidance specifically at this time.

And it is -- at the time when we have more information and have more confidence we would communicate that.

Okay.

And then finally -

We just don't have an answer.

Got it.

It's going our way, but it's not our way yet.

Finally, there was some blather in the press about V-22 testing concerns in the New Mexico desert, comparing them to potential problems in Iraq, I'm sure you guys address.

I guess the testing happened last summer, but the notification came out sometime in January.

Do you have a response to that?

No, the only response I can give you is I'm up-to-date exactly completely on the V-22, because it's going to go into battlefield this year, so I know all the issues we're working and I don't remember a relationship back to that reference.

So we must have gotten that problem behind us, that's not -- we're dealing with a few problems, but none of those ring a bell that would relate back to that test program.

I mean if I knew something I would tell you pal, I just don't.

I mean it's not something that's on our watch list right now.

Okay.

I mean, the report just came out, I guess, January 18, by --

Do you remember what it referenced, the system it referenced?

I don't have that in front of me.

Sure.

When they were at the Air Force operational test and evaluation center, there was concerns that there was marginal operational ability during the 41 flights.

Well, we're obviously not aware of this, so we will have to look into it it and get back to you, Joe.

Okay.

Thanks guys.

Yes.

Thank you.

And next we will go to the line of Chris Kotowicz of A.G. Edwards.

Hi, thanks for staying on line, guys.

Yes.

My questions are really about Cessna, because we haven't really talked about it much.

Looks like we are going to have a pretty big drop off from the December quarter in terms of shipments to the first quarter, which I guess seasonally isn't that uncommon, but this looks like a pretty big drop given the backlog that you have.

Can you talk a little bit about why we're looking at, what is it, 67 or 65 units, which is actually less than I think you did this year, despite the bigger backlog?

It's not uncommon first of all, it's been pretty natural.

We have a lot of customers that want last minute delivery for tax purposes or other reasons, and we tend to have a big push in the December time frame.

And typically over the years, Cessna has done only 19 to 22% of the year's production in Q1, and if you look at just Legacy jets, that would be the case in Q1.

We would be at the low end of that, but still at 19%, about the normal range.

One of the influencers that might be of interest to you is there's only one Mustang that delivers in the first quarter.

And that's been our prior schedule, it's been part of the expected ramp up, but a lot of that is driven by the fact that 68% of the Mustangs that we're going to ship this year are going overseas, and we are not on our schedule expecting the European certification until sometime in March.

So none of those can be shipped until we move into the second quarter.

And we did ship five, about five additional units in the fourth quarter.

So --

That were meant for Q4.

This is very natural.

But we added five to the schedule.

And we added five for next year.

Okay.

I guess part of the reason for the question is that the build rate that you're forecasting right now implies that the other three quarters of 2007, you're going to have 96 shipments a quarter on average.

I mean, that's a pretty healthy up tick back.

You didn't comment on your backlog in 2008, I mean, I guess the last thing I'd heard was your backlog for 2008 at Cessna was, what, half the year.

No, we always, we haven't a set a production schedule for '08 so I can't give you a percent, but we have 350 orders booked for '08 already.

And our ramp schedule through the year is very graceful.

Just because the time when a unit happens to ship, that just depends on what side of the date it's on in terms of a quarter.

But the ramp schedule as we're going out and increasing production each year is pretty graceful.

I wouldn't -- that's not a big worry of ours.

It doesn't make the list of things that you take to bed with you at night or worry about.

It sounds like you're basically, well, let's put it this way, you booked more than 100% of what you expect to ship in '07 for '08 already, then, is what I'm hearing, before growth.

In '07 we're going to 375 units.

Okay, I'm thinking without the Mustangs, I apologize.

Well these are all --

We tend to think of all.

Everything now, so 375 this year.

We already have 350 in the house for next year and we're firm, we're working right now on selling '08 out.

So what stopped you from pulling some of those jets forward in terms of, to kind of bolster the first quarter shipments?

The supply chain and where we sit right now with all the deliveries we made at the end of December.

And we have no objective to bolster the first quarter.

We normally, on that score, we normally don't like to jerk the production line around unless we get real near a delivery and the customer wants it this week versus next week.

Because as you get more of a cadence and drive your efficiencies up you really don't want to pull them from one quarter to another.

And so we -- and right now we're, we're basically locked and loaded.

There's not a lot we're going to do differently in Q1.

But again, we don't really need to do it differently.

And if you go back and track our -- what we said we're going to deliver for the total year versus what we delivered for the total year, we have been remarkably consistent for a long time, except for the sudden downturn.

Well, maybe I'd look at it from a different angle then.

You are going to deliver 65 to 70.

Should we think about it as you're, because one of the tenants of Lean, right, is level loading your schedule.

Are we really thinking about you're going to build 85 or 90 in the quarter, and you're just not going to ship all of them until -- some of them get shipped in the second quarter to kind of maintain the flow?

The way you should think about it is we are going to have a lot of ships that are near completion at the end of the first quarter.

That's right, you have the inventory build, right.

We basically went through a review, and we'll have quarterly revenues for the balance of the year between, I don't know, 1.1 and 1.3 or whatever the numbers work out to be.

But we look at this by quarter carefully.

We - I mean, we -- before we get to this point we know deliveries by quarter, by model, we know everything we need to know.

We have miles and miles to go on our Lean journey at Cessna, but I don't think you can accuse Cessna of not being able to manage their production line.

What they pulled off back in '03 was nearly miraculous in putting the brakes on, and they're pretty good at ramping back up as well.

This will be a very low risk issue here for us.

Okay.

And then one last one.

Do you get progress payments on these jets of any consequences?

Yes.

So that's a chip, second, third, fourth quarter, what do you accrue some revenue over the first quarter?

No.

We don't accrue any profit, we get cash.

Okay.

So it's unearned revenue on the liability side.

Yes, we get cash so it's booked as customer deposits [Audio Interruption] and those are liabilities.

And in fact that's one of the reasons we have such incredible cash flow last year, and it's -- and we will get a little less next year, is because we had such an inflow of customer deposits.

Okay.

Thank you guys.

All right.

And last but certainly not least, operator, we will go to our last caller.

Okay.

And that will come from the line of Steve Tusa of JPMorgan.

Steve Tusa, how you doing, bud?

Good.

Thanks for hanging in there.

Really covered a lot of topics, here.

The MRAV or whatever it's called, very interesting stuff.

But more kind of pointed to the ARH, I'm still not quite clear on how you guys are assuming, how you guys are putting guidance out there for these charges as far as Bell is concerned.

I mean, the Katrina thing is pretty clear.

How did you, maybe just give us a little bit of insight into the process that you're taking to evaluate, is it a complete offset to the Katrina benefit?

I mean, is it a complete offset to the Katrina benefits?

Because all the above the line numbers look to be pretty much in line with what I'm forecasting in my model, and we have a number obviously that's higher than where you guys are guiding to.

So, I just curious, that's really the only moving part that I'm unsure about.

And I apologize, Steve, but we just really can't go there.

There's a huge range of outcomes.

The process is the same process we use regularly of looking at all the risks and all the opportunities, and evaluating what their probabilities are and what options we have, and putting it all into a model that works pretty well.

Historically it's understanding what the ranges of outcomes possibly could be.

But we just cannot talk about where we think this thing might end up given where we are in our negotiating position.

But it's not as if it's kind of an all or nothing with regards to each lot or something like that.

I mean it really can range anywhere from zero to --

If you understand the accounting rules and the fact that we have not booked anything for this, you would understand that there are a multitude of potential scenarios.

Right.

And then lastly just on capital allocation, you're forecasting a flat, basically a flat share count relative to what you put up in the fourth quarter.

So assuming no buy backs and given all the activity that you guys have to focus on with regards to Bell and execution there, as well as a pretty good balance sheet and actually operating profit that's growing 15% plus, stock likely going to be weak tomorrow, why are we even talking about deals?

Why aren't we just maybe focusing on buying back stock, because this would seem to me to be a pretty good opportunity in the intermediate term given that Bell is going to come back late in the decade and Cessna just seems to be continuing to fire along here?

We are talking about value creation, however we have determined we can create the most value for our shareholders, some of our businesses need to acquire things in order to be stronger businesses and grow themselves.

So it's not an either or, we would never take either of those alternatives off the table.

You can't just leave the cash sitting in the drawer somewhere, obviously, and you can only pay down so much debt, so that leaves you with two alternatives: buy your stock or go out and buy something.

And if we find something that's really attractive, adds a lot of value to us, we now how to manage and can attribute to our trends and value growth long-term, well now then you can see if it's for sale.

But a lot of things you go through before you get to buy something these days.

Right.

But on the other hand, if we don't get to check that box, we will be buying stock.

And then lastly just housekeeping on the interest expense item in your run rates, 80 million bucks, coming out of the fourth quarter, it's 100 million, I'm not sure if you addressed this through the myriad of questions.

But, what's really driving that up that significantly?

Is that the deal you guys just closed in December?

I'm just not quite sure on -- clear on how that comes to 100 million bucks.

We have used some cash, but that's our best estimate at this point.

Our interest rates and the like, and just going back to your previous comment, Steve, I would never interpret our guidance assumption in a model to say that we wouldn't be opportunistic buying shares if they're -- if we think that the market is not inappropriate for some period of time.

I think I'd just caution everybody that line item -- don't get overly hung up, a line item by line item.

We're trying to help you with your models.

The important thing is $5.90 to $6.10, and we think we have several different ways to get there.

Got you, okay, thanks a lot.

All right ladies and gentlemen, thank you very much for joining us, and we will talk to you soon.

Good call everyone, take care.

Safe travels.

Thank you.

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