達信公司 (TXT) 2007 Q2 法說會逐字稿

Welcome to the Textron second quarter 2007 earnings conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Vice President Investor Relations, Mr.

Doug Wilburne, please go ahead.

Thanks, Val, and good morning, 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 remind everyone that a package containing key data that will be covering on our call today is available on the IR section of our website.

Moving now to our results for the second quarter.

Revenues were $3.2 billion up 15%.

Year to date manufacturing cash flow from continuing operations was $280 million with free cash flow of $123 million.

Earnings per share from continuing operations were $1.69, up 26% from a year ago.

This result includes a $48 million charge or $0.25 per share recorded at the Bell segment for the Armed Reconnaissance Helicopter, as we reached preliminary agreement with the U.S.

army on the program.

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

Thank you, Doug and good morning, everyone.

Overall our 26% growth in earnings during the quarter reflected strong organic revenue growth across nearly all of our businesses and we leveraged that growth with improved operational execution and performance across the enterprise.

We foresee continued positive operating results through the rest of the year and have increased our earnings and cash flow estimates accordingly.

The even better news is that we believe this positive trend will carry on through the rest of this decade and beyond.

Based on this optimistic outlook and confidence in our ability to execute, Textron's board -- Textron's board of directors approved a two-for-one stock split, a 19% dividend rate and new share repurchase program.

These actions clearly underscore the company's commitment to value creation through a balanced strategy of growth and return in cash to the shareholder.

And our strategic focus on growth was again readily apparent during the quarter.

While robust end markets are certainly supporting demand in our businesses, our success in the marketplace is also the direct result of our transformational focus on our customers' needs and new product innovation.

For example, industrial revenues grew by 7% of the quarter led by double-digit expansion of Greenlee, Kautex, and Fluid & Power.

At Greenlee we're expending presence in the big box retailers.

Our new line of hand tools are doing very well and this year we're also seeing good growth with our Telco product line.

At Kautex current growth reflects having the best product technology and processes and being on the right platforms around the globe.

Furthermore during the quarter, Kautex actually won contracts on new platforms worth about $110 million in annual revenues which will contribute to growth several years out.

And a Fluid & Power, our nuclear pump products are seeing new demand particularly in China and our gear products for mining applications are finding new customers particularly in Australia and South Africa.

We also kept pace on the execution front at Industrial with a second quarter of year-over-year margin improvement.

Operating improvements there reflect our enterprise management strategy with initiatives like Textron Six Sigma and global supply chain integration.

Turning to Textron financial.

We recorded record earnings as our commercial finance business also achieved all-time credit records for both nonperforming assets and delinquent account percentages.

Now, let's move to Bell where we had a number of positive developments during the quarter.

First, we made substantial progress working closely with our customer of the U.S.

army in replanning the ARH program.

At this point we signed an MOU or memorandum of understanding with the army covering aircraft specs, pricing methodology and delivery schedules for the initial 62 Lot-1 and Lot-2 aircraft.

Subsequent lots will be priced under standard practice using then current estimates to recover expected costs and reasonable profits.

The customer also agreed to provide additional funding for continued systems development and demonstration or SDD costs, and while we still have to work out the details of a final ARH plan with our customer, we currently expect that the SDD phase will continue through the next few years including the delivery of the first three SDD production units in 2009.

Like all DOD programs all of this is subject to further discussions and funding availability.

In the meantime, the ARH program -- aircraft continue to progress as an unprecedented pace for a major program.

We're approaching the 700th test flight hours mark, less than two years from contract award.

Feedback from test pilots has been very positive on its great handling qualities during various test phases and other operations.

So while we're still working on final program details, we're very pleased we're able to get the program back on track.

Moving to H-1, we received the first new build cabin from our supplier during the quarter, beginning the transition to new build Yankees which we will start delivering next year.

As we continue moving down the learning curve on the H-1 production line we're also working on a number of technical matters like the helmet issue we discussed in the past.

And execution on our largest program, the V-22 continues forward as we delivered four units during the quarter.

In Amarillo we began assembly of the 100th V-22 slated for delivery early in 2009.

Okay, let's turn to the commercial side.

We delivered 47 helicopters, up from 37 -- 36 units from the first quarter.

Year to date, then, we have made 83 deliveries up 26% from last year.

So we're very encouraged by the progress we made in Bell.

I am quick to add we have more work to do in this regard but the team at Bell Helicopter is moving us a better job in moving forward in each of their very important programs.

We're also very encouraged by what we see at our Textron systems business.

Revenues were up significantly again reflecting in part higher ASV production.

We delivered 152 units during the second quarter.

The ASV continues to provide extraordinary protection and capability to our U.S.

army customer in the field of battle and is a critical part of the army's vehicle strategy.

In fact, last month we received additional funding that supports sustained production through October of next year and 2008 defense budget being deliberated in congress supports production at this level into 2010.

We're also beginning to see the early stages of growth and after market support requirements.

For example, we just received a $200 million funding approval to upgrade fielded ASVs.

We're also in early talking stages with a number of potential nonU.S.

customers, so we anticipate growth in ASV revenues through the rest of the decade.

Wrapping up with Cessna.

Excellent execution continues as margins in the quarter were slightly ahead of our expectations, primarily driven by our ability to deliver 95 jets versus our plan of 90.

This included 10 Mustangs demonstrating superb execution on our production ramp up.

We're also pleased that the Mustang received European certification during the quarter, making it the first new generation entry-level business jet to be certified in Europe.

Given our production pace, we're now increasing our 2007 delivery forecast by five jets which includes four more Mustangs.

So that brings us to 380 total jet deliveries planned for this year.

But the really big news out of Cessna is the continued strong demand for their jets.

We broke an incredible 282 orders during the quarter.

282 orders.

Based on these additional orders we're now pleased to announce that we're essentially sold out of next year's delivery plan where we're targeting 470 jets including about 100 Mustangs.

So as we see it, order and demand will continue strong for the foreseeable future and we're expecting an increase in deliveries in 2009 as well.

In summary, our strategy of investing in organic growth is driving demand across our enterprise.

In fact, combined backlog of Cessna and Bell has hit another all-time record high of $14 billion.

Our first act momentum on both the top and bottom lines combined with our execution progress clearly validates our transformation strategy.

As we continue to invest in new products and execute on our many, many opportunities, we're confident that we can achieve our long-term outlook for 7% to 10% annual revenue growth topline, which would leverage to strong double-digit bottom line growth through at least the rest of the decade.

You can be sure that we will not waiver from our focus on our vision and transformation strategy.

And given our strong forecasted growth, I would predict our shareholders will continue to benefit from that focus as far into the future as we can see.

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

Thank you, Lewis.

It is rare that I have to correct my boss, but the new contract that we received for upgraded top grade field of ASV is $20 million, not $200 million.

Wishful thinking.

Wishful thinking, but still a good step forward.

Let me get started then.

But the fact that we were able to convert 15% revenue growth into 26% EPS growth in spite of the $48 million Bell charge means that we're on the right track in a number of ways.

So let's look at what drove this $0.35 earning per share increase.

Higher pricing in the quarter of about 3%, contributed $0.44 a share, while inflation of about 2.6% cost us $0.31.

Volume and mix provided $0.22, cost performance contributed $0.14.

Textron financial was up $0.07 and taxes also provided $0.07 on a year-over-year basis.

The quarter's ARH charge was $0.22 higher than charges taken a year ago.

Miscellaneous items, primarily increased corporate expense, cost $0.04, and the head winds of R&D, depreciation and pension collectively cost $0.02.

Now, let's review the details of the major drivers in each segment and I'll start with Cessna.

Revenues at Cessna were up $198 million in the second quarter, due to favorable citation jet volume and pricing.

Cessna profits increased $47 million due to higher pricing and the impact of higher volume, partially offset by inflation and increased product development expenses.

With the strong order intake, Cessna's backlog reached $10.4 billion at the end of the second quarter, up $1.4 billion from the first quarter.

Moving to Bell, segment revenue increased $110 million reflecting higher revenues in both our U.S.

government and commercial businesses, while profits decreased $6 million.

For our U.S.

government business revenues were up $70 million, due to higher volume and a lift from acquisitions.

The volume increase reflected higher AS -- V-22s, ASVs and Intelligent Battlefield Systems volume, partially offset by lower spares and service sales and lower volume of air-launched weapon products.

U.S.

government profits decreased $40 million due to the charges recorded on the ARH program and lower V-22 profitability, partially offset by favorable ASV profits.

Commercial revenues were up $40 million due to pricing, the benefit from acquisitions and higher volume.

The volume increase reflects higher helicopter deliveries, partially offset by lower Huey II kits and lower spares and service volumes.

Commercial profit increased $34 million, due to higher pricing, favorable cost performance, and lower engineering research and development expense, partially offset by inflation.

Backlog at Bell Helicopter was $3.6 billion at the end of the quarter, up $700 million from the first quarter, and that's primarily driven by lot 11 of the V-22.

Before we go to industrial, I want to clarify the charges taken on the ARH in the first and second quarter.

As you may recall, we provided for losses of $25 million in Q1.

That provision consisted of $7 million in SDD cost that exceeded the original SDD contract funding limit.

An $18 million in supplier obligations incurred for long lead LRIP component production.

Based on the plan outlined in the MOU, we estimate that our full loss will be approximately $73 million on the LRIP aircraft.

Accordingly, a net charge of $48 million was recorded in the second quarter, reflecting an additional charge of $55 million for LRIP related cost, offset by the $7 million of the SDD costs for Q1 which now have been funded.

Now for industrial.

Segment revenues increased $60 million due to higher volume, favorable foreign exchange and higher pricing, partially offset by the divestiture of noncore product lines.

Segment profit increased $5 million due to pricing and improved cost performance, partially offset by inflation.

Lastly, finance revenues increased $47 million related to higher average finance receivables and a gain on the sale of leveraged lease.

Segment profit increased $12 million, due to the leverage lease gain and from higher average finance receivables, partially offset by increase in provision for loan losses and lower net interest margin.

As Lewis mentioned, portfolio quality continues to be exceptional, as nonperforming assets were 1% and 60-day-plus delinquencies were .56%.

On the share repurchase front during the quarter, we bought 509 million shares at a cost of $55 million.

That brought us to a total of 10 million shares purchased under the previous board authorization.

The new authorization on a post-split basis is for 24 million shares and we would expect to execute that over the next two to three years.

Now for our outlook.

First let me point out that our per share outlook items are going to be stated on a pre-split basis.

We'll make that conversion next time around.

For the full year, we're now forecasting EPS from continuing ops in a range of $6.35 to $6.55.

That is up $0.25 from our previous guidance.

For the third quarter, we're forecasting $1.45 to $1.55.

In addition to higher full-year earnings we're also now anticipating that free cash flow will be in the range of $550 million to $600 million for the year, up $50 million from our previous expectation.

In closing, we generated very strong financial performance during the first half of 2007, allowing us to make significant increases in our outlook for the year.

This execution also provides us with greater confidence in our longer-term outlook, allowing us to further invest in our businesses and our people.

All of which should lead to a continued expansion in shareholder value.

Now I'd like to turn the call back to Doug, who will give you some additional color regarding the outlook.

Thank you, Ted.

Let's start with Bell.

For the third quarter we're forecasting segment revenue of about $890 million with a margin of about 7.5%.

For the full year Bell revenues are expected to be about $3.8 billion with margins around the 8% mark.

At Cessna, third quarter revenues should be about $1.3 billion, reflecting 100 jet deliveries and with margins of about 16.5%.

Full-year Cessna revenues are forecasted to be $4.9 billion with margins of about 6.25%.

Industrial revenues are projected to be about $750 million in the third quarter with margins of about 4% reflecting normal summer seasonality.

For the full-year then industrial revenues have margins are expected to be $3.3 billion and 6% respectively.

Textron financial we're targeting third quarter revenues of approximately $220 million with operating profits of about $55 million.

Full-year finance revenues expected to be about $900 million with operating profit of about $220 million.

Other full-year targets include interest expense of $95 million and corporate expense of about $235 million.

Our tax rate forecast for the full year remains unchanged at 31% to 32%, however, we're more likely to track towards the lower end of that range.

Hey, Doug, hold one second.

I'm sorry.

The year end margins for Bell -- for Cessna, 16.25%.

I think you said 6%.

16%?

It makes a little difference.

Yes.

Yes, I didn't mean to lop off 1,000 basis points here.

So with that clarification, that concludes the prepared remarks, and, Val, we're ready to take questions now.

Thank you.

(OPERATOR INSTRUCTIONS) And our first question will come from the line of Steve Tusa from JPMorgan.

Please go ahead.

Hi.

Good morning.

Hey, Steve.

It looks like there was once again some units, whether it was Bell or Cessna that were kind of pulled into -- into this quarter.

There is always puts and takes.

Maybe you can hash out maybe what was -- what came in that you didn't expect this quarter?

Well, I'll try to give you a little technicolor here, but with the caveat that this -- you always run the danger of selective analysis when you do this, but there were a few things that were clearly different than what we had in the forecast that in my mind I would call timing related.

The biggest one was the TSC leveraged lease sale.

We picked up $0.11 a share on that transaction.

We expected that that would happen sometime this year, but to be completely honest with you, we thought that it would be about half that amount.

So it is probably about $0.06 worth of timing that pulled into the second quarter and in some plus up for the year, and that was just a tremendous gain on that deal.

We also had some discreet tax items, something we've been battling the IRS with for about five years that we finally won in the quarter, as well as a state tax audit that settled in the quarter that were worth about $0.05.

And on the unit side we did pull in a couple of 412s and we did tone down some spending on IR&D at Bell, they're running a little below plan in the first half.

We expect to spend above plan in the second half at Bell to get that back on track, but the quarter was a little lower, so probably about $0.04 at Bell.

And we shipped five jets, probably also worth about $0.04.

So when I sort through all of that there is about $0.19 there of things that arguably are timing, but I really want to caution my sales-side friends, yes, don't take all of that literally, because there are lots of other pluses and minuses, but those were probably \some of the larger things that we didn't expect in the quarter, and we probably took a little bit larger charge on the ARH, also, than what we had in the quarter, although I would say our full-year basis that was well within the range of the guidance we previously put out.

But then corporate was significantly higher, I mean, is there anything in there that you would like to call out?

No, well, that is a quirk.

The main driver -- there is a few things in there.

There is some contingent fees for tax work that show up as consulting fees in there.

But the single largest thing driving corporate is the $20 increase in the stock price during the course of the quarter, and this is a little complicated, but the way that works, we mark to market all of our compensation-based programs, including deferred comp for people that are not here that still hold stock-based rights in the company.

We hedged that, so there is no P&L, there's no EPS impact at all to that.

But because the hedge is nontaxable, we only hedge 65% of the exposure.

So if you wanted to restate our P&L for this quarter, we had a $30 million expense in corporate, offset by a $20 million hedge benefit in corporate, so hit by $10 million, but down in tax we get $10 million of good news.

So the net EPS impact of that is absolutely zero, but it makes corporate jump up quite a bit.

Right.

And then just -- thanks for all that detail.

Just quickly on Bell.

So you basically only got reimbursed for about $7 million of that $25 million charge, so the total charge this year I think you said was about $70 million and that's basically it for ARH as you see it for the time being.

Yes.

Total net will end up being $73 million.

And that shouldn't repeat next year.

That should not repeat going forward.

But, let's make sure everyone understands, that is our best estimate based on signing a memorandum of understanding.

We're still going through the replanning process.

I think the answer is that in the end it won't be exactly $73 million, but it is our best estimate and we think it is going to be pretty close.

Okay.

And then lastly, Bell Helicopter backlog was very strong.

Anything-- is that just some sort of adjustment for military contract or something?

I mean, what -- did you have a pretty good commercial orders quarter?

The single biggest change in the quarter for Bell's backlog was signing up on lot 11 for V-22.

Got you.

That makes a lot of sense.

Lastly, Lewis, any further progress on looking at the industrial portfolio?

No.

Nothing to report there.

We felt good about the fact that we see another good quarter of growth.

We have a lot more growth we expect to get on the bottom line, as well.

No, I would say that we're very focused on getting all of our business running as strong as they can run and we're always on the look-out for opportunities, but right now nothing to report.

Right.

Thanks a lot, guys.

And our next question will come from the line of Jeff Sprague with Citigroup.

Please go ahead.

Thanks, good morning.

Good morning Jeff.

And I just kind of thinking about as we get through this early ramp digestion phase on ARH and H-1, there is a little bit -- where can those margins go and how steep is that ramp?

Well, we've said in the past that we expect Bell margins to settle down in the 8% to 10% range by 2009.

Obviously, with the couple of quarters that we have under our belt we can see -- we can be encouraged about that, but I just have to caution everybody that it is two quarters, we know some of the strength of the Bell margins was a very strong mix in the first half of the year.

Some of the strength frankly is that the new management at Bell kind of pulled back the throttle on some of the spending and development costs in the first half of the year, and we expect to see that reaccelerate here in the second half of the year once the new team kind of got their hands around where they want to go.

So I think we're encouraged that next year can be better than this year, but we haven't sat down and gone through the planning process yet, so I think the best we can say right now is honing in on somewhere between 8% and 10% by '09, and if we can keep up the kind of performance that we've seen in the last couple of quarters maybe it can trend towards the high end of that in '09.

And does the forecast assume and should we expect that until you get to full rate production on H-1 and ARH that those are zero margin type propositions?

Well, H-1, excuse me, will generate some profitability, call it mixed single digits over the next few years.

Some of the production lots are not profitable, but there are other spares, contracts and other types of supplemental contracts that are going to contribute a little bit of profit.

It is fair to say that we would not expect to see any profitability on ARH until probably out in 2011.

Okay.

And then on Cessna, can you give us a sense of where R&D is running there?

Maybe it is percent of sales for the full year, and maybe talk a little bit about I think the margin performance there was certainly very encouraging given Mustangs.

Are Mustang margins right out of the gate?

Maybe not at the segment average, but nicely positive?

Nicely positive, nowhere near the segment average for Mustang.

I don't know if we're -- we're searching for R&D data.

I'm not sure.

Do you have that?

Yes, I do.

We'll have to dig for that.

But I -- Mustang margins are nicely positive, but they're still quite a few -- let's call it gross margin basis 20 points behind the rest of the flock.

As would be expected with a new product launch.

Absolutely.

And then just thinking about ASV and maybe MRAP, is there still some play-up of doing MRAP production as a sub to others?

We're having conversations.

It could happen.

But there is nothing -- nothing that is settled down at this stage.

We're working to continue to improve our product for future opportunities and there are a number of people out there that are looking for capacity and we have some capacity.

So that is possible.

Jeff, Lewis, I would add a little bit to that.

With the -- you never know about congressional funding, but it looks like that we'll get that program pretty steady state funded which is fabulous through the end of the decade, because this unit, although it is different than some of the MRAP vehicles being proposed, it is much faster, it's smaller, quicker and used for different missions, so the -- I expect the orderer quantities, as I said in my portion of the speech, should really continue pretty strong.

And then to your point of could we assemble somebody else's, or do we get back in again on MRAP1 or MRAP3, or whatever happens over the next three or four years, actually our chances are good, but I would -- we don't have a dime in the forecast going forward anywhere on that and so we just -- it is just opportunistically -- opportunistic upside.

And I guess just finally for me, and I'll pass it, as to the cash flow moving up.

As you have this embarrassment of riches in demand and backlog, do you actually foresee CapEx having to move higher in '08 than you guys were talking about?

Can cash flow grow to keep up with earnings growth in the next couple of years or do you still have very heavy investment to think about?

Well, we -- CapEx is moving up from our prior estimates modestly.

We do have to do some more at Cessna.

It is fair to say our '09 and '10 outlook for Cessna is stronger than it was previously.

We have agreed to let Cessna go above their planned spending for CapEx, even in this year, as they have made some reassessments of what it looks like.

So -- but I don't think that's going to have an overwhelming impact, Jeff, on our ability to continue to see cash flow improve.

It's going to take some investment to handle the volume, but it is not huge numbers, it is not an extra $100 million, it is extra $20 million and $40 million.

Hey, Jeff, one more piece on that one.

And obviously we feel really good where we are right now.

For all the employees listening on the line, we're like 20, 25 yards down a 100-yard football field on really implementing lane.

We don't have a good way to estimate how good we can really be, but based on other companies like Toyota and others, we have so much more cash earning out of this company.

As somebody said, we just begun to fight.

So we're proud of what we're done, but we know we've got a lot to do.

We're sure not going to be resting on our laurels, I can tell you that.

Okay.

Good stuff.

Thanks a lot.

Yes.

Okay, and our next question will come from the line of David Bleustein with UBS, please go ahead.

Good morning.

Morning.

Just a quick question.

If you're setting records at Textron financial for delinquencies and some of the other metrics, is your loan loss provision only rising due to the size of the portfolio or is it rising as a percentage of benefits?

Well, actually, our provision has been trickling down.

It has been fairly stable, but if anything it has come down just a little bit.

But it is -- we do have the pull-up every year with the level of growth that we're also experiencing.

But net-net it has been fairly stable and kind of $90 million, $100 million area.

Alright.

It was the line offset in the loan loss provision that threw me.

Yes, we did have in the quarter some increases for some specific issues around a few of our liquidating assets.

Fair enough.

Of the business jet orders you took in the quarter, do you have a rough geographic split?

Yes, it is about half and half.

I don't know if I have that page.

I don't know if I have it here in front of me.

It's not half and half, because we had the big net jet orders in there.

It is 50% international and then --

And net.

I'm assuming most of that general order will be domestic and most of that one specifically, yes, so --

And then coming back to that question on the industrial group -- or in your opening statements you mentioned China, mining, nuclear, a lot of of the buzz words that right around now probably command pretty big multiples out there.

Is there -- is there any sense of urgency, given the current market valuations and popularity of some of those end markets that you mentioned?

Well, I don't know if I really want to answer that question, no.

There is no sense of urgency I guess is the bottom-line answer, but we are evaluating all of those things as we look at all of our businesses all the time.

So it is both a combination of what our businesses are able to do themselves, how much intrinsic value they're able to create, but we're also mindful of all of the other value options that are out there.

Terrific.

I'll let it go there.

Thanks a bunch.

Okay.

And our next question --

Hey, Val, it's Doug here, let me just back up and fill in a hole that we had left earlier on the issue of IR&D.

At Cessna we're pretty much on track with what we had talked about earlier on a global basis.

There would be $280 million this year.

How much?

$280 million.

Yes.

And that's consistent with what we talked about back in February on a total company basis.

Go ahead, Val.

Okay.

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

Please go ahead.

Morning, Shannon.

Morning, guys.

Just a follow up on question with Bell margin question.

This issue of -- I guess, Dick pulling back on spending a little bit there.

Ted, can you quantify that a little bit more, and is that something that was just strictly one-quarter issue or did you make kind of an assessment of what was done previously and some of that is permanent?

Well, we'll see, right now it is his intention to still make budget for the year which means he's got to spend some between IR&D and SG&A some $32 million more in the second half than he spent in the first half.

He has only been there six months so there is a continual assessment going on there, but right now the intention is to pick that back up in the second half.

You remember, when I announced and went down there, I talked about the fact that the pilot systems, I think he went eight straight years and basically never missed a plan.

Now Bell is a bigger more complex situation with a lot of programs moving around.

So no promises on that.

But this guy tends to make plan a heck of a lot more than he misses them.

So --

Well, then maybe just to follow up on that, Lewis.

In terms of Dick's relationships with the customer and maybe internally, too, is -- are you seeing a notable sort of change of reception regarding Bell's reputation?

Your reputation can be ruined in a minute and it takes a long time to get it all back, and I think we over the last two or three years we suffered from making some mistakes that I'm not very proud of and I take responsibility for that.

I mean, I'm the captain on the deck here.

But Dick does -- I mean, it has been a long time leader here at Textron.

He goes way back, he was here when I got here, and he's -- he's dealt with the customer a lot, he's a straight-shooter, and I think, yes, I think he has done a lot to regain the confidence that our military customer has as Bell.

We're not overconfident, we're certainly not cocky, but, yes, I think he has done that.

He and his team.

I can't just say Dick.

Dick has got a real strong team in place now.

He has brought in a top guy of a supply chain and put him in charge of operations and engineering.

He has reassigned some people that were more in jobs to develop back into the areas they really know best.

And he is a real team -- strong team player and he's really a hard-driving guy, too.

So all of those things have combined to make the first two quarters at Bell look very good.

I said, we feel good about what they're doing, but we just have to see for a few more quarters before we can really convince ourselves that we're on an upward launch rate.

Okay.

And just on Cessna, your margin came in stronger than expected in the quarter.

Can you break down -- is pricing stronger than you thought?

Mix?

How would you characterize the margin on performance?

Cost performance predominantly.

Few extra units, but good cost performance.

Cessna will tell you they might not even agree with Lewis that they're on the 25-yard line, they may say they're further back than that.

But they're making a lot of progress in starting to implement lean -- we have a long, long, long way to go.

But good solid cost performance.

And I think that's helped us in a lot of ways at Cessna because kind of counter-intuitively in the past cycles when Cessna has really ramped up volume and had to hire a bunch of new people, productivity usually suffered.

And the good news here is that combination of maybe doing a better job on-boarding people, so we have not had -- or training people.

But also not having to bring as many on as they leaned out the processes.

I think the number they showed me the other day, is they've had -- if this cycle had been the last cycle, they would have hired 1,200 more people by now in order to meet this volume, and they haven't had to do that, and that means they've got more skilled hands out there assembling these aircraft and we're seeing that in cost performance.

Okay.

Great.

Thanks a lot, guys.

Okay.

And our next question will come from the line of Richard Safran with Goldman Sachs.

Please go ahead.

Hello, Rich.

This is Noah [Pathnek] for Rich, good morning.

Good quarter.

Thanks very much.

Just following up on that Cessna margin question, you were 60 bi[s ahead of the range for the quarter.

And you only raised a full year by a two and -- two to three -- by 20 to 30 basis points.

Can you just talk about the puts and takes in the second half of the year that are causing the full year not to be a little bit higher than that?

Yes.

There are really three things.

We have higher ERD spending primarily driven by CJ-4, encore plus, and the large [Cabot] study work.

We've got a higher used aircraft revenue which has typically very little margin on it.

We also have higher citation shares revenue, which comes with no margin on it.

And we are ramping up the next phase of an SAP implementation and there is some additional expense that is in the second half for that.

Okay.

Thank you.

And then looking at the delivery numbers the full year you took up by five -- if I heard you correct eight, four of the five are Mustangs.

Right.

That's correct.

You've beaten your forecast in the first two quarters and this quarters beat -- none of it was Mustang, yet the full-year deliveries excluding Mustang is unchanged.

So given the health of the backlog, what is the probability or the possibility that you would beat -- that you continue to beat your forecast on the jets, excluding the Mustangs.

You mean on deliveries?

Yes.

Low.

Yes.

I mean, it could go one or two, but we have to beat a big number.

You look at our third and fourth quarter to hit the numbers that we have out there, we're ramping legacy up by the fourth quarter we're running at the '08 rate.

So it's -- we got a pretty steep ramp here in the -- in this third to fourth quarter.

We feel good about it, but I don't think there is much probability we'll runway by it.

Okay.

And so the new -- just to confirm the new '07 Mustang expectation is 44?

Correct.

And how many of the 470 that you talked about for '08 are Mustangs?

Is that still 100?

100.

Okay.

All the upside from the 435 to 470 is--

The Mustang -- the Mustang is fluid.

It is not going to drive the end results of Textron wildly, whether we're plus or minus 10 Mustangs, but we're in a launch phase right now where we do 44 this year, we do about 100 next year and trying to do 150 the year after that.

Could those numbers -- those numbers could move plus or minus 10 one way or the other depending on how that ramp-up is going.

But that's not going to be the huge influence on the bottom line of Cessna.

But I was down in Independence three weeks ago, and that's quite a changed place.

It is pretty amazing to see us ramping to 150 jets and still producing all the single engines in the exact same space that we used to just to do single engines.

That is an amazingly implementation down there.

Another way to think about the volumes, our ramp-up year-over-year, our increase year-over-year is really the combination, obviously, of all of the volume of the planes.

So each aircraft, CJ-4, CJ-3, CJ-2, of course 4's not there yet, but it adds its own yearly production curve, and once we get into what we'll call full rate for each model then we predict when it is slowing down slightly and put it into block point changes.

And a good way to think about it is, we would be happy in the next two or three years to continue what you see in '07 and '08 for legacy jets, if you don't mind me using that phrase.

Because we're going to go from about 335, 336 legacy jets this year, to 370 next year if you take 100 of the 470 you get 370.

And I would be really pleased to see that 10% each year on legacy and then get our Mustangs up to 150, and then, don't forget, as soon as the Mustangs out there in pretty good volume for three or four years, we're expecting some step-ups, so we should see -- we're hoping to see -- should is not the right word, we're hoping to see customers that heretofore that no experience in a citation because Mustang wasn't there, to come out of Mustang and to come into our product line.

So that has a little bit of interesting upside to us or at least market support for us near the end of the decade.

Okay.

That is great color.

I appreciate that.

Yes.

Following up on the ASV, the new number now you're talking about 570.

Last quarter when you were talking about 530 and said potential upside once the supplemental gets signed and MRAP.

Clearly your MRAP picture is still in question, but in terms of the supplemental, does this 570 now represent all of the potential upside you talked about from the supplemental or could that still go even higher from here?

That represents everything that is on the table now.

Yes.

Okay.

The only upside would be some type of MRAP involvement, but even the chances of that this year would be pretty small.

If you'll allow us to run at average monthly rate of about 48 which is what we have originally been targeting for.

Obviously, that is down a bit from the first half when we were trying to drive some additional capacity up, so we are -- we will suffer a little bit in the second half from a little lower volume.

The other impact on the second half is that we've made a strategic decision to do some outsourcing of weldments for that product line, for two reasons, to create upside additional capacity should those opportunities present themselves to us, and, two, to also buy some insurance in case we have any other weather-related problems in the New Orleans area, and that is going to cost us a little bit in the first half versus the second half, and in the Bell numbers as well, but we think it is a smart, strategic thing to do.

Okay.

And could --

If I could just interrupt.

I am going to move on to the next analyst now, because we have quite few people on the line.

So thank you very much.

Val.

Okay.

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

Please go ahead.

Good morning, guys.

Good morning, Nicole.

I guess the first one would just be, Ted, on your combo analysis, you gave us the price number of $0.44, is there any way -- that is a pretty big number.

Is there any way to break it out by business?

And is the majority of that Cessna?

That would be a big piece of it and, yes, I've got that.

Let's see here.

But I have to dig for a moment.

Okay.

Bell segment was about -- I'm doing dollars now and not pennies, so you can sort of divide by two to get -- Bell was just a little under $20 million, Cessna was a little over $50 million.

The industrial businesses were about, well, were $13 million.

Great.

And I guess, Lewis, as you look at Bell over the next, say, I don't know, 18, 24 months, can you articulate for us the metrics and the milestones that you see in the second half of the year that you're going to be really kind of judging them on, and then also into 2008?

Well, first of all, we're somewhat watching them on a weekly basis, we're all kind of pretty tight on everything we're doing here, because we decided we're all going to stay really close on each program.

So the main item to work on is delivery, and then the second item to work on is cost.

I guess I would have to go back and say, though, the first thing to do is do it right the first time.

We've kind of refocused ourselves to make sure we don't pass anything down the line.

We assemble things in station.

We got into some bad habits a couple years ago and I think we're moving past that now.

So I would say build in station which begets better first time quality in each one of the stations and then delivery on time, and finally cost.

And interestingly, even though you list cost third, it turns out to be improved by focusing on the first two, so, you -- I mean, you could say that the first two drive the third pretty easily.

I guess the next thing we're looking to is the metrics in up about 2%.

That is scheduled, we split off a [val] on each one when we had helmet issues, which weren't our issues, but the other issues so the (inaudible) starts next year.

So we're watching developments to make sure those get started.

And then of course ARH we need to watch the test program there.

We watch a combination of test metrics and quality, delivery and cost metrics.

And we watch those pretty regularly and we have good reporting on that.

Okay.

Great.

And I guess if you think about process, how much have you reengineered the lean kind of initial process, evaluation, training, etc., based on what's happened at Bell?

On Bell, we've just -- we have just started there, and I would say that they have made some very good progress in certain areas of Bell, but we have more to do there.

We have just so much more to do there.

And actually, I mentioned we sent our supply chain guy down there, I kind of misspoke myself, he also is in charge of Textron Six Sigma, which included lean, so we injected our vice president of the company into the organization to really drive lean.

So we're already seeing benefits from that.

We will continue to see benefits, especially as we look real hard at the component areas within Bell, component departments within Bell, that then furnish components to final assembly.

Because we found out if we work hard on leaning some of those components supply departments out, that adds a big boost on throughput and quality in the assembly shops throughout Bell.

Great.

Thank you.

Yes.

Okay.

And our next question will come from the line of Cai von Rumohr with Cowen & Company.

Please go ahead.

Hi, Cai.

Thank you very much.

Great quarter, guys.

Price at Cessna.

Can you give us a qualitative sense, presumably price has been improving in the sector and you've added 70 firm orders to -- of larger business jets to 2008, were those at meaningfully better pricing than the first 300?

Somewhat better.

Yes.

Okay.

Qualitatively on price, has it been getting better as we go through the year?

We've been walking the fine line.

I mean, we're not trying to overly take advantage of our customers, but there have been reasonable cost inflation and commodities out there and it is fair to say that we're more than able to recoup that in the marketplace.

Yes.

Okay.

And the second question at Cessna, your projections for next year have the larger business jets up about 9% or 10%.

Right.

What are the constraints to going higher?

Is it supply chain?

Is it internal?

And what are the chances you might be able to get that number up?

Well, the constraints are both, our internal capabilities and supply chain.

We have some constraints we need to break around paint and metal bond, predominantly.

And we authorized Cessna to spend the money to go out and start breaking those constraints.

But there are also clearly tightness in the supply chain, and this is -- we'll keep working it to see if we can get a few more units out.

The customers would certainly like that.

But this is what we think we can do right now.

Yes, and let me just add one more thing, Cai, nice to talk to you this morning.

Let's take any line you want -- CJ-3, alright?

From Cessna's been -- this is an important piece of Cessna's strength.

Cessna has been delivering jets in the early '70s, and they learned a lot about the cadence and volume year-over-year that they should expect to deliver for any specific jet based on its initial demand and ongoing demand.

So let's suppose that we took in orders of 75 and we could have produced those for a jet -- we could have produced them in two years and then you'd be done.

We wouldn't be doing that.

We would phasing that to try to predict what the order flow would be to create a constant flow line -- a flow rate on the assembly line so that we could maximize quality, maximize delivery productibility and minimize pain to the customers.

So you can't have somebody waiting five years for a jet.

On the other hand, it would not be atypical unless you get in early to have to wait a couple years.

So I just say there's constraints on the one end, there is very careful production modelling on the other, so that we basically maintain a very steady cadence to our delivery rate, and we go back on price for a minute.

We could charge more, but eventually when things slow down you have to cut your price.

We don't cut price.

So that is what holds Cessna's long-term value for used jets up.

By the way, we forgot to mention, we're now down to 10% of jets available for sale now in the market, and most of those are -- used jets, I mean, sorry, and most of those are probably too old to sell or pretty close.

And we've never been tighter, I don't think.

I'd kind of like to follow up in terms of what Lewis said in terms of rigor of the pricing in the marketplace that we always exercise, going back to your original question in that are we getting better price now than at the beginning of the year.

But basically we don't gain that same on weekly or monthly or quarterly basis.

It is basically a annual process, if you will, where we publish a price sheet and there is very little variation from that.

So you really shouldn't be looking for a lot of upside on price, beyond the 4.5% so -- or so, that we've been dealing with over the past 18 months, or so.

Okay.

And last one, because I know it is busy, the ARH MOU, when do you expect to have that finalized and what are the kind of hurdles do you have to jump over to get that done?

Well, we have a lot of discussion to go through with our customer.

What they want and what they're able to do is going to drive a lot of it, what funding is available when, and but we would expect to have that definitized sometime early next year.

Thank you very much.

Okay.

Thank you.

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

Please go ahead.

Hey, good morning, guys, nice quarter.

Thanks.

I think just about every question has been asked, but let me just follow up with just a couple.

Given the increase in build rates at Cessna, what do you see on the supply chain?

Because you guys are going up and Boeing and Airbus, everybody's going up.

I mean, how tight is the supply chain and how hard is it to manage?

Well, contracts just 1.5 years ago were for some reason, maybe two years ago, the supply base really hadn't totally figured out that we're going to see this kind of expansion.

It lasted a very long time.

And so my perception is that we had some tight spots and I don't think it is fair to hang any one supplier out to dry here, but we had some tight spots, but we might move one plane into a quarter and one out of a quarter because of that, but I -- the supply base tends to have figured out the fact that this is going to be a long-term growth rate, so they put the investments in place.

And just as Ted kind of mentioned, we see a tight spot coming up in bond and so we have to put some capital in place.

Businesses invest capital when they believe they can get a return on it.

And truthfully when they hear our announcement today and understand the volume predictions and take their own forecasts, they'll have the willingness to invest in where they need to invest to keep up the supply, and we treat our suppliers very well and they in turn take good care of us.

So it is surprising that it is not more of an issue really, but I just believe that people have now figured out we've got a long time running and putting the money to participate in that run.

Yes, no, that's great, that's great.

Just a quick numbers question just to clarify something that Doug mentioned.

The IR&D is $280 million was that for the whole company or just Cessna.

That was Cessna.

Okay.

That was Cessna.

And do you have the whole company number?

Not in front of me, but I'll tell you what, Ron, is that your last question?

Nope, just one more after that.

Alright, go ahead and ask that one and we'll come back to you, then.

Okay.

That's great.

And I guess, again, a follow up on Bell.

I think this keys off of Jeff's question earlier.

When you add back the charge, pretty phenomenal margins in Bell and then it kind of looks like where your guidance is, it's kind of has fallen off in the second half of the year.

How should we think about that?

Is that conservatism?

Well, I think there are some very direct fundamentals, the one is $32 million more in IR&D and SG&A in the second half to the first half.

Okay.

The other is the lower ASV deliveries and the lower margins due to our outsourcing strategies and other $12 million first half, first and second half.

And we've got a much less favorable commercial delivery mix in the second half than the first half.

Now, all of that being said, I think it is also fair to say that as a practical matter that we've seen a couple of great quarters at Bell, but we still have risks that are associated with new programs and production ramp-ups, and we've reflected some of that risk in our forecast.

If everything goes perfectly, there may be some upside opportunity, but two quarters in a row is not enough for us to feel strong enough about it, yet.

Yes.

Fair enough.

Thanks.

Alright.

Ron that total number then was $465 million across the company.

Great.

Thank you, Doug.

And Val, I think we're on the top of the hour, so we'll take one more caller and conclude the call.

Thank you.

Our final question comes from the line of Robert Stallard with Banc of America.

Please go ahead.

Morning.

I still have 14 questions to go through.

You have two minutes.

First of all, V-22, there has been talk about you guys getting a multi year on that.

When might we hear that announcement and what size are we looking at in the terms of number of years involved?

That would be about a five-year program and it will probably firm up throughout the balance of this year.

Yes.

Five-year program, but it would run through '14.

Yes.

'09 through '14.

Sorry.

I didn't mean -- that's right.

That would be a good deal.

And we're having a lot of conversations and discussions and proposals are on the table, and the customer has to go through and sort through the benefits versus the detriments of doing the multi year and decide what they want to do.

That would be like a multi-billion dollar award if you got it.

Yes, it would.

Yes, you bet.

It would be about $11 million between ourselves and Boeing so split in half.

The point on this is that we are -- we are just starting to run, so I expect this would be the first multi year of many to come.

And then just, finally, you mentioned about the pump business for nuclear mining, what sort of size in terms of annualized revenues is that business at the moment?

Well, the total Fluid & Power business is about $600 million and the pump business is about half of that.

Great.

Okay.

Thanks so much.

Okay.

Thanks.

Alright.

Ladies and gentlemen, thank you very much for joining us, and, Val, if you'd make the replay announcement, I would appreciate that.

Good day, everybody.

Take care.

Thank you.

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