達信公司 (TXT) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Textron fourth quarter earnings call.

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

(Operator Instructions) I would now like to turn the conference over to Doug Wilburne, Vice President for Investor Relations.

Please go ahead.

Thanks, Gwen and good morning everyone.

Joining us today are Lewis Campbell, Textron's Chief Executive Officer; Scott Donnelly, Textron's President and Chief Operating 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.

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.

And then, one final point is, when we get to Q&A we'd like to ask everyone to please limit themselves to one question with a possible follow-up so that we can get through everybody.

We would appreciate that.

So now, moving to fourth quarter results.

Revenues in the quarter were $3.6 billion, up slightly from a year ago.

Our income from continuing operations, excluding special charges, was $0.40 per share.

Consistent with our revised guidance of $0.30 to $0.40 offered in our December 22 press release.

Special items in the quarter included the following.

A $293 million pretax, or $0.86 per share, market-to-market adjustment against assets held for sale in TFC in conjunction with our exit plan announced on December 22.

A $169 million pretax charge or $0.67 per share to eliminate TFC's goodwill.

A $31 million tax charge, or $0.13 per share, related to the change in investment status of TFC's Canadian subsidiary.

And a $64 million pretax charge, or $0.18 per share, for restructuring charges across the enterprise.

Also, we closed on the sale of our Fluid & Power business and recorded an after-tax gain of $111 million, which is reflected in discontinued operations.

The reconciliation of our reported GAAP loss of $0.87 is attached to our press release.

For the full year, our manufacturing businesses generated $899 million in cash against capital expenditures of $542 million.

Textron received $142 million in dividends during the year from TFC.

And in December, we made a $625 million capital contribution into Textron Financial to maintain the earnings to fixed charged coverage ratio under the support agreement between Textron and TFC.

Keep in mind, that the contribution did not result in an increase to the total combined debt of Textron and Textron Financial, as the increase in debt outstanding at Textron was exactly offset by the lower debt outstanding at TFC.

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

Thank you, Doug.

And good morning, everyone.

Let me set the stage for my remarks this morning by first pointing out the obvious.

Economic conditions weakened further during the fourth quarter but actually at a pace and degree that has not occurred in decades.

The impact on our customers at Cessna, industrial and Textron Financial were particularly significant.

Consequently, as many of you have already observed, we believe 2009 is setting up to be the most challenging year ever for most manufacturing companies.

Furthermore, at Textron, we have an obviously additional challenge related to our commercial financial business and we're addressing that.

That being said, we've developed plans for 2009 that squarely focus on two important goals.

Improving cash generation and operating performance at each of our businesses in a markedly slower demand environment and aggressively converting finance receivables at TFC to cash.

Frankly, we're taking a very pragmatic approach to every aspect of the business given this unprecedented economic environment and we've implemented a very comprehensive liquidity plan for the Company.

We'll talk about that.

And the cornerstone of this plan is the expanded TFC exit strategy announced on December 22, which calls for liquidation of at least $2.6 billion in receivables by the end of this year.

We have a detailed execution plan for achieving this liquidation target and Ted will describe this in more detail very fully later.

In addition to the portfolio runoff, we're also pursuing significant asset sales of individual TFC businesses.

A variety of potential buyers are currently looking at various portions and combinations of TFC's assets and we're working these possibilities vigorously.

We're also working on new securitizations or facility extensions, similar to what we did last month, when we extended the maturity on a $550 million aircraft facility for about a year.

At the Textron level, we expect positive cash generation from our manufacturing businesses, plus we're evaluating a full range of potential capital markets alternatives, as well as other asset sales.

Our recent successful closing of the Fluid & Power transaction, which Doug mentioned, is indicative of the kind of interest that exists, even in these times, from strategic buyers.

To close this discussion, we believe that successful execution of our TFC exit plan, combined with our other liquidity actions, will raise cash sufficient to meet or exceed our needs.

You also know that we have a very strong leadership team on the field.

The addition of Scott Donnelly to our team last year has proven to be very beneficial.

And now, as our new President and Chief Operating Officer, he and I are keenly focused on running the business consistent with the quickly changing demand environment in which we find ourselves.

After I wrap up, I've asked Scott, who's with us this morning, to provide some additional detail on the actions we're taking in our manufacturing businesses.

So now, let's move to the specifics, beginning with Cessna, where we delivered 131 jets in the fourth quarter, bringing full year 2008 deliveries to 467 units.

That's actually a new record for both the quarter and the year.

Unfortunately, the economy is having an especially egregious impact on the business jet industry, including Cessna.

In the quarter, we only reported 30 gross orders, without about a 45/55 split, by the way, between United and international.

In that same quarter, we also saw 23 cancellations and an unprecedented number of deferrals.

Combined, these developments affected deliveries in the quarter and more significantly, they will impact planned deliveries for 2009.

Needless to say, it's extremely difficult to forecast this year's delivery number because ultimately, it will depend on how the economy and other factors affect customer orders and cancellations.

So we're now basing our Cessna operating and production plan on an expected delivery level of around 375 units for 2009.

To put our expected '09 Cessna plan into historic perspective, remember that our previous peak deliveries occurred back in '01 or the '02 time frame, I believe, with just over 300 jets and Cessna's revenue then were about $3 billion.

At a delivery level of about 375 jets for 2009, Cessna's receivables will be $4.6 billion, significantly higher.

Coupled with the actions we're taking, we expect Cessna should have solid double digit financial performance, even while preserving the critical components of R&D in '09.

While Cessna is clearly a cyclical business, it does remain a premiere franchise, in what we believe an attractive, relatively young industry, with an extremely bright long-term growth outlook.

Moving now to industrial.

The slowing economy had significant impact in the quarter on volumes in each of our businesses there.

But the largest decline came at Kautex, where volumes were down 20%, reflecting automotive OEM shutdowns, literally, around the world.

Looking forward, in 2009, we believe volumes across all of the industrial will be down about 20% to 25%, on average, with the largest decline happening in the first quarter, as our customers adjust their inventories and production to the lower demand.

On the other hand, a bright note inside industrial's '08 performance relates to the importance of our devotion to R&D and consequently, new products.

Our RXV Golf Car EZ-GO, introduced at the beginning of the year, made up nearly 60% of '08 deliveries, contributed to a 13.5% in EZ-GO revenues last year, in spite of the slowing economy.

Now let's shift to Textron systems, where we're providing our US government customer essential capabilities critical in today's conflict scenarios that keep American soldiers out of harm's way.

And the effectiveness of our products is beginning to attract business from foreign military sources as well.

In particular, we're now selling our Sensor Fused weapon product to the United Arab Emirates and we're working a contract with another international customer as we speak.

Our ASV is now being deployed in a number of countries for their internal security missions.

In fact, we expect to generate over $1 billion in foreign orders for a variety of Textron systems products during 2009.

Now, that's literally five times what we generated last year.

These should begin to contribute to growth in 2010 and beyond.

Furthermore, we were recently awarded a contract to operate a performance-based logistic program for in-country operation of AAI's Shadow System in Iraq.

On this basis, we anticipate solid growth over the next several years at systems, as US and international military interests in our products is expected to be relatively unaffected by the economy.

We also are pleased with the execution and operating performance at systems.

Given the amount of acquisition integration activity that we've had underway over the past two years there, results there are even more impressive.

Okay, to complete my discussion today, let's now move to Bell, where execution is also a good news story and we've made substantial progress over the past two years.

I think the V-22 is probably the best example.

Last year, we delivered 18 aircraft, each ahead of schedule.

Actually, most were one month ahead of schedule.

In the fourth quarter, Bell added another $1 billion in the backlog of V-22, reflecting next year's funding of our multiyear contract, which was approved last March.

On the operational side, the V-22 has performed extremely well in Iraq.

Most recently the CV-22, which is the Air Force special ops version of the Osprey, recently self-deployed with aerial refueling more than 5,000 nautical miles, for a joint multinational operation involving special forces.

Feedback from the customer, all ready on this unique capability, is that the CV-22 exhibited superb performance during the mission.

Likewise, early this month, the first detachment of H-1 Yankee utility units have gone into service, as they set sail aboard the USS Boxer with the US Marine Corps 13th Marine Expeditionary Unit.

We deliver 12 H-1 units last year, which included an early delivery from 2009.

Again, we're ahead of schedule.

And we continued to improve factory productivity.

Execution on the commercial side of our business also showed improvement last year.

We delivered 167 commercial helicopters versus our beginning of the year target of 160.

On the demand front, our US military business should experience significant growth over the next several years, as we ramp the V-22 and H-1 programs and as we service and reset legacy aircraft that have seen heavy in-theater use.

On a commercial side at Bell, we actually saw a few cancellations and deferrals during the first quarter but nothing really severe.

Nevertheless, we're going to take a cautious approach to commercial production for 2009.

With an expectation of about 180 deliveries versus the 169 in '08.

We are obviously -- will watch this very carefully through the year.

Okay.

So in conclusion, the economic environment has changed quickly and we're taking serious actions accordingly.

We have three premier businesses in Cessna, Bell and Textron Systems, which combined, should generate 80% of our revenues this year, at double digit margins, with strong cash, flow even in the midst of this economic dislocation.

Our priorities this year are crystal clear.

Maximize cash flow and operating performance in our manufacturing businesses and convert finance receivables to cash at TFC.

We believe we have a plan by which we can successfully navigate these difficult times and we are committed to execute that plan.

We believe that we will emerge leaner and more focused.

And looking forward, we fully expect that growth in our strong defense businesses will sustain us over the next several years.

And after the world economies recover, this will be augmented by expansion at Cessna, as well as within the remainder of our commercial businesses.

With that, I'll turn it over to Scott.

Scott?

Thank you, Lewis.

Good morning, everyone.

Clearly, our focus this year in the manufacturing business is to maximize cash flow out of our operations, while at the same time preserving the critical product development efforts that will support our future growth when we come out of this economic slowdown.

Accordingly, we are aligning our '09 production to match expected lower commercial demand.

Lowering our selling general and administrative costs through head count reductions.

Curtailing most discretionary spending, including some reductions in product development.

Freezing salaries across the Company.

Aggressively reducing our working capital.

And eliminating nonessential capital spending.

Specifically, we've dramatically reduced our production plans at Cessna and industrial and to a lesser extent, at Bell Commercial to ensure we reflect our current view of customer demand to minimize our finished goods inventory.

Correspondingly today, we announced an additional 2,000 head count reduction at Cessna, consistent with our reduced production level of about 375 jets.

Overall, we're targeting a 10% reduction in SG&A expense, which is worth about $150 million in cost savings.

With respect to R&D, while we were originally planning an increase of nearly 10%, we're now committed to reducing that R&D spending by about 8% or $45 million less than 2008.

Looking at our working capital, the primary source of cash opportunity here is our inventories, which last year were $3.1 billion.

We're working across all of our inventories and all of our operations to reduce that number by 15%.

Leveraging our lean activities deeper into our manufacturing processes.

And by resetting our supplier delivery schedules to align with our reduced delivery requirements.

To finish with CapEx, we are planning to reduce our spending to about $315 million this year.

That's down 42% from last year's $542 million, again, consistent with our reduced capacity requirements.

In summary, we recognize and are planning for reduced demand in our commercial businesses and we're taking the appropriate actions to optimize our performance through this down cycle.

And in our defense operations, where demand remains strong, we're committed to efficiently building the foundation for growth that's in our plans over the next few years.

With that, I'll turn it over to Ted.

Thank you, Scott.

Good morning, everyone.

Let me start with a discussion of the TFC exit strategy and then our overall liquidity plan.

The exit strategy consists of two elements; liquidation of TFC's noncaptive financial receivables and the sale of assets.

We've developed a comprehensive bottoms up, account by account, liquidation plan that targets a 2009 receivables reduction of $2.6 billion.

Notifications were issued late last year informing our customers of our intention to terminate financing as soon as contractually permissible and advising them to seek alternate funding.

We're monitoring progress against weekly targets to ensure that we meet our reduction goal.

Despite a minimum 90-day window for most contract terminations to become effective, we do expect to achieve over $400 million in liquidations in Q1.

We're only a few weeks into our plan but we're having early success and tracking slightly ahead of target.

As we pass the minimum notification period in the second quarter, we expect a significant acceleration in liquidations then.

In some cases, we're able to assist groups of our customers in locating alternate financing.

For example, late last year we completed a customer transfer agreement with another inventory finance company.

Under the agreement, this company will assume new funding requirements for a pool of our consumer electronics and appliance floor plan customers.

We're pursuing similar transfer arrangements for as much as our distribution finance portfolio as possible.

The second part of our exit strategy involves sales of TFC assets.

And in that regard, we've designated $2.9 billion of our managed receivables as now being held for sale.

Based on the number of interested parties currently performing reviews, we believe we may be able to complete a number of meaningful transactions this year, thereby augmenting the liquidation process.

Now, let's talk about how the exit strategy fits in with our overall liquidity plan.

First, between Textron and TFC, we continue to have daily access to the commercial paper markets, although some days have been more difficult.

TFC is using small amounts of its bank lines to supplement its CP program and currently has about $200 million outstanding.

But clearly, our committed credit lines are working just as they were designed to work.

By the way, we typically see our heaviest issuance of commercial paper in the first quarter, as our manufacturing businesses usually experience a decrease in sequential deliveries.

Of our $2.6 billion in expected '09 liquidations, between $1.5 billion and $2 billion of that will go to pay off bondholders of our securitization vehicles.

That leaves an available balance of between $600 million and $1.1 billion for TFC to meet $1.6 billion of term maturities in 2009.

Our plan to address that shortfall is follows.

We are pursuing a wide variety of sources to not only cover the '09 maturities but also to reduce our overall reliance on commercial papers.

So, we are driving to bring the balance down.

We're looking to generate between $1 and $2 billion of cash through the combination of asset sales at TFC, as we've discussed, new securitizations or extensions, similar to what we just did with our aircraft facility in December and other potential asset sales at Textron.

We're also expecting to generate about $400 million in cash from our manufacturing businesses after CapEx.

And as Scott discussed, we're looking to bolster that through various operating initiatives.

We continue to closely monitor the corporate bond markets.

And as soon as practical, will access term capital to further pay down commercial paper.

And finally, as the ultimate backstop, we have our $3 billion in committed credit facilities.

So, we have a comprehensive plan by which we expect to meet our funding needs.

Now, let's turn our attention back to fourth quarter results.

Looking at what drove the year-over-year changes.

Income from continuing operations, excluding special charges of $0.40, was down $0.57 from a year ago.

$0.46 of the decline came from TFC, the details of which I'll go through shortly.

On the manufacturing side, higher pricing of about 3% added $0.26 a share.

However, this was offset by about 3.7% inflation, which cost about $0.30 a share.

Cost performance benefited the quarter by $0.12.

And taxes provided a positive $0.10, primarily as a result of the foreign tax credit benefit from the repatriation of foreign cash during the quarter, which we discussed in our December 22 release.

Lower volume and unfavorable mix cost us $0.16.

Head winds from engineering, research, development and depreciation cost $0.12.

And a variety of miscellaneous items were $0.01.

Now, let's move to our segment discussion and we'll start with Cessna.

Despite the late year falloff in demand, the fourth quarter was a capstone on a record year at Cessna in terms of jets delivered and revenue and profit generated.

However, Cessna's fourth quarter revenues and segment profits did decrease $64 million and $90 million respectively.

Revenues were down in spite of higher jet units.

That primarily reflected a higher mix of Mustangs.

This was partially offset by higher pricing and the benefit from the Columbia product line acquisition.

Segment profit decreased due to used aircraft mark-to-market adjustments.

The impact from lower revenue mix and higher product development and overhead costs.

Cessna's backlog at the end of the fourth quarter was $14.5 billion, up $1.9 billion from the end of last year.

Looking to '09.

Based on revenues of about $4.6 billion, which would be associated with 375 jets, we estimate that we will be able to achieve full year margins in the 10% to 12% range.

However, the first quarter is going to be our most difficult at Cessna, as we anticipate less than 80 deliveries due to the inability to efficiently replace lost deliveries that affected the quarter.

Things should stabilize somewhat in the second quarter as we rearrange customer slots and cost savings from our downsizing actions take hold.

Moving to Bell now.

Revenues and profits increased $98 million and $40 million in the fourth quarter.

The increase in revenues was due to higher volume and pricing.

The increased volume relates to higher V-22 and spares and service revenues, partially offset by lower commercial helicopter mix and the absence of ARH program revenue.

Segment profit increased due to favorable cost performance, higher volume and pricing in excess of inflation, partially offset by unfavorable mix.

The cost performance reflects the non-recurrence of program charges recorded in the third quarter of 2007 in both military and commercial programs and higher royalty income this quarter.

Bell backlog at the end of Q4 was $6.2 billion, up $2.4 billion from the end of last year.

Looking to 2009, we believe revenues and segment profits will be approximately flat with 2008.

Sales for the year reflect a decrease in military revenue, primarily due to the absence of ARH development activities, lower V-22 spares and support, and the temporary reduction in H-1 production, which will ramp back up starting in 2010.

Again, the first quarter is our lowest delivery quarter and we expect first quarter revenues and profits to be about the same as last year's first quarter.

Now, looking at Textron systems.

Revenues and segment profit increased $180 million and $37 million respectively.

The increase in revenues is due to the benefit of our acquired AAI business and higher volume for ASV spares and logistics, intelligent battlefield systems and Sensor Fused weapons.

Segment profit increased due to favorable cost performance, higher volume and the benefit from the acquisition.

Backlog at systems ended the year at $2.5 billion, compared to $2.4 billion at the end of last year.

This backlog should help drive an increase in revenues in 2009 to just under $2.3 billion.

We expect full year profits to be slightly down, as last year's favorable cost performance on a number of completed government contracts gets reflected in this year's new lot pricing.

And they'll have a fairly even distribution of earnings across the quarters.

Next, we have industrial, where revenues and segment profit decreased $135 million and $59 million respectively.

Revenues decreased due to lower volumes and an unfavorable foreign exchange impact, partially offset by higher pricing and the favorable impact of the Paladin Tools acquisition at Greenlee.

Segment profit decreased due to the impact of lower volume and mix, inflation in excess of higher pricing and the unfavorable foreign exchange impact.

As Lewis mentioned, we expect volumes and revenues will likely be down 20% to 25% this year, with the largest decline occurring in Q1.

At these volumes and with our cost actions, we expect to achieve slightly positive full-year segment profits in 2009, with a first quarter loss approximately equal to the fourth quarter of '08.

Now, finishing with finance.

Credit performance continued to deteriorate, with 60-day delinquencies increasing to 2.59% of financed receivables, up from 1.06% at the end of the third quarter.

Nonperforming assets increased to 4.72% from the third quarter level of 2.67%.

Against this backdrop, revenues decreased $64 million in the fourth quarter due to lower market interest rates and lower securitization gains, which were partially offset by the benefit of interest rate floors.

Segment profit decreased $171 million, as a result of increased loan loss provisions, higher borrowing costs and lower securitization gains.

Again, partly offset by the interest rate floors.

We recorded $133 million in loan loss provisions to reflect general weakening in market conditions, declining collateral values and the lack of liquidity available to our borrowers and their customers.

This also incorporates our increased estimates of future losses, as we believe that our exit plan will negatively impact credit losses over the duration of our portfolio.

After $33 million in charge-offs during the quarter, our loan loss reserves rose to $191 million or 2.8% of our current $6.9 billion worth of owned receivables held for investment.

Managed receivables ended the year at $10.8 billion versus $11.4 billion at the end of the third quarter.

Looking to '09, on the performance side of TFC, we are planning for credit losses that range from 2 to 4 times higher than in previous down cycles.

In that context, we expect a TFC segment loss in the range of $150 to $175 million this year.

We expect to make additional capital contributions to TFC this year but we also plan to have TFC dividend cash back as we liquidate the portfolio.

In total, we expect TFC to flow about $50 million net back to Textron after capital contributions.

In conclusion, we are projecting full-year earnings per share from continuing operations and before special items will be in the range of $1 to $1.50.

Given first quarter volume considerations and the fact that many of our cost initiatives do not take full effect until the second quarter, we're expecting only modest profits before restructuring charges in Q1.

We're managing through this global economic reality with swiftness and intensity.

Bringing to bear the resources of the enterprise, the strength of our diverse business base and our commitment to take a hard line in streamlining operations.

We look forward to keeping you informed about our progress as we move through the year.

And with that, Operator, we are ready to open up the call for questions.

Thank you.

(Operator Instructions) And at this time we have a question from Nicole Parent, Credit Suisse.

Please go ahead.

Good morning.

Hi, Nicole.

First, could we maybe get a sense, when we go back to August, obviously the financial landscape has deteriorated rapidly for everybody.

But in the context of the finance presentation that we got back in August, when we talked about the portfolio quality improving and kind of there was no way we were going to get back to the losses that we had in the '02/ '03 time frame.

At the end of the fourth quarter, it looks like we've widely exceeded the charge-off ratio, the NPA.

When you think about the losses for '09, how much conservativism is put into that forecast?

Well obviously, Nicole, the world did change in the fourth quarter in a big way for us.

And we have taken substantial reserves in the quarter, higher than what we had previously expected.

Both as a combination of the changes in the world and the impact it's had on our borrowers and their customers but also in the context of the fact that our business model largely blew up as a result of all the changes that have happened with the financial crisis.

And we have changed strategies to move ourselves back to a captive position.

And we believe that that will result in further losses, higher levels of losses because of that.

I think we have been reasonable and maybe reasonably conservative.

We have put reserves up in Q4 at levels that are, as I said, depending on business, 2 to 4 times higher than what we incurred in the prior downturn.

We also have significantly raised charge-off expectations in our numbers for next year, as well as assumptions that we'll have to continue to put up significant reserves.

I just don't know where the economy is going to go from this point.

I think we're being conservative but time will tell.

Fair enough.

And Lewis, just one follow-up on the cancellations and deferrals.

You're seeing 20% delivery forecast decline for 2009.

It seems reasonable.

Maybe any read through that you can make on who's cancelling, who's deferring or is it all customers, all industry across the board?

Well, Nicole, it seems to be across the board fairly broadly mixed.

We still have a good mix of international.

We haven't really seen any single pocket of cancellations that makes you think that there's some kind of a very serious targeted problem for us.

And it's basically what President Obama and the rest of the world is trying to figure out.

How do you stimulate the economy enough so the people can go out and borrow money at rates they can afford to buy business jets and other items?

So, I would say, nothing noteworthy.

Thank you.

And next we have a question from Jeff Sprague, Citi Investment Research.

Please go ahead.

Thank you.

Just on TFC, Ted, would you actually envision continuing to build your provision balance over the course of 2009?

You provisioned well in excess of charge-offs here in the quarter but should we expect the balance to continue to increase over the course of '09?

No, Jeff, I think we have substantial charge-offs that we expect in '09.

We will continue to put up additional provisions as we go through the year but we expect charge-offs will be higher than provisions.

So that balance will come down, as will the overall asset balance come down.

We're targeting to be down to just over $8.5 billion of receivables by the end of the year.

Jeff, the midpoint of our range assumes a midpoint of charge-offs somewhere in the 3.5% area, so that would nod lead to an increase in reserves then.

Ideally, we obviously put up the reserves first and the charge-offs follow in subsequent periods.

Got it.

And, Ted, you kind of walked us through the liquidity with some of the pluses and minuses we needed to think about.

But just to be specific where are the CP balances today and what are the timing of the '09 term maturities?

The CP balances today are around $1.7 billion somewhere in that neighborhood.

I don't have, this morning.

Just below $1.8 billion yesterday.

Just below $1.8 billion yesterday.

The timing of maturities are pretty much back end loaded.

The TFC maturities are in the $200 to $300 million range for the first three quarters of the year.

And then about $800 million in Q4 for a total of $1.550 billion for the full year.

And then, if I might just change gears a little bit back to Cessna.

This will be your follow-up, Jeff.

I know.

But it's the world we live in, isn't it?

Nicole asked the question a little bit as it related to Cessna but what does the '09 production imply for Mustang?

And is there any particular distinction between how Mustang customers are acting and others?

Certainly, a couple months ago, they were looking more resilient and I wonder if that's changed?

No, Jeff, I would say that's still where we are.

The number of inquiries, cancellations, delays as we've gone through the mustangs backlog remains very firm.

We've taken it down modestly from our original '09 plans but the reductions there are not as significant as some of the other larger equipment.

So, we're looking at about 130.

Thanks a lot.

And next we have a question from Cai von Rumohr, Cowen and Company.

Please go ahead.

Okay.

So, you said 130 Mustangs, which would imply, basically, you're up 30% there.

Is that correct?

So all of the decline is coming in the good stuff where you make the good margins?

That's correct.

The Mustang is still in a rampup.

Okay.

And could you you give us some more color on which of the models that are having the greatest difficulty?

And why the first quarter, from kind of a disappointing fourth quarter, is going to be 80?

Is that sort of delays or is it execution?

Or I didn't quite understand why the first quarter was going to be quite so low.

Scott?

It's primarily a factor of the delays and cancellations that we saw as we went through the fourth quarter last year and went through and talked to all of our customers in the backlog.

So, those 80 units that we have forecast for Q1 delivery are all firm sold aircraft.

It's the speed in which the cancellation process and delay process happened in Q4.

A lot of near-in aircraft got canceled and we're in a process right now of trying to reset the line.

Move customer slots around, move some customers up but there's not enough time to make a lot of that happen in Q1.

So, do we assume that you do about 30, 35 Mustangs in the first quarter?

It should be about that.

It's a linear run rate and the run rate that we had going out at the end of the year supported the original plan to be able to do about 150 a year.

So, yes, you'd expect those Mustangs to deliver pretty linearly across the year.

Thank you very much, gentlemen.

And next, we have a question from [Poponac,] Goldman Sachs.

Please go ahead.

Good morning.

Talked about the CP being available but more difficult on some days.

Can you give us kind of what the actual cost is on average?

And comment on whether or not the recent rating agency downgrades have impacted your access at all?

I'll start with the first.

Average, 4.5% but that's varied.

We've - it got very expensive late in December.

We came back after the 1 of January.

The cost plunged quite a bit.

And then I would say, that as our ratings kind of reset here in the -- over the last few weeks, that has had some impact both on cost and quantity in the short term.

Hopefully, that's all settling back down now and we will have a better position going forward.

It varies by maturity.

The overnight obviously is less expensive than that.

It's in the 3.5% range and stuff that we're getting out into March is a little bit over it, in the 5.5% range.

That makes sense.

A quick follow-up.

On the Textron systems guidance, it looks like it implies that the margin percentage is down about 100 basis points year over year, even though your volume is increasing in the upper single digits.

Can you just walk us through the puts and takes on that?

I think the big driver there is kind of a problem of great performance.

During the course of 2008, we consistently overperformed on a lot of our government contracts and continued to pick up big gains on contract closeouts.

And obviously, as you see your actual performance and we negotiate new contracts, which happens on pretty much an annual basis, with a lot of these businesses, you've got to reset your margins back down into the more acceptable levels for our customers.

So, we really outperformed in '08.

We expect to have good solid performance at traditional margins in '09 but just not repeating the overperformance we had in '08.

One comment I'd add there, just quickly, is that systems for, gosh, I'd say a decade has probably been our most aggressive in employing lean tactics and just creating an improvement mentality for the entire workforce.

Everybody from the engineers to the factory floor.

And we have historically quoted fixed based -- or fixed price contracts, which can be risky.

In our case, they have never been.

And then, we have historically found ways to beat those prices over the contract period, so you actually incur more profit than you estimated.

And that's what Ted talked about.

So, I would expect that what you're looking at going forward to be conservative not aggressive.

Okay.

Thanks a lot.

And next, we have a question from David Strauss, UBS.

Please go ahead.

Good morning, thank you.

The 375 deliveries that you're forecasting for Cessna, can you just give us an idea of coverage?

Are you completely sold out on those, given the deferrals or do you still have to take some orders to actually hit that kind of number?

Right now, where we are is a little over 80% sold out.

80%?

80%.

Just a little above 80%.

And then, the deferrals that you're seeing, is it -- are customers moving out six months, a year, or are they moving out beyond that kind of period, pushing deliveries out a couple years?

It varies quite a bit but obviously, most of the folks that are in '09 slots and they talk about a deferral, they want to at least push it to '10.

And they're looking at the economy, trying to understand where they'll be.

So, I think that it's sort of fluid when you look at a deferral.

You negotiate your work with the customer and we'll continue to work with them until they want to commit a firm date.

Okay.

And the interest expense forecast for the year, $180million.

Ted, can you maybe give us some color on what exactly is baked into that?

We are assuming in that number that we will term out a sale -- one of our strategies for taking the CP balance down, so we have less reliance on that market, would be to term out debt.

And we have assumed that we will term it out at some fairly high prices.

So, it may be a conservative number but we wanted to have covered what might happen.

Okay.

Thanks, guys.

And next, we have a question from Steve Tusa, J.P.

Morgan.

Please go ahead.

Hi, good morning.

Hi, Steve.

I have a quick question for you.

A couple weeks ago, GE, Tyco, a couple others, took advantage of a small window in the bond market.

Were you guys around for that?

Were you exploring doing a deal at that stage of the game?

Could you talk about whether you explored doing something in the market at that stage of the game?

And I'm also just curious, everybody kind of beats up on GE when they look at their finance business.

And in August, they did an equity offering and it seems like they've been actually ahead of the curve relative to you guys as far as kicking down their exposure in financial services.

And I haven't seen any management changes here in financial services.

I'm just curious as to why we are continually strategically behind the curve here or if this is just a function of an unprecedented environment?

If you would comment on both of those items, I'd appreciate it.

Thank you.

I don't think we're behind the curve.

I think we had a strategy to continue to refine and focus this business when the world was going through a more normal looking recession.

But when we went into the September, October time frame and had Lehman brothers and other things happen, it became apparent, at that point in time, that the whole model of wholesale borrowing for our kind of business was broken.

And we pretty quickly made a decision that we needed to take more aggressive action to do that.

And obviously, we've been working on that for a lot of that quarter, until we came public with it on the 22 of December.

So, I don't think we're behind the curve.

Obviously, if we knew what we know today, we would have started doing this a long time ago.

As to the capital markets, I think you can safely assume that we are evaluating a whole range of and have designed a whole range of possible directions that we might want to take then.

And when we think the markets are amenable to doing so, we're ready to strike on a moment's notice.

Thanks.

And next, we have a question from Matt Vittorioso from Barclays Capital.

Please go ahead.

Good morning.

I was hoping just to get a little more clarity on liquidity for Textron Inc.

specifically.

And then more specifically, looking at Q1.

So, if we take into account the way you're talking about Q1 being probably the toughest quarter on the Cessna side.

So, I would think there's going to be some buildup of inventory there, which could lead to a cash outflow or free cash flow negative for Q1.

So, if we think about the possibility of free cash flow negative for Q1 versus having to contribute cash to Textron Finance, just, could you lay out what your liquidity at Textron Inc.

is, which would tell us what your ability is in Q1 to support Textron Finance?

Yes, based on our -- well, first of all, supporting Textron Finance largely happened in Q4 with the capital contribution we made there.

We will start, during the course of '09, bringing some net balance back.

We will have to make small capital contributions at the end of the each quarter but we'll also be taking dividends back out of TFC as we liquidate the portfolio.

So, it's our expectation that we will have a net flow back to Textron in '09.

It will all depend on how well we execute the liquidation.

But based on our rundown, $2.6 billion, somewhere north of $50 million of net should come back up to Textron.

If we are able to execute on any asset sales, which we are working hard on during the course of the year, that number could be bigger.

So we don't expect a further slowdown.

In fact, with the 625 that went down, TFC's leverage is down to just over 5 to 1.

So, there's a lot of room to bring some of that money back up.

We do have, always, first quarter is a challenging quarter but incorporating all of our business plans for the operations of the business, obviously we're shutting off inventory flowing into the house on the manufacturing side as best we can.

We think we can still operate in Q1 with our CP balances under the $2 billion, $2.1 billion kind of range.

So, well comfortable with our credit lines.

Could you -- what's today, if you look at the credit line at Textron Inc.?

It's, I think, the $1.25 billion credit line.

What's the availability, considering CP balances and other borrowings?

I think the outstanding CP, the piece of CP outstanding at Textron is 7 something.

I don't know an exact number today.

700 to 800, somewhere in that range.

Okay.

All right.

Thank you, guys.

And then again, though, just to follow-up on that point.

The entire $3 billion of our credit lines are available to TFC.

There is a sub limit for Textron.

Okay.

(Operator Instructions) And at this time, we have a question from Steve Searl, Conning Asset Management.

Please go ahead.

Yes, can you just tell us, what was TFC's total debt at the end of the year?

About $7 billion.

And can you just talk about the pension plan, what impact that had on your shareholders' equity and maybe funding needs for this year?

The pension plan, as most, took a pretty good hit last year.

We did better than many but we're down about 20% or so.

Actually, the hit to equity was about a little under $800 million.

EPS wise -- I know others will be interested in that.

I think we have a headwind of somewhere around $0.04 to $0.05 a share for higher pension costs in 2009 versus 2008.

And we have fairly minimal funding requirements in '09.

We have our normal ongoing.

We have a little bit of a DC plan that we pay cash into.

We have some foreign plans that we put $15 to $20 million of cash a year in.

That's more of an ongoing.

The master trust, which is where the largest portion of the pension assets are and where the decline occurred, we'll put less than $10 million in in '09.

Depending on how the stock market performs in '09, we could have requirements to put significantly more cash into those plans by the September 2010 time frame.

Thank you.

And next, we have a question from Mike Meek, Atlantic Investments.

Please go ahead.

Hi, I want to make sure I understand your guys' Cessna assumptions.

Say that again, I'm sorry.

You broke up.

Sorry.

Just wanted to make sure I understand your guy's Cessna assumptions.

You've got 80% of the projected deliveries in hand, so the assumption is you'll be able to move customers who are further out in the backlog up to take those slots?

Yes.

There will be a combination -- so if you look at the number of aircraft that are unsold in terms of '09 delivery slot, some of those, quite possibly, will come from customers that are in at later delivery dates.

And a fair number right now are potentially new customers.

Okay.

We're looking at about 30 to move up from 2010 and we actually have a pretty good order forecast for 2009.

But, Mike, clearly, that's a risk in our plan, which is why we have such a wide range of guidance out there.

But that -- we've gone through this with our sales force.

And based on what they see out there in the marketplace and we'll call it say the cleansing, the churn in the backlog that we had, that they feel reasonably confident that they can fill those slots.

But it is something that we're going to have to track very closely and react to as we go through the year.

Great.

Thank you.

And next, we have a follow-up from David Strauss, UBS.

Please go ahead.

Yes, just to clarify.

The $2.6 billion decline in receivables that you're talking about this year, Ted, is that just all runoff or is that any sales in there?

The $2.6 billion has a little under $200 million of sales that are kind of right in our scope but the vast majority of that is all just runoff.

Okay.

Thanks.

And next, we have a follow-up from Noel Poponac, Goldman Sachs.

Please go ahead.

Yes, when you talk about keeping your eye on the term market, do you think you're more likely to issue out of the parent or the FinCo?

More likely to issue out of the parent.

It would probably be staggered, so you'd do the parent ad then possibly follow with TFC term debt.

Okay.

And then, you also mentioned looking at further asset sales outside of the FinCo.

Can you talk about maybe what some of the assets you're looking at as candidates are?

No.

We never do that.

We always get that question in some form or the other.

And it's just -- I know you'd love to have an answer and obviously, we did make a statement that said we're studying that and pursuing that but we don't really announce things until they're done and --.

It's not in anybody's interest to do that.

So -- you can appreciate that.

Yes.

Clearly, we are -- we have every option on the table and we are looking at a number of assets on the manufacturing side of the house as well.

Fair enough.

Thanks a lot.

And next we have a question from Brian Jacoby, Goldman Sachs.

Please go ahead.

Hi, guys.

This is actually [Nick Riley] for Brian.

Just a techno question.

You mentioned earlier, you had about $200 million drawn on your revolvers.

I was just wondering, where that $200 million was drawn from?

Is it Textron Fin or or in --?

It's at the Finance Company.

Thank you.

Gwen, if we have no other calls, we'll conclude today's call and thank everybody very much for joining us.

Thank you for joining us.

Have a good day.

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