達信公司 (TXT) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Textron earnings conference call.

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

Later, there will be a question-and-answer session.

(Operator Instructions).

As a reminder, today's call is being recorded.

At this time then, I would like to turn the conference over to Doug Wilburne, Vice President, Investor Relations.

Please go ahead, sir.

Thanks, Kent, and good morning, everyone.

Before we begin, I would 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 SEC filings and also in today's press release.

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

Finally, you can also find an Excel download of our income statements for the past five years recast to reflect the move of HR Textron to discontinued operations as a result of the sale of this business in the quarter.

We'll begin our call today with a brief discussion of first-quarter results.

Then Lewis Campbell, Textron's Chairman and CEO, will follow with comments on our liquidity plan, the excellent progress we've made in the first quarter and how today's public offerings support that plan.

After that, Scott Donnelly, Textron's President and Chief Operating Officer, will review key operating items in each of our segments.

We'll wrap up with additional analysis of our first-quarter results and a few comments about our outlook.

And we also have Dick Yates, our acting Chief Financial officer, present to participate in Q&A as needed.

Moving now to first-quarter results.

Revenues in the quarter were $2.5 billion, down 24%.

GAAP earnings were $0.35 per share.

And adjusted earnings from continuing operations, excluding restructuring charges, were $0.26 per share compared to $0.88 a year ago.

Our results included a $0.13 per share after-tax gain from the sale of CESCOM, our aircraft tracking service at Cessna -- that is our aircraft maintenance tracking service at Cessna.

On a pretax basis, the gain was $50 million, and was included in Cessna's first-quarter segment profit of $90 million.

On the cash front, we've adjusted our definition of free cash flow to enable a better understanding of cash generated by the Manufacturing group separately from the cash generation of TFC.

By the way, Textron corporate cash flows are included in the Manufacturing group.

Looking at page 3 then of our key data schedules, titled Manufacturing Group Cash Flow, you see that Manufacturing operations used $286 million in cash during the first quarter.

It is important to note that this was favorable to plan, as cost savings and cash conversion actions we're taking have already begun to gain traction.

Nonetheless, the Manufacturing cash usage reflected a significant build of inventory at Cessna, as we delivered 69 jets versus our plan of about 80, as well as significant seasonal payments made across the Company during the quarter, including about $100 million in cash to settle our 2008 stock-based compensation hedge.

Also, keep in mind that the inventory build at Cessna, which was about $250 million in the quarter, should begin to reverse itself during the second half of the year as our production flows reach their new target levels.

Scott will speak in more detail about the actions we have taken at Cessna to address the inventory build, as it has been a key focus area for us.

And one last item regarding an accounting convention at TFC.

We've decided to report nonaccrual finance receivables separately from hard assets we own that were received in settlement of troubled receivables -- troubled finance receivables.

This separate reporting reflects the increasing proportion of recovered assets and the difference in characteristics between owning hard assets versus finance receivables.

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

Thank you, Doug, and good morning, everyone.

The industrial and financial sectors of the economy continued to be a challenge for us this quarter, and as a result, most of the Company's commercial markets experienced further softening and TFC credit quality weakened.

On the other hand, we had continued solid results at Bell and Textron Systems.

And importantly, we had strong execution on our liquidity plan.

Specifically, we liquidated $926 million of managed receivables at TFC, about twice of what our plan called for.

As you know, we also completed the sale of HR Textron for net cash proceeds of about $275 million.

And we took steps to right-size our manufacturing businesses and improve working capital efficiency.

As expected, we used cash to support our Manufacturing operations in the quarter, but we did so at a pace less than what we had planned despite lower-than-anticipated volumes.

Looking to the full year, we expect a significant contribution to cash generation from inventory reductions as the year progresses, and we remain on track to generate $400 million of manufacturing free cash flow for the full year in 2009.

To ensure our organizational focus on our cash objective, we have already incorporated a significant incentive compensation management element for our top 1000 managers directly linked to stretch cash generation goals.

Okay, let's discuss our overall liquidity plan, starting with a review of the plan objectives, which we have listed on page 4 in our schedules.

And it's going to be important to follow these schedules, especially for page 4 and 5.

Okay.

We intend to complete our plan without selling any of our core assets, including the [Company] finance business.

In addition, we look to maintain a minimum cash balance of at least $1 billion to ensure operating flexibility.

Over time, we look to restore efficient access to the unsecured debt markets.

And finally, we are targeting to accumulate sufficient cash to pay off our bank lines and to be in a position to renegotiate those lines well in advance of the April 2012 maturity.

Now, to reach our plan objectives, we have many different initiatives, most of which we're already executing, and there are others which are currently being pursued.

Okay, with that as a backdrop, let's look at our updated base liquidity plan, which is shown on page 5 of the schedules.

And I'm going to spend some time on this one, so turn to page 5.

We have changed the format of this schedule somewhat from what you have seen previously.

You know, we started with a commercial paper balance; we've paid that off now.

So we now show the starting unit as cash on the balance sheet, shown at the top of the page.

Additionally, our forecast now reflects first-quarter achievements, as well as refined estimates of future cash flows.

So let me first look at the column for the first quarter.

We began the year with combined cash balance of $547 million, shown at the top there.

To that, we added our managed receivables reduction of $925 million.

Then we subtract the $286 million use of cash for manufacturing operations.

On the funding side, and as you know, we drew on our bank lines for almost $3 billion, and paid down commercial paper and term and securitization debt, as shown on the chart.

Any of you that saw our previous chart know that the debt payments were slightly more than what was originally and contractually required, as we made some early retirements of debt.

Continuing, there is the $376 million in gross cash from the HRT sale, keeping in mind this transaction should net about $275 million after we pay cash taxes later in the year.

And you can see that on column 2, under the 2009 full year.

Then after dividends paid and other miscellaneous uses of cash and non-cash adjustments, Textron and TFC ended the quarter with combined cash of $1.7 billion.

Okay?

Looking now to the full year.

We are increasing our '09 forecast of TFC liquidations from our original $2.6 billion to $3.1 billion, and we are doing this while maintaining our original 2010 plan of $1.9 billion of liquidations.

We have total debt payments of about $1.6 billion for bondholders and $2.3 billion for securitization investors.

With our projection of cash from manufacturing still at $400 million, we are now estimating and ending '09 cash balance of about $1.3 billion.

And moving to 2010, our base plan now shows an ending cash balance of about $700 million, up from the previous plan of about $225 million.

So obviously, we are pleased with our progress so far.

And today, as we announced last night, we are taking advantage of favorable capital market conditions to raise capital through an offering of convertible senior notes and common stock.

Net proceeds are expected to be approximately $470 million, net of fees, and those of course depend on market conditions and our stock price.

This will significantly increase our cash liquidity, bringing us to an end of 2010 cash balance of nearly $1.2 billion, almost $1 billion improvement from our original forecast.

You can see that at the very bottom of the page.

The offering also has the benefit of strengthening and extending the maturity of our capital base.

Operationally, we are focused on managing for a slower economy.

For example, we expect the business jet order environment will take considerable time to recover.

Accordingly, we have recently reached the very difficult decision to suspend the Citation Columbus program.

You know, we are obviously disappointed that we will not be bringing this product to market in the timeframe originally planned.

However, at this point in the cycle, it is more important for us to invest in our core light and midsize product lines.

On the other hand, as I've said earlier, we are fortunate to have two very well-positioned businesses, Bell and Textron Systems.

Their solid growth outlooks are evident when looking at the 2010 DOD budget outline recently released.

And longer term, with the ramp-up of the V-22, the H-1, the Bell Commercial 429, unmanned aircraft systems and a host of other programs, we expect solid growth from these two businesses for years to come.

To wrap up, our liquidity plan is working, and we've been able to demonstrate progress on every front.

With today's actions, we are significantly increasing our flexibility to meet our funding needs under a variety of scenarios.

Clearly, cash is the key metric to watch this year.

On the other hand, '09 earnings will depend in large measure on the economy and to what extent business jet order demand recovers.

In any event, our earnings performance is going to be tough this year.

As a result, we've adjusted our outlook to reflect this challenge.

We now estimate earnings from continuing operations before special charges will be in the range of $0.45 to $0.75 per share.

I am going to close on one final point.

While we are focused on cash, we remain committed to improving our core manufacturing capabilities and efficiencies and continuing to invest prudently in new products across the businesses so that when we emerge from this economy, we will be poised to resume growth and to generate very significant shareholder value.

I look forward to keeping you informed and updated on our progress.

And with that, I will turn it over to Scott.

Scott?

Thank you, Louis, and good morning, everyone.

I would like to discuss our start our discussion this morning on the manufacturing side of the business, where our focus remains on driving productivity, improving our working capital efficiency and generating cash from these businesses.

We achieved an ahead of plan cash flow position in the first quarter, as we saw early results from our efforts to reduce our inventories and conserve cash.

Our only inventory growth, which we will talk about later, is in Cessna.

A perfect demonstration of this was evident in our Industrial businesses, where despite significant volume declines of 35%, led by a nearly 40% decrease in Caltex, resulting from the reduction in global auto production reductions.

However, we were able to offset most of the profit impact and post a solid improvement in sequential profitability, and more importantly, Industrial posted a sequential improvement in cash flow, as well.

So as we look at the full year, as a result of our combined cost reduction and working capital improvement plans, we believe the Industrial businesses will generate positive profitability and solid cash flow.

Textron Systems.

We think about the Textron Systems business, while revenues were down on a year-over-year basis, primarily reflecting slight reductions in unmanned air systems and military training simulation systems, as well as Lycoming commercial engine volumes, we do continue to see strong demand for these products.

It is important to point out that although we had a lower comparison in the first quarter, we will ship more UAS in 2009 than we did in 2008.

The comparison only reflects a slippage of units from 2007 to 2008 in the first quarter last year.

So despite this, we still see very strong demand for UAS, our armored security vehicles and our Textron defense products for both the US government as well as growing international opportunities.

At Bell, we had a very strong quarter.

It was clearly our strongest business in the quarter, where revenues grew approximately 29% and cash flow was also solidly positive.

The increased revenues reflected strong demand on the military side, as we delivered five V-22s versus four last year and nine Kiowa Warrior retrofits under the Safety Enhancement Program.

We also had higher military spares and H-1 program support revenues.

And on the commercial side of Bell, deliveries were also up by 15, as we delivered 37 helicopters.

This included three 407s that were delivered to the US Army for prototyping and ultimate delivery to the Iraqis.

We recently signed a contract for an additional 24 units to be delivered in 2010 and '11, with an option for an additional 26 407s beyond that.

Commercial spares and service revenues were also up in the quarter by 8%.

And finally, our commercial pricing made a significant contribution to revenues in the quarter, as well.

While we have seen some demand weakness on the commercial side, we've been able to offset this with customers moving forward in our backlog, new orders and foreign military demand.

As a result, we remain on track to deliver about 180 commercial aircraft this year.

Importantly, the long-term outlook at Bell remains solid, especially in the US government and Homeland Security and foreign military segments.

At Cessna, we continue to experience weak order demand.

We are taking all the right actions to maximize our cash generation over the next two years, while continuing to support an appropriate amount of product development, as Lewis referred to.

In the quarter, we recorded 92 net cancellations.

About half of those were for deliveries in 2009, the balance being out in 2010 and '11.

With customers agreeing to move forward from their later delivery slots plus orders in the quarter and the 69 aircraft which we did deliver in the first quarter, we have for the total year 295 sold positions at the end of March.

Therefore, as we did announce last month, we are further reducing our production plans and currently have a production target to build about 325 jets this year.

Our production goal is to minimize white tails at the end of the year, while protecting our sold slots in the order book.

Please keep in mind that any white tails or finished goods inventory that we do have at the end of 2009, obviously, we would expect to sell in the early part of 2010.

With respect to 2009 deliveries, it certainly is very difficult in this market to forecast accurately.

However, we do analyze our backlog and identify those risks and look at remaining orders on a very regular basis.

We continue to pursue opportunities to move additional customers forward in our backlog.

And of course, our sales teams are out working on prospects for new orders.

Given this environment, we believe we will deliver somewhere in the 290 to 300 aircraft this year.

Importantly, from a cash flow perspective, we are working very aggressively on our working capital.

We are starting to see reductions of in=process.

We continue to see growth in the first and second quarter in term of finished goods as a result of aircraft that were already in the production schedule.

However, we are confident that in the third and fourth quarter those aircraft will turn to cash and significantly reduce our inventories.

To wrap up on Cessna, we are monitoring our quarter and cancellation activity on a daily basis.

We have extensive programs underway to continue to restructure and [reside] the program to meet the appropriate demand, and we do expect to generate maximum cash this year and next.

Finally, let's cover TFC, where we did make meaningful progress through our liquidation of our non-captive finance receivables.

Importantly, we took the opportunity to work with many of our lower credits early on, as we had a contractual right to do so in the case where many customers were in technical default.

In other words, the reduction was not accomplished primarily from our better credits within the portfolio, but we reduced a larger percentage of our weaker credits than our better credits.

So we believe our progress is all the more meaningful.

In terms of where the runoff occurred in the portfolio, the two largest reductions came in our Distribution Finance and asset-based lending businesses, as shown on page 6.

And earlier this month, we signed an agreement with a [PNC] subsidiary that will allow them to originate a portion of our new E-Z-GO financing, which in turn reduces our funding needs and improves our liquidity position.

To make the other point about the quality of our first-quarter reduction, while these liquidations are certainly easier at the beginning of the process, historically, liquidations are highest during the spring and summer months, due to cyclical, seasonal nature of many of the products financed in our Distribution Finance business.

This pattern may not be as necessarily as strong in 2009 due to the declining balances, but the seasonal trends are in our favor.

On the credit performance front, results worsened in the quarter, reflecting continued deterioration in the general economy and, to some extent, our decision to liquidate.

Nonaccrual Finance Receivables and total receivables held for investment increased to 6.1% compared to 4.0% at the end of the year.

Charge-offs did increase to 2.82 on an annualized basis compared to about 1% for 2008.

The deterioration of credit quality was most prevalent in the aircraft portfolio, reflecting deterioration in used aircraft prices and related collateral values, and in our resort business, where we saw increases in customer defaults and a general lack of liquidity in that industry.

If you look at page 7, you can see our new charge-off projections for the full year.

Now let's talk about liquidation progress and the impact it has had on cash flow at TFC, starting on page 8.

The reduction of receivables of $926 million was offset by net increases in hard assets we now own, such that our net decrease in total finance assets was $838 million in the quarter.

I want to point out that the repossessed assets fall into two categories.

Those that we will immediately seek to monetize through disposition, such as RVs, boats and other consumable durables.

And in fact, we've reached a point now where we certainly are repossessing every week, but we are also selling assets out of that at a like rate every week.

And assets that we will operate and approve for future disposition in better markets, such as golf courses.

When we foreclose on those golf courses, we hire professional management and will continue to operate those courses until we can sell those assets at a reasonable price.

Actual cash generated from finance assets after discounts and other non-cash deductions then was $779 million, which represents a cash conversion rate of about 93%.

To summarize TFC, we are well ahead of schedule with our receivables reduction and cash generation, and we are very pleased with our cash conversion rate.

Looking forward, as the distribution and finance portfolio notification window is now behind us, we expect to see second-quarter liquidations will be about as large as those in the first quarter.

By the way, with the acceleration of liquidations, we expect an acceleration of losses, as well.

Therefore, we are now estimating Finance segment losses ranging between $225 million and $250 million for the full year, reflecting the impact of faster liquidation and a tougher credit environment.

Nonetheless, we believe our total cash collections over the next several years will be consistent with our original plan, but on an accelerated timeline.

Before I conclude, let me take a moment to update you on our expanded restructuring program.

With softening demand across our commercial businesses, we are now taking out additional capacity and overhead costs, most notably at Cessna.

Correspondingly, we are now estimating full-year restructuring charges will be approximately $75 million, up from our previous estimate of about $40 million.

This brings our total headcount reduction to about 8300 employees, or about 20% of our global workforce.

To conclude, despite continued headwinds, we believe our first-quarter results demonstrate that we are taking the necessary actions and have the right programs in place to maximize cash generation as we manage through these difficult times.

With the actions we are now taking to streamline our costs, we do believe when the economy recovers, we would expect to see significant operating leverages as we ramp up commercial volumes.

Now I will turn the call back to Doug.

Thanks, Scott.

Going now back to our Q1 EPS from continuing operations, excluding restructuring charges of $0.26, let's examine the major drivers that drove the $0.62 reduction from last year's result.

And we are now on page 9 of our schedules.

As you would expect, the largest driver on the manufacturing side was lower volume, which cost $0.67.

We achieved positive pricing of 2.6%, which added $0.16 per share.

This was partially offset by $0.09 of inflation, reflecting an inflation rate of 1.2%.

As we mentioned, the CESCOM sale was worth $0.13.

Overall cost performance benefited the quarter by $0.10.

Taxes provided a positive $0.04 on a year-over-year basis.

And this reflected $0.09 in discrete items this year compared to $0.05 in discrete items in last year's first quarter.

Discrete items this year were primarily due to benefits from a tax election enabled by Canadian legislation enacted in the quarter and the recognition of previously unbenefited capital losses as a result of the CESCOM gain.

Lower corporate expenses contributed a positive $0.04 benefit, and miscellaneous items, including lower interest expense, provided $0.01.

On the negative side of the ledger, used aircraft valuation adjustments at Cessna cost $0.03.

This reflects 51 used aircraft on the balance sheet at the end of the quarter with a carrying value of $247 million.

Headwinds from engineering, research and development and depreciation cost $0.03, and the remaining $0.28 of the year-over-year decline came from TFC.

With respect to TFC's managed receivable portfolio, Schedule 10 shows ending balances among the categories of captive, held-for-investment and held-for-sale.

The schedule reflects the fact that we've moved two portfolios worth about $650 million from held-for-sale to held-for-investment, as we determined that these assets would generate greater value if we were to pursue orderly liquidation there instead of outright sale.

Turning now to our full-year outlook, you can find forecasts of segment results on page 11 of the schedules, and page 12 provides forecasts of corporate P&L items.

You can see that our new outlook incorporates lower interest costs, reflecting net savings from having drawn our bank lines.

And our outlook also includes a number of tax benefits expected to occur during the balance of the year.

We'll wrap up by mentioning that our Manufacturing free cash flow outlook of $400 million includes expected pension plan contributions this year of about $70 million and cash restructuring costs of about $100 million.

With that, Kent, we are pleased to take calls at this time.

(Operator Instructions) David Strauss, UBS.

Good morning.

Thank you.

The securitization that you have remaining for the rest of this year, the $2.3 billion, can you tell us how that kind of plays out through the year, what comes due Q2, Q3, Q4?

Hi.

This is Tom Cullen.

The total liquidation is going to be about $1 billion in the second quarter, and it is reduced to about $900 million in the third quarter, then finally about $500 million in the fourth quarter.

Come up to the rough $3.1 billion for the full-year forecast.

David, by the way, that was Tom Cullen, the CFO of Textron Financial, and for the benefit of everybody else listening.

Great.

Thanks.

Moving to Cessna, Lewis, on the 290 to 300 revised production schedule, what portion of that are you actually sold on?

And could you also just comment on how the service business is performing?

Sure.

Well, we have sold positions of 295.

So right in the middle of that spread.

So that is fact number one.

Factor two, the service business is doing well.

The only comment I have to make, though, is we are doing well for the business we are getting.

We still have strong service business.

But on the other hand, with aircraft usage down, you do have, necessarily, less opportunities to do overhauls and repairs, etc.

So I think we are only going to be up slightly this year versus last.

Okay.

My last one.

On the $400 million forecast for the Manufacturing free cash flow, does that assume that working capital is basically neutral for the full year?

No, it doesn't.

It reflects significant reduction in working capital across the businesses, most of which we're already starting to see.

As I said earlier, the one area where we have not yet seen a reduction in working capital is Cessna, and that is really just a function of the fact that our production plan, because it was so high coming into the year, declines over the course of the year.

So we have a fair bit of finished goods inventory that is being manufactured in Cessna in the first and second quarter.

But that will play out as those aircraft are sold in the third and fourth quarter.

But in net, we are seeing reductions, and would expect to see further reductions in working capital over the course of the year that are part of that $400 million plan.

David, plus or minus, it is around $225 million, the working capital piece.

Okay.

Thanks, guys.

Cai von Rumohr, Cowen and Company.

Yes.

Thank you very much.

You mentioned suspending the Columbus program.

What does that mean for R&D at Cessna?

Where was it in the first quarter, and where should we expect it to be for the year?

We're going to get that.

We've got a schedule.

We've just got to dig it up.

Let me just give an overview of this, though, and that is don't write the Columbus off your radar screen.

Because we've decided that we need to be careful with our R&D spending across the Company, and that program was going to take effect and be sold into commerce about 2013 or so.

And until we know much more about the market it is going to be selling into, we thought it was more prudent to suspend it, and then to redirect all of our efforts to invest in our existing core products at Bell and Cessna.

So that is what we've done.

Now, I don't know, [Scott], do you have the math on the actual R&D spend?

Yes, if you looked at 2009, we would have forecast the funding this year around 285.

That is ramping down.

Obviously, we are partly into the year, and have been spending some money on Columbus and we will have some closeout costs associated with it.

But we will be taking that down to a run rate more like $242 million a year.

And where was it in the first quarter?

Hold on just a second.

We will have to get that for you.

While he's digging that up, Cai, can we talk about anything else, while we're looking for that schedule?

I have -- yes, a very quick question.

In your 10-K, you mentioned, I think, that you were going to have to make $370 million in pension contributions in 2010 and '11.

What does that number look like today, given you've had more layoffs?

Any guidance on that, or rough color?

As we said in our prepared remarks, we are looking at about $70 million this year.

Next year, it is dropped to about $50 million to $55 million.

But we are still looking at that higher level going into 2011 then.

And that is all reflected in our liquidity outlook.

One of the things on that liquidity model is it takes about two pages in order to show all the line details that we show -- use for our own use.

So some of these things are collapsed into other line items, so apologize for that.

Okay, Cai, it's Scott.

The actual spending in the first order for Cessna was just a little over $82 million.

Excellent.

Thank you very much, guys.

Ron Epstein, Bank of America.

How many white tails do you actually have right now, and how big is your inventory of used Cessna jets sitting around waiting to get sold?

We said -- we gave those numbers in the prepared remarks in terms of used.

And for market reasons, we're not going to give you an exact white tail number that we've got in there now.

Obviously, we are building inventory in the first half, and hope to see that flow through in sales in the second half, Ron.

I guess I'm curious -- how did that happen?

I thought you guys had a whole process of managing the backlog and you had control over your sales force.

How did we end up in a situation where you do have any white tails?

Well, I think if you remember, going back to the middle to the latter part of last year, production forecasts were, at one point, around 500 jets.

And so you had a whole supply chain, suppliers, internal production in terms of number of labor and production line rates, that were designed to do that.

And so that team has been scaling back in terms of both our in-house workforce and going out and working with our suppliers.

But the fact of the matter is with the relatively long lead associated with a lot of that material, that stuff is all coming in.

So the most efficient way to manage this ramp-down has been to do it as we take our own internal labor down, as we are able to turn off that incoming supply of material.

So if you look at the year -- and again, as we've been taking the labor out and slowing that incoming stream.

it doesn't happen overnight.

So as we ramp this thing down, obviously, you are going to have a lot higher build rates in the first quarter and second quarter than the third and fourth quarter.

So the plan that we have right now, and we've obviously just announced another round of -- a significant round of layoffs in the business, is to continue to bring that production rate down.

But it does take notice periods to bring those folks out, and again, we had an awful lot of long lead material that was in the pipeline through our suppliers.

So obviously, we take that into consideration, as we continue to try to balance production versus demand.

But it will result in forward production in the first and second quarter.

Scott, how should we think about, I guess, the margins in Cessna, if you normalize out the $50 million gain on the sale of the CESCOM asset?

We're just under 5%.

When we think about -- where should trough margins be in that business when you're at, say, trough delivery?

Well, I think we probably are in that trough.

The costs, as they're coming out, I think we've probably bottomed on that margin rate, so that we will maintain at or above that rate, even with lower volumes, through the balance of 2009 and lower volumes in 2010, as well.

Okay.

And then just one last question, a follow-up on one that David asked.

How should I think about you guys getting to your cash flow guidance, given that you had such a humongous cash outflow this quarter?

I mean, I just don't understand how you are going to get there.

Help me understand that.

Sure.

If you looked at the balance, I think we had at or better than what we had planned, pretty significantly frankly, out of most of the businesses in terms of reductions in working capital and overall cash efficiencies.

The only thing that offset it was the buildup of inventory coming through Cessna.

Now you know, first quarter is always a difficult quarter for us from a cash perspective, just because that number reflects not only out of the operating businesses, but all the corporate costs, things like hedging against stock-based compensation, things like that, which are all cash outflows in the first quarter.

So there are some unusual things that don't occur in this first quarter, which obviously was factored into our plan.

But I would say from an operational perspective, the big swing is really the reductions of those inventories at Cessna in the third and fourth quarter.

Let me add one more comment to that, because I know that it's got to be on everybody's mind when you just look at the charts we've put up here and the numbers we've talked about.

Obviously, we are pretty strong with that $400 million number for the end of the year.

And just another fact which you may know about -- I said it in my opening remarks, but you may have missed it.

Because we changed the way we intended to pay the top 1000 managers, we changed our annual incentive compensation or our bonus formula, if you will.

And I should have mentioned that 50% of the top 1000 managers in the company, 50% of their bonus, which is always targeted as a percentage of their base salary -- let's say it's 30% -- and than half of that 30% or 15% will be based on them making their stretch cash targets.

We've never done that before, but we have had experience in redesigning the comp system to gain improvement in a metric, most notably ROIC, when we went from 8 to 21.

So I would be very surprised and disappointed if we don't see the kind of improvement that our managers are signing up for.

And another point that might not be obvious, Cessna is still a strong cash generator in '09, '10 and '11, and so are Bell and Systems.

So 80% of the Company are very strong positive cash flow generators.

So, Lewis, here, just one last follow-on to those comments.

With the Textron Six Sigma, the reengineering of Textron, I would've expected in the downturn that maybe Cessna would do better.

But it looks like you are kind of going back to the historical performance of Cessna in a downturn.

I mean, how should I think about the impact of that whole program for the Company in an industrial downturn?

To me, it doesn't look like it is paying off in a downturn.

Well, if you wouldn't mind me to respectfully disagree with you in front of about 160 people, I would like to, because --

That's fine.

That's great.

I know.

Look, it takes a Herculean effort to be planning to run at about 500-plus deliveries in October of '08 for the model year -- for the calendar year 2009, and then take that number down to 290 to 300.

Man, that is a tough thing to do.

Secondly, if you think about it, although we manufacture planes about as -- well, actually, more efficiently than most others, when you think about it, you can't just stop -- you can't just change the production and pull planes out of sequence.

You get stuck, actually, making a plane if someone cancels on you in the first quarter.

So then what we have to do is move up someone out of the second quarter, third quarter, or 2010, which we've been pretty successful in doing.

So although it would appear to you -- and I don't blame you for saying that -- that our numbers are different than you might have thought.

I will give you another interesting comment.

You know, back in 2001, when our margins -- 2002 and '03, when our margins dropped as a result of 9/11, we were not producing any Mustangs.

Mustangs have a very low profit contribution.

So when you take a look of the mix of businesses -- you have to factor that in, too -- when considering the number we are producing, I would say our margins have held up pretty darn well.

In fact, most people believe that had we not had Six Sigma and lean in place, we would have been much worse off.

Great.

Thanks for all the comments, guys.

Before we go to the next question, I just want to follow up, Ron, because I think your question about cash flow is one that is on the top of a lot of people's minds.

And even though in the overall scheme of our overall liquidity plan, it is a small piece, I really want you to understand.

f you look at the midpoint of our range, that results in a Manufacturing net income of about $255 million.

And when you go down through the math to get to 400, that is going to require an increase -- or a contribution from working capital of about $225 million.

So it is not that big of a stretch when you think about it in those terms.

Because obviously, as Scott explained, in the first half of the year, we've got the momentum in the production process at Cessna.

And to the extent that we sell those in the second half of the year, that working capital is going to recover.

Not to mention all the programs that we have underway to just streamline our supply chains.

So if you doubt that we are going to be able to sell all those planes in the second half of the year, then you just move it out to 2010, again, as Scott kind of explained.

So the cash flow from manufacturing operations over the next two years, I think we feel pretty comfortable about the cumulative $900 million on our schedule there.

The other item for the quarter, we talk about interest and taxes and comp programs and various expenses.

The run rate for the year is $500 million to $600 million.

We will have spent -- or we did spend close to $300 million in Q1.

So essentially, you will see substantially less cash used in those categories in the remaining three quarters than you did in the first.

Okay.

Steve Tusa, JPMorgan.

Just a question on the can rate going into the second quarter.

How front-end loaded were the cancellations in the quarter, and what are you seeing as you kind of head out of the first quarter?

Steve, the cancellation rates -- I mean, it's a bit lumpy.

So I think that what -- the trend that we are seeing is that we are starting to see a tapering off of cancellations that relate to aircraft deliveries for 2009.

We are still continuing to see cancellations in the 2010 and '11 timeframe.

And frankly, I think we will see -- you should expect to see significant cancellations in the second quarter, although primarily associated with aircraft for later year deliveries.

In particular, having announced the suspension of the Columbus program, for instance, you would expect to see quite a few cancellations of Columbus orders in this quarter.

Of course, those are deliveries that are out in 2014, '15 timeframe.

So you all, as you take those out of backlog, you consider those cancellations, and those will come through mostly in the second quarter?

Yes, that's correct.

Okay.

And on that front, just interested, when they go into backlog, I assume that there was a deposit.

What is the timing as to which you have to return those deposits?

Well, I think if you look at something like a Columbus, where it is a result of -- the customer's cancellation is a result of our suspension of the program, you would expect to see that cash flow virtually immediately back to our customers.

Obviously, that is a very different situation than a customer who might cancel when an aircraft is almost complete, in which case, in most cases we are keeping the majority, if not all of that, deposit to account for remarketing and reconfiguration of the aircraft.

So the $2 billion backlog you had of Columbus, is it fair to say that like 10% of that, that is kind of the number we should be thinking about?

No, the amount of deposits that we have on Columbus is just a little over (multiple speakers).

Just a little over 50 --.

I'm sorry, what?

It's about $50 million worth of deposits that we had taken on Columbus.

Okay, so manageable.

And then just on commercial helicopters, what were the orders in the quarter, and what was that year-over-year?

Our net orders in and out of the backlog, Steve, on a unit basis were slightly negative, and on a dollar basis, were slightly positive.

Yes.

What's generally the trend we are seeing, Steve, is we've had some cancellations that have been primarily in the 407 and the 206, so the lighter, smaller helicopters.

And where we've seen the strength in the orders has been in the 412s, which is --.

You're saying slightly negative on a year-over-year comp basis?

Or all-in net cancellations?

All-in net cancellations.

Okay.

And then one more question, just on how quickly -- you noted that the production doesn't really ramp down at Cessna.

So does that mean we have another seasonally weak free cash period in the second quarter?

I know cash is tough to predict, but you seem to be predicting it with a pretty good visibility here for the year.

Is second quarter also negative?

At Cessna, we will still have cash consumption at Cessna, correct.

And for the Company?

No, I would say that we should be --

It will be pretty close.

-- close to even there.

Yes, it's going to be close.

Great.

Thanks a lot.

We worked it ahead of our plan in Q1, and we are working hard to try to get that in Q2, as well.

Okay.

Thanks, Scott.

Noah Poponak, Goldman Sachs.

A little more clarity on the Cessna numbers.

How many of the 290 to 300 are Mustangs?

Of the 295, it's probably going to be somewhere in the 120 to 130 range.

Okay, so that is not really changing?

No, the mustangs are actually holding pretty well.

Mustangs are fairly easy to pull forward, too, because we have such a big backlog.

So as we've seen the customer mix shift a little bit, that is going to be our number.

Okay.

That makes sense.

And you gave us a sold out number for '09.

Can you tell us how many aircraft are sold for 2010?

We can, but we don't want to.

Actually, right now, we feel pretty good about 2010, knowing the order book.

But I don't think it is smart to put that number out there because until we see cancellations stabilize -- and Scott mentioned they are tending to soften -- the rate's softening some, so that is good.

Right now, I would be happy if we went through the year and started from where we are and built slightly in 2010.

That would be a pretty good year for us.

We know exactly what our production schedule is.

We will be down at that run rate by mid-2009.

And that is kind of how we sit.

Okay.

And you are taking up the full-year target for the runoff to $3.1 billion.

Obviously, it has been very successful to date.

But you guys had sort of alluded to if you had early success, you would maybe want to pull back the throttle and had alluded to not wanting to take up the target, because you knew you would be pushing people into a greater loss position.

Could you just tell us how that has played out?

Has the better credit market made it a lot easier to move people to other sources of financing, and so the losses aren't as bad?

Or what is your thinking in taking that target higher?

Well, there is a number of things going on.

I think primarily our philosophy on this is that as we went through the first quarter, we had originally set our target.

We obviously more than -- we almost doubled it.

So we had a dramatic improvement, and that was driven by a couple things.

One is that because the economy has still been pretty tough, a lot of the dealers who we floorplan finance are also being very cautious about increasing their inventory.

So in many cases, as those customers sold those assets, we got paid, so we moved the receivable to cash.

And in many cases, they didn't finance up because they didn't want to increase their inventories.

Now we've actually gone past the period where we were committed to fund them, and so we don't have a financing requirement for them going forward.

So when we laid out the original plan, we had assumed that we would have to do more financing in the first quarter until we had given the notice period to these dealers that we weren't going to finance them going forward.

So basically what happened is we are taking all of the improvements in the accelerated -- our receivables reduction that we achieved in the first quarter, and simply making that additive to our plan for the year.

So right now, really what we are doing is executing at the plan we would have expected in the balance of the year.

And by the way, so far, that is going right on track.

So if you take what we overachieved in the first quarter and you add that to the 2.6, you come up with the $3.1 billion number.

Thanks a lot.

Heidi Wood, Morgan Stanley.

Good morning.

I wanted to focus a little bit on Cessna and understand -- can you describe to us a bit your bookings policy and how that stands vis-a-vis other OEs in the industry?

I'm just trying to understand, given the degree of cancellations we've seen in the less than 12 month timeframe, how does that give us confidence that your contract terms are really and truly firm?

I can start with that one.

We've had the same contract terms for -- gosh, since I've been here.

I came in '92, basically the same.

Let me tell you how they work.

Basically, when you put an order down, you actually make a nonrefundable deposit, or we do not count it as an order.

That deposit is approximately $250,000.

And then depending on the model and the price for the model, you then have to make, I will call it, progress deposit payments, all of which are nonrefundable.

For the large planes, 18 months prior to delivery, you may have to put up $1 million.

So now you are $1.25 million in.

A year prior to delivery, you make a another deposit of $1 million, so you are now $2.25 million in.

And six months prior to delivery, you make another $1 million, so you are $3.25 million in.

And that would be true for the Sovereign Citation X.

Now, to just make this quick, so I don't have to do each one of them, if you slide down to the XLS, which would have a list price of about $11 million, you would have your first quarterly million in.

And then you would make nine-month and six-month predelivery payments of $0.5 million each.

So you would have $1.25 million in.

If you cancel, and you provide us notification that you are canceling, we then follow a procedure where we have to inform you that we intend to keep that deposit.

If you've got a loan with a bank, the bank has the option to buy the plane.

And if they turn it down, then we keep the deposit and you have no access to it.

And that has been in place, and we use that religiously.

I would have to admit, though, that if it were a hot year, if it were a year of strong sales, and something happened that we thought was reasonable from a good customer -- remember, 70% of our customers are repeats -- then we may make a deal with you to say, look, okay, we are going to keep your deposit, we are going to keep all the interest on your deposit, but let's see if you can't book another order in 2010 or' 11.

Obviously, that is not the case this year, because the cancellation rates are higher and the production volumes are down.

So we keep it the deposits.

All right.

Thanks.

But it's still -- I guess one would always think that the nearer-term deliveries would be firmer than the farther out ones.

But you talked about knowing exactly what the production schedule is for 2010, and yet, again, there has been a 50% decline in your deliveries for '09 between what you guided in October versus what you are guiding now here in April.

So what processes are you engaging in that gives you better visibility for next year than you feel that you had this year?

And can you also touch on what has been going on with pricing, because obviously with rising used inventory, you've got to be challenged on the pricing front.

Well, I would say that -- these are pretty extraordinary times.

So I think it is very hard to go back and compare how this process usually plays out versus how it is playing out today.

I don't think that we've ever seen a period of time where you have customers that get to the point where they've actually picked interiors, they've done paints, everything, and at the last minute want to walk away from an aircraft.

And I think it is driven by the general economic situation.

I mean, we have cases every day, a customer comes in, they've made all of their deposits, they've actually come out, they've done the paint, they've done everything they want on the aircraft, and they've had to turn around and lay off 10% or 20% of their workforce.

And they come back to us and say, look, we just can't fly in our new airplane into our town, having just laid off a bunch of our employees.

So as Lewis said, we work with a customer like that.

Many of these are already Cessna customers, and they probably will come back.

But it's not going to be this year or next.

So I think these are pretty extraordinary times.

When Lewis talks about where we are in '09 and what are visibility is into 2010, again, not a process that we've had to do in the past, but we are trying to maintain very regular communication with our customers.

If you look at our production schedules, both for this year and next year, we look at every tail number, we talk to every customer, we try to assess the risk.

Is that customer going to stay in the backlog, is that customer going to cancel?

So we are talking to them, we are talking to, in some cases, to their financial institutions to understand and make sure the financing is solid.

So I wish I could tell you that we have perfect visibility to this, and clearly, we don't.

I don't think anybody in the industry does.

No, I'm just trying to understand if this process has given you additional insight to better know how to baseline 2010.

Obviously, 2009 has been a novel period; I think that is clear.

But obviously, there is a learning process, as well.

So I'm just trying to understand if there is new aspects to the conversations that does give you reason to have confidence for 2010 that would be greater than 2009.

And also, please touch on pricing.

I'm sorry.

So anyway, I think what the new process is is that the number of contacts and the amount of communication with the customers to understand where they are, are they really staying in the backlog, are they really going to move out, or are they really going to cancel is much greater than it has ever been before.

It is not a perfect process.

You still could have a customer that shows up and something changes at the last minute.

But I think the visibility we have on the balance of 2009 and then through 2010 is all derived by that level of contact and trying to understand exactly what is going on for every single customer situation, which we've just never had to do before.

On the pricing front, clearly, there is pricing pressure in the industry.

Used aircraft values, in particular, have dropped significantly.

What we have been doing is on the new aircraft side, we are not moving our list pricing.

We are working with customers to do special things around, let's say, maintenance and support kind of activities, that we can give them some additional value to incent them to take an aircraft or to come into the order book in some cases, beyond what we would normally like to do.

But we are trying to protect the pricing of the new aircraft.

On the used aircraft front, obviously that is a very dynamic market, and we do have some special programs that we are running right now in order to move our used aircraft, where customers are interested.

But they're concerned -- is there going to be a further reduction in the value of that aircraft.

In some cases, we are actually going to guarantee that value.

So we give the customer a several-year window.

They take the aircraft, they pay for the aircraft.

But frankly, they have the right to put that aircraft back to us at the end of that term or deal with a trade-in to something else.

And so we are basically protecting that residual.

We think that is in the best interest of moving the used aircraft, bringing the cash in and getting customers back out there and using these aircraft.

All right.

Good.

Thanks very much.

Robert Stallard, Macquarie.

First question, you had obviously quite a few cancellations in the quarter.

I was wondering if you could give us some flavor of where these have been coming from in terms of geographical distribution, and if possible, the industries that are canceling.

Well, Rob, the distribution, as I said, is roughly about half 2009 deliveries and half future deliveries.

I don't have the data sitting in front of me, Rob.

But I tell you, I haven't seen any trend of specific segments or specific kinds of individuals or companies that are canceling.

Obviously, we get a very broad range of different sort of root causes for the cancellations.

Many are just the general economic conditions, and remember, a lot of our aircraft, because they are the small to midsize aircraft, are small companies.

In some cases, wealthy individuals, but generally, they are registered into corporations and represent guys that run small businesses.

I think in general, you see a lot of people that either have a difficult situation in their business, which can either manifest itself as difficulty in getting financing -- and we certainly see some of that.

Or, as I referred to earlier, just guys that have companies and they are laying off a lot of people and don't feel like it looks right for them to come in in a brand-new aircraft when they are in the process of laying off a bunch of employees.

Which I think, if you go back and you look at the trends, which I think you are probably as familiar as anybody with, that the business jet industry is one that cycles very, very highly correlated to US corporate profits.

So when times are good, people are buying aircraft; when times are not, they defer or cancel those aircraft.

So historically, that has been a very, very high correlation factor, and frankly, we would expect that going forward.

So as you see the economy strengthen and as people start bringing employees back in and their companies start doing better, we would expect also to see the demand for the business jets pick up again.

[Twelve] months ago, you were talking about the international side being very strong.

It came to about 50% of orders.

Have these new international customers proved to be more sticky than some of your US customers (multiple speakers) in particular causing you trouble?

I don't know that there is any particularly statistical difference at this point, Rob.

And we can go -- kind of try to chase that data down.

But you know, we are seeing the situation both domestic and internationally.

I know we picked up some international orders here in the quarter, and we are certainly shipping a lot of international aircraft.

But we still, on balance, are shipping a lot of US aircraft, as well.

And just finally, Lewis, you said you weren't looking to sell any core assets.

Are there any non-core assets that you might be interested in disposing of over the next 12 months?

I don't think it would be fair for us to comment on that.

I think it is best for us to keep things close hold until we announce we've got a signed purchase and sale.

But I just couldn't comment on that, if we were or if we weren't.

And I apologize for that.

Okay, thanks very much.

Okay, Kent, I understand there are no more questions in queue.

I just want to do one clarification.

Earlier, I think David Strauss asked a question about the securitization and amortization through the rest of the year, and I think we misunderstood him and gave a full managed receivables amortization.

So on the $2.262 billion of securitization, it actually amortizes 490 the second quarter, 757 in the third and 335 in the fourth for the full year amount.

So with that, that concludes our call and we thank everybody for your interest in Textron, and we'll talk to you soon.

Great.

Thank you very much.

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