達信公司 (TXT) 2008 Q3 法說會逐字稿

Welcome to the Textron earnings call.

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

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

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

The recording will be available as of 11:00 a.m.

today until January the 28th at midnight, and you may access the AT&T play back service by dialing 1(320)365-3844 with the access code of 896298.

Again, the number is (320)365-3844 and the access code of 896298.

I would like to turn the conference over to our host, Mr.

Doug Wilburne, Vice President of Investor Relations.

Please go ahead, sir.

Thanks Alex, and good morning, everyone.

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

Before we begin I'd like to mention 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 annual SEC filings and also in today's press release.

Finally you can also find a slide deck containing key data items from today's call in the Investor Relations section of our website and we will be specifically referring to a couple of these charts today during our discussion.

So moving to our results.

Revenues in the quarter were $3.5 billion, up 13.6% from a year ago.

Earnings per share from continuing operations were $0.85 per share compared to our guidance of $0.76 to $0.86 adjusted for the move of Fluid & Power to discontinued operations.

By the way, operations at Fluid & Power generated about $0.05 of EPS on the disk ops line which is not visible due to other offsetting items.

Slide 4 in the key data schedule shows the major elements that are contained on the discontinued operations line.

Free cash flow through the first nine months was $344 million compared to $442 million in 2007.

Finally, we retired 8.1 million shares in the quarter at a cost of $342 million.

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

Thank you, Doug, and good morning, everyone.

These are unprecedented times in the US financial markets and around the world.

As a result, we are taking immediate actions in three areas -- a downsizing of TFC, measures related to our funding needs, and steps to accelerate cost productivity across the enterprise.

I'll start with TFC.

First, we'll be exiting our asset based lending and structured capital segments plus several additional product lines through an orderly liquidation over the next two to three years, as market conditions allow.

These assets represent about $2 billion in managed receivables within TFC's $11.4 billion portfolio, and we estimate that these assets can be reduced by about $500 million by the end of 2009.

Second, we are limiting new originations in our distribution finance, golf and resort portfolios consistent with maintaining franchise value and our commitment to serving existing credit worthy customers.

This should contribute another $1 billion in asset reductions next year.

Taken together, then, these two actions should result in over a 10% reduction in managed receivables in 2009.

As a result of our decision to downsize, we expect to write-off, if not all, most of the goodwill of TFC as well as take a restructuring charge for head count reductions and consolidations in the fourth quarter.

Going forward, we will continue to carefully evaluate the appropriate range of lending activities in light of the strategic fit and continuing developments in the capital markets, and all in a manner that maximizes value to shareholders in any current or future financial market scenarios.

While we are talking about TFC let me comment a bit on credit performance.

Credit stats continue to soften in the third quarter, particularly in September.

Given the historic events in the past several weeks, it's apparent that we are likely to experience a more difficult credit environment in this cycle.

However, we believe our credit losses in this tougher setting will be manageable and Ted will share much more of those details in just a minute.

Let me address capital funding.

First, let me assure you that throughout these recent volatile times we've maintained daily access to funding from the commercial paper markets as well as other sources.

However, given the possibility of continued volatility, we are taking additional steps to provide predictability in our funding outlook.

Our first action, actually taken in September, was to suspend all share buy back activity which will remain in place until after financial markets stabilize.

The suspension includes the remainder of the repurchase we announced in July as well as repurchases we had planned with the proceeds from our pending sale of Fluid & Power which, incidentally, is scheduled to close in November.

With respect to our commercial paper program, it's important to note that it's fully supported by $3 billion in committed credit lines within -- and they're well within the excess of our current outstandings.

So we have plenty of credit line back up for our CP.

These commitments extend to 2012.

As a point of reference, we stress tested our plan under the unlikely scenario that one, CP markets close and remain closed for A2/P2 issues over the next 12 months and term capital markets are closed as well.

Under this circumstance, we believe we have sufficient capacity under the bank lines to cover all term maturities for the next 12 months.

Now, we certainly don't predict this outcome but preparedness is extremely valuable in these volatile markets.

Nonetheless, to provide additional reliability we are exploring a number of other options to reduce our use of commercial paper.

Moving now to our accelerated cost improvement plan.

In addition to restructuring at TFC, actions to reduce overhead and improve operating efficiencies are underway across the enterprise, primarily at our Industrial segment.

We expect the total cost of restructuring activity including those at TFC will be approximately $25 million and we estimate they will yield approximately $40 million in annualized savings.

At Industrial, the impact of the economic environment, including our difficulty in getting price recovery of commodity cost, was apparent in the third quarter segment results.

Now we've been actively modifying customer pricing agreements at Kautex to better insulate ourselves from commodities inflation risk going forward, and we expect to see benefits from these protections next year.

In the meantime, demand in the segment remained pretty good in the quarter with overall organic growth of about 6%.

This reflected strong non-NAFTA growth at Kautex and strong double digit growth at E-Z-GO and Jacobsen.

However, with further deterioration in world economies, there was a fall off in demand in September in this segment, and we expect slowing will continue from here, especially at Greenlee which has begun to see a significantly slower commercial construction environment.

Now, moving to our aircraft and defense businesses, the defense industry is relatively less affected by general economic trends, so the government lines of business at defense and intelligence and Bell Helicopter provide a more predictable growth outlook.

For example, we received a $242 million in funding from the army for 17 shadow systems and $313 million for 434 armored security vehicles.

These orders fill our production plans for both products well into 2010.

And we are operating at very high levels with these programs in terms of delivery, schedule, quality, and cost, good for both our customers and our shareholders.

We continue to develop new products here that will be valuable to our US and allied customers.

For example, we recently demonstrated new technologies for command and control of unmanned vehicles, compliant with NATO standards, which will allow interoperability among allied assets.

At Bell we received good news on the H-1 program during the quarter, as the utility version was approved for full rate production and the attack model was extended for limited production pending next year's operating review.

As a result, we recently signed the Lot 5 contract for the H-1 for 11 utility and 5 attack units to be delivered in 2010 and 2011.

The V-22 program continues to perform well and six of the 13 units delivered so far this year were delivered early.

Finally, on the ARH, we've been working closely with the Army and the Defense Department.

We are working hard to bring the current Nunn-McCurdy view in to be a successful conclusion, and we expect a decision soon.

Moving to the commercial side of Bell, global demand is currently well in excess of industry capacity.

To that point year to date, we've received 235 new orders, including 64 for our new 429 model.

With strong demand from both commercial and military markets, we continue to make steady progress with expanding overall capacity.

This is not yet reflected in our current revenues, as much of this activity is readying for the significant ramp-up of our three major military programs, as well as our commercial output.

Staying with Cessna, with aircraft, and turning to Cessna, they posted another outstanding quarter delivering 124 jets, an all-time quarterly high, as we continue to ramp toward our annual target rate next year of about 535 jets.

In the after-market arena, our investment in service centers continue to pay dividends in the quarter, as parts and service revenues and profits were up 9%.

Our first four XLS-plus models rolled off the production line and are now in final preparations for our initial deliveries this quarter.

We also made good progress with development on our new CJ-4 during the quarter as we accumulated 114 flight hours on our prototype article.

The CJ-4 will enter into service in 2010.

Finally, we reached an important market milestone in the quarter as we surpassed 1,000 Citations operating in Europe, underscoring the global nature of demand that has emerged over the past five plus years.

So lots of accomplishment and success in the quarter for a world-class company.

Now I understand many of you attended MBAA last week where you heard how recent economic developments might impact the business jet industry.

Market indicators such as used aircraft sales and jet utilization weakened depreciably during the quarter, especially in September.

In this environment, we actually booked 47 jet orders last quarter, which was less than what we anticipated.

So the order downturn has arrived more quickly than what we were expecting, as the events of the past several weeks have put a big chill on the market.

The last down cycle which began in 2001 provided us with critical experience in managing in a down environment.

We are fortunate at this time to have that experience, but more importantly, to have a very large and robust backlog of over 1500 jets which includes many customers who are interested in taking deliveries earlier, if they can.

To develop a very specific and dynamic plan to maintain delivery continuity, our Cessna team is contacting customers in the order book now so we can be prepared early in the cycle in the case we need to move up delivers.

So we remain comfortable with next year's production plan at this point, but beyond that frankly, we are taking a wait and see attitude with respect to how demand develops from here.

On the other hand, with our backlog we don't need a lot of net orders to sustain our production in 2010 and 2011.

Beyond that, we continue to have a faith in a healthy long term systemic global demand, and we have a very robust new product pipeline over the next ten years, as well.

In the meantime, we are carefully monitoring the situation and we'll make sensible adjustments at the appropriate time if necessary.

To wrap up, the credit and financial markets have changed precipitously, and as a result we are taking strong measures as we've outlined this morning to address specific challenges and prepare for a slower economy ahead.

You can be sure that we are committed to implementing these actions as expediently as possible as well as take future steps necessary to navigate these most challenging times.

With that I'll turn it over to Ted.

Thanks Lewis.

Good morning, everyone.

Today I want to start with a discussion of the factors that pressured TFC in the quarter relative to our guidance.

We generated operating profits at TFC of $18 million, which was $12 million less than our forecast of about $30 million.

The three primary drivers were as follows: First, coming into the quarter, spreads between prime and LIBOR rates were already abnormally compressed.

As we now know, those spreads continue to narrow.

In fact, they are virtually nonexistent as we speak.

That led to a $5 million impairment related to our distribution finance securitization facility.

Second, even though we were projecting abnormally high borrowing rates, they went up even further, and that cost us about $2 million.

And third, as the consumer economy deteriorated, our loan loss provision cost about $5 million more than what we had planned for the quarter.

Now let's talk about TFC results going forward.

Looking at the fourth quarter, we are assuming that credit performance continues to weaken, as well as a continuation of the current dislocation in the relationship among prime, LIBOR and Fed fund rates.

On this basis, we are projecting a range of possible outcomes from a pre-tax profit of $5 million to a loss of $20 million, depending on how these two major factors play out.

This may seem like a wide range for TFC, but in the current environment forecasting accurately has become much more difficult.

Looking forward to 2009, the goodwill charge and operating results in the fourth quarter will likely result in a capital contribution to TFC between $170 million and $200 million in the first quarter of next year to maintain certain requirements specified under our committed credit facilities and support agreement.

With that, let's continue with our forecasting discussion by examining the factors that are going to affect 2009 at TFC.

To facilitate this discussion I'd ask you to please refer to slide 12 in our key data schedules that we put up on the website.

This schedule summarizes a few very important points that address the resiliency of asset values in most of our portfolio.

Historically, TFC has experienced low charge-offs relative to delinquency rates because of high recoveries on defaulted loans.

For example, in our distribution finance portfolio recoveries have been high because we have three avenues for recovery -- the underlying hard collateral of finished goods inventory, the guarantees of the dealers, and the repurchase agreements with manufacturers.

In the case of aviation finance, we've had extraordinary control over recoveries because of our intimate presence in the aviation markets.

Moreover, the aviation portfolio currently has a loan-to-value ratio of about 70%, so there's significant collateral cushion from which to recover.

In our golf portfolio, high recoveries reflect the significant level of owner equity in the assets, typically 25% of our assessed value, as well as deep pocket owners, plus the intrinsic value in the underlying real estate in the event of a default.

Finally our resorts portfolio has shown steady performance through every cycle over the past 20 years.

For the largest portion of this business, we have three layers of loss protection -- excess collateral related to no pool excess spread, and the advance rate being limited to 90% of pool value, developer repurchase obligations, and finally the underlying real estate itself.

With that as background, please take a look at slide 13 where we are laying out two possible 2009 scenarios which range from TFC breaking even to a loss of $125 million.

Neither of these scenarios represents our forecast for next year, per se.

Rather, we are presenting this analysis to you as a way to understand how different economic scenarios might impact TFC performance next year.

Both scenarios reflect our downsizing plan.

The break-even scenario assumes that the charge off rate goes to 1.5% compared to the current year-to-date rate of 0.81% and our previous peak of 1.25% reached during the 2001 to 2003 period.

At these levels, reserves would end next year at 2.25% compared to our current level of about 1.6% and the last peak of 1.77%.

Looking at the financing side, the break-even scenario assumes the current prime LIBOR spread improves from where it is now to the August levels of about 250 basis points, but still higher than the normal level which has historically been a very consistent 285 basis points.

And this scenario also reflects the borrowing spread over LIBOR returning to about 100 basis points compared to the current average of about 250 but still much higher than our historic norm.

Now moving to the right side of the chart.

You can examine for yourself the assumptions there under the loss scenario and how they compare.

We believe these scenarios are reasonable possibilities, but given the tremendous uncertainty in the economy and financing markets, we are going to be monitoring developments very, very carefully and continuing to react as appropriate.

With that I want to move now to our normal analysis of what drove our third quarter results on a year-over-year basis.

Earnings per share from continuing ops were down $0.03 from a year ago.

Volume and mix provided a positive $0.10.

Higher pricing of roughly 3.3% added $0.27 a share, while inflation of about 3.2% cost us $0.22.

Performance contributed a positive $0.03, acquisitions a positive $0.02 and miscellaneous items about $0.04.

Headwinds from engineering research, development and depreciation cost $0.08, and Textron Financial was lower by $0.10.

There were two one-time items that benefited last year's third quarter by $0.09.

The first was $0.04 from a recovery in the ARH program and the second $0.05 related to an insurance settlement.

So let's move now to our segment discussion and I'll start with Cessna.

Revenues at Cessna increased $150 million due to higher volume and pricing and the benefit from last year's acquisition.

The higher volume reflects increased jet and caravan deliveries, partially offset by lower used aircraft sales.

We delivered 124 jets in the third quarter and that compared to 103 last year.

Cessna segment profit increased $16 million due to the impact from higher volume and pricing in excess of inflation.

These were partially offset by higher engineering and product development expense, higher overhead costs, and a modest used jet valuation adjustment.

Cessna backlog at the end of the third quarter was $15.6 billion, up $3 billion from the end of last year, reflecting 484 Citation jet orders taken year-to-date, but down about $400 million sequentially from the prior quarter.

Bell segment revenues increased $52 million in the third quarter and segment profits were up $5 million.

Revenues in segment profits in the government business were down $44 million and $11 million, respectively, and that decrease in revenue is due to lower V-22 volume, partially offset by higher H-1 program revenue and higher spares and service volume.

Segment profit decreased due to the non-recurrence of the 2007 ARH cost recovery and the lower volume.

Revenues in segment profit in the commercial business were up $96 million and $16 million respectively.

The increase in revenues is due to higher helicopter volume, higher pricing and revenues from newly acquired businesses.

The increase in segment profit reflects the higher volume and favorable sales mix, and higher pricing in excess of inflation partially offset by some unfavorable cost performance.

Bell's backlog ended the quarter at $5.3 billion, up $1.5 billion from the end of last year.

Defense and Intelligence segment revenues were up $177 million in the third quarter, primarily due to the acquisition of AAI partially offset by lower volumes.

Segment profit increased $31 million reflecting the AAI acquisition and favorable cost performance largely related to the ASB program.

Third quarter ending backlog at D&I was $2.6 billion compared to $2.4 billion at the beginning of the year.

Revenues in our Industrial segment increased $74 million due to higher volume, favorable foreign exchange, and the beneficial impact of an acquisition and some higher pricing.

Segment profits were down $17 million due to inflation in excess of pricing and unfavorable sales mix, partially offset by improved cost performance.

For Textron financial, revenues were down $30 million due to lower market interest rates, partially offset by the benefits of higher volume and interest rate floors.

Segment profit was down $36 million due to an increase in the provision for loan losses and higher borrowing cost, partially offset by the benefit of interest rate floors.

The increase in the provision for loan losses was primarily attributable to the distribution finance portfolio, as general US economic conditions have continued to impact borrowers.

The increased borrowing costs are driven by a widening in the spread between LIBOR and the target Fed funds rate, and to a lesser extent from increased borrowing spreads on issuances of debt in comparison with '07.

However, these increases were substantially offset by increased receivables pricing as a result of the floors.

With respect to credit quality, the 60 day plus delinquency percentage increased to 1.06% of finance receivables from 0.61% at the end of the second quarter.

Our nonperforming assets of 2.67 was up from the second quarter level of 2.31.

Corporate expenses of $38 million was lower than expected primarily due to lower stock-based compensation expense which had no material impact on EPS due to the offset in the tax line related to our hedges.

Correspondingly, the higher tax rate had no material impact on EPS relative to guidance as the higher rate reflects the nontaxability of hedge losses.

Excluding the hedge impact, our effective tax rate in the quarter was 33%.

Now for our fourth quarter earnings outlook.

Earnings from continuing operations and before restructuring and goodwill impairment charges are expected to be between $0.80 and $0.90 a share.

Our projected free cash flow provided by continuing operations forecast remains at $700 million to $750 million.

To summarize, while we are disappointed that we've had to moderate our expectations, we are taking all necessary steps to maximize performance in this environment.

Doug will provide modeling information now for our fourth quarter.

Thank you, Ted.

At Cessna we are expecting fourth quarter revenue to be approximately $1.7 billion with margins of about 16.5%.

This reflects about 140 jet deliveries for the quarter and relatively low used aircraft revenues.

At Bell we expect fourth quarter revenue of around $750 million with margins close to 8%, reflecting an unfavorable mix of commercial deliveries.

At D&I we are expecting revenues to be about $525 million with margins of about 12.5%.

Industrial revenue is expected to be approximately $700 million with low single digit margins.

And Ted has already covered finance so that concludes our prepared remarks.

As we move to open up the lines we ask that participants please limit themselves to one question with an optional follow up.

So Alex we are now ready to open the lines.

Thank you, sir.

The first question comes from the line of Ronald Epstein with Merrill Lynch.

Go ahead.

Good morning, guys.

When you guys are scrubbing the backlog at Cessna, have you seen any evidence yet of any customers wanting to push out, wanting to defer and how are you going through that process?

Ron, it's Lewis.

One of the unusual things about this environment we're in is we just haven't seen too much of that yet.

Cancellations are not even noteworthy.

We've had a few customers who have come and ask for different financing terms in the fourth quarter but basically we just haven't seen much movement as you might have expected by your question.

So things are pretty steady at the moment.

Okay, and then just one follow on to that.

What impact do you think that what is going on in the capital markets will have on the financing of business jets?

It's a little early to tell, Ron.

We have had a few customers, really in the month of September, during this high turmoil period of time, come to us and say their financing has fallen through, but it's less than a handful.

And have asked if we would look at their credit from a TFC standpoint to step in from whatever financing they had previously arranged typically with a local bank or a regional bank.

But too early to tell.

Clearly if things continue to be as tight as they are, we may see more customers come in and look for alternate financing.

And if they are creditworthy, we are happy to stand in and do that.

Great.

Thank you.

Next question comes from Heidi Wood, Morgan Stanley.

Go ahead.

Hi, I'm going to take Ron's question and ask it a little bit differently.

But Lewis, you've acknowledged seeing the softness in the used business jet market and it's probable that we'll see within the next three to five months a possible risk of a decline in pricing on used.

And so customers are increasingly going to be confronted with being able to see getting used planes earlier and cheaper than some of the new planes that they have placed orders for and presumably have to wait for.

So give us a little bit of color about your '09 delivery assumptions on how many of these slots in 2009 are at risk of deferral.

They may not cancel but they may ask to push out.

Well, as I've said in the earlier response to Ron, we are not seeing any number that I can even put my finger on.

If there's any, I am not even aware of anybody asking to push back, and we review our numbers with Jack Pelton and his gang all the time.

So specifically in '09 we have not seen much -- any pushback of any consequence.

Do you think you should wait to see it or do you think you should anticipate it and maybe enhance the scarcity value of your new planes in anticipation of what is going to happen because your customers are still used to seeing their planes at a profit when they've gone in to see what they were marketed at, so they thought they had a profit but over the next couple of months, they may start to see that those prices are coming down and that may cause them to feel differently.

I can't really argue with the logic of your point, so please don't take my answer in the wrong way here.

But let me put some statistics out there.

First of all, we are not seeing a dramatic reduction in used prices.

The used market for Cessnas available for sale is a little bit ahead of 13%.

The average used availability over a long period of time has averaged between 8-plus % and 19-plus %, and coincidentally, the average over let's say the last ten years is probably close to 13%.

I think it's 12.9%.

So so far we haven't seen a rapid deterioration in use.

And then the next point, about 70% of all used aircraft are no longer in production.

So that does bode well for staying in newer aircraft that are more fuel efficient and have more features, which I think is a plus.

The other point I will make relative to Cessna is, and we've talked about this before, but I want to make a point that one of Cessna's strengths is we continue to upgrade our products in fairly rapid succession year after year after year.

I looked at a chart this morning.

There is only one model for sale right now that has not been refreshed or launched since 1996.

That was a Citation 10 that came out in '96.

Everything else is 2004 or younger.

And over the next 8.5, 9 years we will be upgrading at least one product every single year.

So therefore, I believe that Cessna, unlike others, has a very high probability of maintaining our volume levels because we have new products for sale, and of course those are the things that attract our customers.

I think maybe one follow on, Heidi.

Relative to being proactive, the Cessna team is out proactively talking to everyone in the order book for '09 deliveries right now to try to get a sense, as early as possible, if anyone is going to come forward and ask us to push something out because we do have other customers who are continually expressing an interest in being pulled forward.

The challenge, of course, is getting those to all balance out requires some advance planning.

So the sales team at Cessna is out right now doing just now, trying to understand if they have someone that might slip so that they can work earlier rather than later on trying to pull someone forward for that aircraft.

Great.

Thanks very much.

One quick follow up, though.

I didn't get the impression again from your answer to Ron's question.

Again, give me clarity if you can about do you have specific insight into the financing requirements per customer so that you know if they are fine for the 2009 planes?

We are out inquiring right now.

We've had people come to us, but many of our customers finance with a variety of other sources, particularly our domestic customers who have historically had lots of other bank alternatives, but we are out talking to them right now to try to understand if they may have issues.

When someone places an order, not only do they have to put down a nonrefundable deposit but also we require an understanding of where they are going to get their financing, and knowing that, then, that database is really valuable as we can then look across the entire spectrum of customers and then have some understanding which customers might have the most difficulty.

We also know their net worth, et cetera, so we have a pretty good understanding about this.

Thanks very much.

Your next question comes from the line of David Strauss with UBS.

Please go ahead.

Good morning, thanks.

The draw down, the downsizing of TFC that you are talking about happening through 2009, what are you assuming there for the natural run off, the receipt of receivables versus actually selling part of the portfolio?

Most of it, in fact all of it is predicated upon a runoff scenario, although once this is out there publicly, our experience the last time that we took a piece of TFC out, was that people will come forward that are interested in potentially buying some pieces.

But right now it is a natural runoff driven, contract termination driven.

So it's actually interesting.

The pieces that we are exiting will actually run off a little bit slower.

The areas that we are slowing down will actually make the largest contribution to '09's reduction whereas businesses like ABL will actually take a little bit longer than that to start to run down.

Okay.

Ted, could you give a little bit more color around the idea that commercial paper market completely closes up that you'll be able to cover all your maturities?

What are you assuming there for the underlying portfolio quality going forward under that scenario?

Well, we are really looking at all of our existing CP requirements and our term debt maturity profile as it runs out over the next number of quarters, and we have a whole range of both public and private sources to replace all of that term debt as it rolls off.

Number one of which is the free cash flow that our business generates over that period of time that will first and foremost go to ensure liquidity.

Obviously the next most attractive is our of program of de-assetting both TFC and then also asset sales such as Fluid & Power.

We have a variety of securitization vehicles that are in place today, and we are working on extending.

We have in the very recent days been able to establish some by bilateral term loans with various counter parties.

And then, obviously, we are looking, as market continues permit, other term debt replacement.

So essentially looking to term out and reduce the exposure on the CP side.

And it might be a nuance that wasn't obvious but a lot of the assets that we are downsizing at TFC are specifically those assets which are short funded assets such as the ABL and parts of the distribution finance business.

We have far less challenge with our businesses like aviation finance which are long funded assets.

One quick last one.

Your commercial paper balance outstanding as of the end of the third quarter?

Combined Textron and TFC is just over $2 billion.

With about, maybe it's a lower than that today, but with back stops of $3 billion.

We are well back stopped.

Thank you.

The next question comes from the line of Cai von Rumohr with Cowen and Company.

Please go ahead.

Thank you.

And thank you for providing some of the detail in terms of your loan to asset ratio.

It's very helpful.

Ted, can you tell us what is the expected run off -- natural run off of -- of receivables, or what can you get at TFC in the fourth quarter near term, and what are your near term refinancing requirements.

And also I think at June you had about $2.6 billion of securitization.

When do those securitizations run off in terms of creating additional obligations for you?

I think the first one of those securitizations that we have to re-up is sometime next May?

May -- is in next May.

So we have a bit of time on that.

We do have some term debt maturing, about $460 million, between TFC and Textron.

The largest piece of that is at Textron not at TFC.

That is in the fourth quarter?

In Q4, yes.

Not very much in Q1 and then it builds up across the course of the year.

So the de-assetting is going to start picking up more aggressively probably early in the first quarter.

We have to do this very carefully.

We will notify people of our intention in areas where we are leaving.

Obviously it's easy when you are not picking up new business.

Remember, a lot of this business that we are tightening down on has been growing like gangbusters.

We are not only going to grow, we're going to turn around and go the other way, so that will create a lot of relief.

But in a number of areas it's very important that we don't go too fast and create a liquidity problem for our customers.

We need to create an ability for our customers to move to other sources and create funding continuity for them.

So we've developed a pretty aggressive plan but we are going to implement it very, very carefully to ensure that we don't create problems for ourselves on the credit side as we go to take these asset levels down.

Just a quick follow up.

You said that it starts in the first quarter, but I think your assets at TFC were up about $125 million in the quarter.

Do you expect them to come down to provide some help in meeting those near term debt maturities?

And could you follow up?

You said some people may come forward to express interest.

What is the chance of maybe selling off at a discount some of those businesses you might exit?

First of all, most of the run up you have seen just recently is seasonal growth in the distribution finance business.

Our actions to start taking assets out are already a month plus old.

I'd say it starts in force in the first quarter but we are already taking steps to stop filling the bathtub up, if you will, but the drainage gets a little more aggressive as we get into Q1, Q2 time frame.

So we are going at that I think in a very measured pace and intelligent way that says let's take the pressure off as quickly as we can, but let's be smart about it and not create problems on the credit side by rushing too fast.

And our plans are still evolving.

Obviously the last month has been quite a lot of changing environment, and we've had to react to that changing environment, but I think we have a good plan in place and we are looking for more alternatives.

I suspect that we may have assets that are attractive to people here or there among the portfolio, and it's really hard to predict.

But I wouldn't be surprised if we are able to sell a piece here or there.

That's what happened last time, as you know.

We announced that we were going to get out and all of a sudden people started knocking on our doors.

The environment is a little tougher right now so there may not be as many.

Thank you very much.

Next question comes from the line of Nicole Parent with Credit Suisse.

Please go ahead.

Good morning.

Good morning.

Ted, I guess could you give us some color on the funding requirements at TFC that require the parent to make the capital contribution in the first quarter and how you expect that to play out?

Yes.

Nicole, there is a fixed charge coverage requirement at TFC that requires us to maintain under our support agreement a fixed charge coverage ratio at TFC.

And the way it works, there's a cure which says if we ever go below a certain level, we have one quarter to make a contribution to restore that fixed charge coverage ratio, and the charge for the goodwill write-off during the quarter, the fourth quarter and some restructuring charges we expect to take during the fourth quarter, will require us to make a payment in the first quarter under that support agreement in order to restore that fixed charge coverage.

Okay.

Can you tell us what that certain level is?

Pardon me?

Can you tell us what that certain level is?

1.25 times coverage.

Okay.

And, Nicole, that doesn't really affect our cash flow.

It just moves money from one entity to another.

The net effect of that is no incremental debt required.

Essentially we'll move some CP from TFC to Textron.

Going under this coverage ratio is not an event of default under our agreements.

We just have to make this makeup payment and effectively we'll end up moving a little CP from TFC back up to Textron which, frankly, isn't all that bad an outcome in the current environment.

We can borrow typically a little cheaper at the Textron level.

Okay.

With respect to TFC subsegment, it's probably irrelevant going forward but in the context of the quarter can you give us some idea of the contribution of the $19 million of net income that you actually generated?

Yes.

$18 million.

We had a loss at DFG, we broke even at Golf, and every other business unit was profitable.

And just one last one.

When we think about portfolio moves and you think about the funding requirements, how do you think about the portfolio as it exists on a go forward basis?

You are obviously making moves with the finance business.

Are there any other plans, or do you contemplate selling anything else that you have right now, or does the market environment preclude that?

We don't ever talk about things we might sell specifically in advance, but as we said we are always evaluating everything in our portfolio to try to determine what the best value for our shareholders would be.

And certainly Fluid & Power falls into that category.

That is a business that has essentially tripled its EBITDA in the last three years, has one of its best backlogs ever in a good market, so now was the ideal time to sell that business, and we have taken that step.

But we'll always look at everything.

Okay.

Thank you.

And our next question comes from Shannon O'Callaghan with Barkley Capital.

Please go ahead.

Good morning, guys.

Is your understanding that the support agreement would prevent from you selling all of TFC.

And if that is not the case, why didn't you pursue a bolder strategy like that rather than the limited wind down?

Well, I understand that sentiment, but we clearly don't think that would be in our shareholders' best interest.

We've looked at all alternatives, obviously, and really any concept of selling, spinning, or giving away TFC is going to result in our shareholders effectively getting a fire sale price.

There are restrictions under the support agreement and certain other loan covenants that don't make that an attractive alternative.

If you were willing to accept what you think is an unfair haircut, if you wanted to go forward with it, your understanding is that you could do so under the support agreement?

No, no.

We have restrictions that require bank lines to be renegotiated in certain circumstances, and we have covenant restrictions that would require us to ensure that TFC maintain equal or higher ratings to the ratings that we have today, and those are unattractive alternatives.

Okay.

But if the buyer could get those ratings higher, is there literally absolutely no way under any circumstances this can happen?

Is that restrictive, or is it just that you think it's unattractive to do so?

We could under the event that a buyer of the business could ensure an equal or higher credit rating, do that if we chose to.

We do not think that is the best way forward for our shareholders.

Second question.

Around the fixed charge covered ratio, to maintain the 1.25 you are talking about the goodwill and the restructuring.

Now looking at your scenario analysis in '09, obviously if it lost another $125 million, you would probably have to inject some more capital to maintain that ratio.

What is the current position at the parent in terms of your discussions with rating agencies in terms of how much leverage you can take on the parent if you wanted to put some more capital in?

Well, we have had discussions yesterday with all the rating agencies, and they understand what our plans are and are evaluating it and we'll wait to hear from them in due course.

But there's a lot of flexibility from a financing covenant standpoint at the Textron level to be able to continue to inject capital.

Obviously there is some limit to that from a ratings standpoint.

We think we are in good shape right now but we'll have to see how things develop

The other point there that runs right beside that is the fact that we intend to reduce the total amount of CP as well as the total amount taken together of our term financing for next year through those series of options that I referred to.

That works against ever bumping up against over leverage of the parent.

Thanks a lot guys.

Next question comes from the line of Jeff Sprague with Citi.

Please go ahead.

Thank you.

Good morning.

A couple of things.

First, I don't quite have my arms around actually how much through cash liquidity you think gets the least by the $1.5 billion of drawn down of receivables.

Obviously that requires a calculation on recovery and charge-offs and everything, and relative to leverage ration in the assets affected.

Can you give us a sense how much cash would actually be released in that process?

Well it's even more complicated than that, Jeff, unfortunately because it depends how some of our securitization vehicles get structured on a go forward basis which will happen as we move into 2009.

But we have actually tested our liquidity position through that period of time with the assumption that some of those securitizations will actually run down.

We are going to try to not let that be the case but with some of them running down, some of that de-asseting at TFC will, at least for a period of time and really through '09, go into those securitization vehicles to pay down the obligations that are inside those.

Our model does not assume that all of the asset reduction is available back to us in the form of cash.

If we can get the securitization vehicles structured in a way we are hopeful that we will be able to, then a larger piece of that could be available.

But when we said we think we are okay for the next 12 months in that stress test scenario, that stress test also assumes that some cash will have to be diverted into securitization.

Along the lines of where Shannon was going with some of his questions, so it's not palatable to do the full exit maybe any time soon unless a high-rated acquirer comes in.

But how do you actually navigate -- the fact remains, funding costs are all out of whack.

If we are starting from a clean sheet of paper, you probably would say you wouldn't want to be in any of these businesses today.

So that requires you to go back to the market and get price to try to protect the profitability of the go forward business.

Has that process begun to happen?

What kind of natural demand disruption might come from that, credit availability would be tight, so maybe you can pass it through, but just what are your initial [thoughts on that]?

We have tried -- it's a hard one to get your hands around -- we have tried to understand the price elasticity curve, if you will, to understand that that could be a way to de-asset.

If you look at clearly where we are today, I wouldn't say all of the businesses because the long funded businesses are still doing okay.

But clearly the short funded businesses, the business model doesn't work if LIBOR equals prime and that's where we are at this moment.

We look at that and say that's an untenable situation that has to correct itself, but how soon does it correct itself, and how long do we have to suffer through a period where essentially you're a borrower at LIBOR and a lender at prime and the two numbers are the same number.

We think that will correct itself.

We are out aggressively, though, pricing our portfolio in general, and more specifically working to move our customer base towards a more LIBOR index set of lendings.

Now, that's not a fast fix because we've got some customers where we can do that.

We've come up with a notion we call the Textron Financial base rate which is essentially LIBOR plus a spread, and then we're pricing Textron Financial base rate plus a margin to customers.

But we have a lot of customers that have contractual arrangements that we're going to have to work our way through, but we are out there trying to push the price through, and we do think that will be a part of the asset reduction strategy that customer will walk away at the higher pricing, and that's fine.

Our expectation, that's why we put in those scenarios, that funding box at the bottom because that really is, between our two scenarios presented half the difference almost is being driven by that funding market environment.

But we do think that LIBOR and prime have to separate, it's just a question of how fast and how far those are going to go, and that's going to help bring the model back in.

But we'll continually evaluate whether or not we believe that by a line of business we have a business model that will work.

And just finally one off one on Cessna.

Are all these order numbers we got today net orders?

Yes, they are.

Thank you.

But very little cancellation in there.

Okay.

Thanks.

Next question comes from the line of Robert Stallard with Macquarie.

Please go ahead.

Good morning.

Lewis, just a follow-up and a final question on Textron Financial.

Given your experience so far with this credit crunch, has it really called into question the strategic rationale for having Textron Financial as part of the group?

Well, sure, as it would any other business that has elements of it that suddenly change dramatically from the underlying assumptions that we put the business together under.

I go back to just repeating somewhat what Ted just talked about, and that is, any business at Textron, including the subsegments inside TFC, continually have to pass through an intrinsic value test, they have to pass through a long-term business viability test, and they are regularly evaluated to see if it makes sense to have any of our companies, or pieces of our companies retained inside of Textron.

You may recall that nine-by-nine box where we talk about business health and attractiveness of the industry and what percentage of our strategic business units fall where on that grid.

And we actually break apart all of our businesses as appropriate, including TFC, to look at the different components of TFC as the market conditions change.

I think we are seeing a very abnormal economic situation now, certainly as measured by historic standards, and so we are right now closely evaluating what positions we would take should things continue, if they get better, how does that change our model.

And you can be sure we are going to move quickly as soon as we understand what we need to do and we can do it.

This is a follow-up, actually looking at Cessna.

Could you let us know how large the international customers are now as part of the backlog, and how you are getting comfortable about some of these new international customers and whether we have to pay for their jets?

I can give you that in just a second.

I have to find it.

It's a big number, it's a good number.

We have so many charts here.

International orders and deliveries on the order side of 68% are international, and on the delivery side this year through the end of the quarter 57% are international.

And if you look inside that and say where are they, Europe is by far the biggest.

They're half of the international order backlog, and then Asia-Pacific is a little more than 10%, Middle East and Africa is a little less than 10%, Latin American is about 20-some percent.

So it's a pretty darn good mix.

And, of course, remember, every time we finance somebody, no matter where in the world we finance them, they have to come forward with that nonrefundable deposit and also supply us with bank financing or whatever financing sources they have so we can get convinced they are not speculating, and also get convinced that they can make good on their order.

So I think it's a very good backlog right now.

Thank you.

Next question comes from the line of Rich Safran with Goldman Sachs.

Please go ahead.

Good morning.

Good morning.

You may have made some remarks about this.

With respect to future write-downs, recognizing what you said in the release about capital contributions as appropriate, am I correct that you would expect any potential capital infusion to come out of free cash flow?

Or do you actually -- did you make the remark that you might think you might have to raise debt?

We would be making capital contributions into TFC at least for the foreseeable future out of our precash flow.

But at this point in time you don't foresee having to raise debt in order to meet anything there?

Not at this point in time.

We'll have to see how things develop.

Okay.

And just back onto your answer on the commercial paper balance of approximately $2 billion, can you just also give us a possible, what the average maturity is and what the cost is right now?

The average maturity is about 10 days.

Cost is -- it depends -- anywhere from 4.5 to 6.5.

We've had some wide days in the heat of the last few weeks.

We've seen numbers over 6.

We've also seen days in between those where it gets down to 4.

Okay.

It's a wild time out there.

It sure is.

Just switching topics completely.

There's a potential MRAP light competition coming up in 2009, and I just wanted to know if you were planning on entering that competition?

Yes, we are.

Thanks very much.

Our next question comes from the line of Brian Jacoby with Goldman Sachs.

Please go ahead.

Thanks for taking my question.

With respect to the portfolio at TFC, you haven't really taken any write-downs at it now, and there are a lot of other finance companies out there that have really gotten wracked pretty hard, and you guys have done a good job managing through this downturn.

But the question is, over the course of the next several quarters clearly there could be some write downs as you look either to sell or as this cycle plays out, your portfolio might not be worth where you are carrying it now.

So it begs the question of, there may be a need for more capital.

So to Rich's question, it almost sounds like you are going to have to borrow money and maybe doing it through the parent company which the credit default swaps trade a lot better on the parent.

There's industrial assets behind it and cash flow that maybe it might make sense to do that at some point.

Is that something that you are going to watch the markets and if that opportunity presents itself, maybe you can do that?

That's a lot of questions.

First of all, we believe that we have a very strong portfolio and a great recovery process, and the reason that we don't mark our portfolio to market.

So we are not pricing assets like you see some financial institutions under a scenario that assumes you would fire sale.

Our expectation is that we will go out and exercise our recovery processes.

And we do recognize charge-offs and additional loan loss provision when we make a determination that we are not going to be able to get full recovery of interest and principal, and clearly we've been doing that.

Those numbers have been going up.

We expect those numbers to continue to go up as you saw in the scenario analysis that we were looking at.

Within reason -- let me take this in two steps.

The goodwill write-off, which is causing the initial requirement for additional capital infusion into TFC is really a non-cash event.

It's a non-cash write-off in TFC, but under the support agreement requires us to make a cash contribution.

All that is doing is having the effect of moving commercial paper requirements out of TFC to the parent, which as you know is not an all bad thing to have happen, up to a certain level.

To the extent that we do have higher levels of loan losses, as we modeled in a couple of scenarios that we shared with you today, obviously those are more cash oriented events, and at this stage depending on what range they are in, they are fundable out of the general cash flow of our industrial businesses.

If they got to some extraordinarily higher level, then obviously they could, at some point in time, require us to fund them, and we would likely have excess capital down in TFC as a result of these contributions so a lot of that funding probably would be at the parent.

But our overall objective through all of these actions that we are taking is to reduce our reliance on commercial paper and potentially replace that with more term related debt.

One other quick comment.

In the 10-K you guys provide a nice amortization of the assets and liabilities, to the extent, fourth quarter you could give us something like that as you wind down some.

That would be helpful because it might answer a lot of the questions.

That will be in the 10-Q.

It will be a much expanded liquidity disclosures in both the Textron Financial and Textron 10-Qs which you will have soon.

And last thing is just drawing on the revolver if need be, is it fair to assume that that's probably the last resort you would want to do.

I don't think rating agencies like drawdown on revolvers.

Is it fair to assume that's probably the least attractive option for you guys, or is that not the case?

We are working hard, and so far have been successful in operating in the CP market.

Our paper is rolling fine.

I would mention fine but expensive.

But we have been able to successfully utilize the CP market.

Those back up lines are there for one reason only and that is the CP market becomes unavailable, and we would have to do something different.

Thanks again for taking my question.

All right, Alex, I think we have time for one more call.

Your final question comes from the line of Steve Tusa with J.P.

Morgan.

Please go ahead, sir.

Good morning.

Hi Steve.

A question on the Textron TFC.

You guys gave us a slide that showed the liquidity profile back in May, and it showed receivable receipts matched up against your liability payments.

I'm not a finance analyst so maybe I'm not looking at this the right way, but I'm curious, how much of your receivable receipts are coming over the next year and a half?

Why not take a little bit more -- is there something contractual here that's a reason as to why you can't take a more aggressive approach towards maybe not selling these businesses but just winding them down and paying off the debt, given this is a solid cash business as opposed to what everybody's freaking out about, which is stuff that is mark-to-market, it's not really cash related?

The answer somewhat varies by business, Steve, but there are certain businesses like ABL where we have contractual relationships with a customer for a period of time.

They are expiring revolving loan structures.

And we can't walk in day one and tell that customer that we are pulling that line unless that customer has, in some way, defaulted, breached a covenant, et cetera, in which case we would be quick to do so.

So what we'll be doing in that business, for example, is notifying the customers of our strategic intentions relative to this business, that we don't intend to renew, as contracts come to expiration, and that if a customer has any transitional issue, please come talk to us because we also want to make sure that we don't throw a customer under the bus in a way that comes back to hurt us.

So we are working all that carefully.

In other businesses like distribution finance, we have a variety of different structures there.

In some instances we can stop funding a particular dealer, but in other instances, these are very tightly constructed programs with manufacturers, and we do have certain commitments for certain periods of time with those guys, and we are going to honor all the commitments, obviously, that we have made to any of our customers, and that is what really controls the pacing.

And in some instances you still have to recognize, even where we can do something contractually, it may not be smart to do because that customer needs to find funding somewhere else or you need to help them work their way through the situation.

How often are these contracts renewed and is it a five year term, ten year term, one-year term?

Typically two to three year kinds of terms.

There are contracts rolling off every quarter.

Right.

Okay.

The other question is on Cessna.

I am going to stop asking you why you are being so conservative which is I guess the flavor of the last three years calls, but it looks like the environment has obviously changed.

Still, though, you think with a backlog business like that your incrementals would be able to hold up, and they were a little bit disappointing this quarter.

I don't know what your fourth quarter guidance implies but I think it's a flat margin on up deliveries.

I'm just curious as to what is really going on there?

And I have a very quick follow up to that.

We are seeing some impacts of this weakening economy in Cessna, and it's not on new jet deliveries, but we are seeing a slowing growth rate in the after market business.

We are clearly seeing a reduction in volume in the single engine piston caravan side of the business.

We did see for the first time a little bit of used valuation hit in Q2, but a little bit bigger number in Q3.

So we have baked into our numbers that our used inventories are starting to grow on book at Cessna, and values are down a little bit.

We have a much better process now than last time, so we think those will be much more limited, but we are seeing some of the used valuation impacts.

And frankly at Cessna in the last quarter we have seen some productivity issues that I think really relate to the strain of stepping up to these larger volumes.

So we have a little bit of cost performance weakness in there, as well.

So we do think the real driver of the business is jet deliveries and jet deliveries will be driven by the backlog.

But around the periphery of the business there are some impacts from the current economic environment.

Got you, and then just one follow up on the margins.

Cessna was, obviously, very strong this cycle and driven partly by pricing and you guys are doing a better job there.

But, Lewis, when you reevaluate how you guys manage the business, I guess you call it the IVM methodology and you feel like that corresponds where the equity value is and how you create value for shareholders, is there any reevaluation of that, given what's happened here.

And some of these businesses have had hiccups whether it's Bell which was in a phenomenal growth curve but just couldn't get the margin.

Industrial was obviously rolling back over here.

You never got that business up to its previous peak margin and I'm not sure IVM plays into TFC but obviously things are falling apart there pretty quickly.

So any reevaluation of how you guys are looking at your portfolio and the methodology?

Well, obviously with the situation we find ourselves in in today's global economic crunch, it really affects quite a bit of our portfolio, but let me say this.

If you really think about what is embedded inside of Textron currently, even with the current economic environment, a large portion of our company is well protected from -- appears to be so far -- well protected from the current fall off in the economy.

Cessna, okay, margins off a little bit, but you have to admit they've really held up well.

Some of that strained that we self imposed on ourselves to get the volumes up in the fourth quarter is necessary because we have to come out of January the third, or whenever we start next year, at the run rate to make 535.

So if you take Bell Systems and Cessna, that piece of the portfolio is good.

Now let's take TFC and industrial.

Industrial of course is really getting hit by recessionary tendencies in different markets, obviously, and we do continually look at every one of our assets to evaluate when or if they should become a part of somebody else's portfolio.

And the win is sometimes determined by the fact we know something about going forward that makes it more valuable in the future than it would be today.

So I still am a big believer in intrinsic value.

I think it's served us well.

I think our earnings growth over a long period of time has been very predictable because of it.

I don't feel good about where we are in several of our segments but you can be very very sure we are going to push hard to get everything back in line with expectation as quickly as we can.

Thanks a lot.

Thank you, ladies and gentlemen.

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

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

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