達信公司 (TXT) 2009 Q2 法說會逐字稿

Welcome to the Textron second quarter earnings conference call.

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

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

(Operator Instructions) As a reminder this conference is being recorded.

I would now like to turn the conference over to our host, Doug Wilburne, Vice President of Investor Relations.

Please go ahead.

Thanks, Didi, and good morning, everybody.

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 SEC filings and also into today's press release.

You can also find an earnings call presentation slide deck containing key data items from today's call in the Investor Relations section of our website.

We will be referring to those slides during the process of the call so be sure to pull those down.

On the call today we have Lewis Campbell, Textron's Chairman and CEO, and Scott Donnelly, Textron's President and Chief Operating Officer.

Moving now to second quarter results, revenues in the quarter were $2.6 billion, down 29% from a year ago which yielded a GAAP loss of $0.22 per share.

Adjusted earnings from continuing operations excluding restructuring charges were $0.08 per share, down $0.90 from a year ago.

Textron recorded second quarter pre-tax special charges of $129 million associated with the Company's restructuring program.

This included $43 million in non-cash impairments related to the cancellation of the Citation Columbus development program and $25 million in noncash charges associated with recognition of pension related prior service cost triggered by head count reductions.

Manufacturing operations provided $27 million of positive cash flow during the second quarter.

This positive cash flow was achieved despite incurring cash payment of $77 million in return customer deposits at Cessna and $39 million for enterprise restructuring.

Now let's examine the major drivers that drove the $0.90 year over year reduction in adjusted EPS which are outlined on slide four of the earnings call presentation.

As you would expect, the largest driver was lower manufacturing volume which drove $0.86 of the reduction.

TFC's lower earnings contributed $0.29 to the decline in EPS and used aircraft valuation adjustments at Cessna that cost $0.10.

We achieved positive pricing of 1.4% which added $0.09 per share.

This was partially offset by $0.06 of inflation reflecting an inflation rate of 0.8%.

Overall cost performance including selling, general and administrative expenses benefited the quarter by $0.29.

Tax rate changes contributed $0.02 and miscellaneous items provided $0.01.

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

Thanks, Doug, and good morning everyone.

Well, once again this quarter we had real solid performance at Bell Systems.

On the other side of the coin so to speak we continued to experience market challenges at Cessna, industrial and finance.

Looking on the positive side though, we generate manufacturing cash flow that was positive this quarter which reflected our efforts to improve working capital productivity and lower cost.

This is especially noteworthy considering the significant volume decline experienced at Cessna and industrial.

So I think it's a job well done on the second quarter on cash.

Finally we made a significant progress liquidating noncap finance receivables at TFC once again.

We had a gross reduction of about $1.3 billion during the second quarter and cash conversion even better than what we expected.

So this brings us to a year-to-date reduction of $2.2 billion, which is nearly half of our original two-year target of $4.5 billion.

So as you might expect with that success that we've just demonstrated in Q2 we've now increased our two year reduction target from $4.5 billion all the way up to $5.2 billion.

Okay with this in mind let's take a look at our updated 2009 liquidity plan.

I'll take a minute to get you turning over to slide five and that's our cash summary slide.

If you then start on the second line labeled TFC receivable liquidation, there you see that we've recorded the second quarter amount of $1.28 billion and reflected our higher two year goal in the full year 2009 and 2010 columns.

On the next line, we reduced the 2009 manufacturing cash flow projection by $50 million to $350 million reflecting lower expected jet deliveries which we'll discuss later.

We've added the $775 million in proceeds from the equity and convert offerings we completed in May, and moving down to the term debt payments line, the annual amounts are higher than in previous versions as we've been opportunistically retiring debt that is coming due in the next three years at meaningful discounts.

So far we have actually repurchased $393 million of face value debt at an average discount of almost 8%.

And early this month we consummated a $500 million facility with XM bank for funding Cessna's international and Bell's international purchases.

Expected proceeds from the XM facility we spread across two years and they're spread between 2009 and 2010 as we show on the chart.

Next the second quarter $648 million securitization payment actually includes a $150 million early payoff again economically motivated on our part.

And finally we paid off the $410 million advance we took against our Company-owned life insurance program, COLI.

Obviously we can reborrow that at any time but we don't see the need to have that borrowing at the present time so we paid it back.

In total then this results in a projected 2010 cash balance of just under $1.5 billion which is $1.3 billion better than our original plan.

Okay.

Now once you heard the cash story, let's go so slide six and this will then summarize our liquidity position.

Our total liquidity improvement consists of the higher cash plus $111 million in a lower 2010 debt balance which represents that portion of the $393 million in repurchased debt that would have matured after 2010 and the retirement of the $410 million insurance advanced I just mentioned.

So we've improved our 2010 liquidity position by almost $1.8 billion from our original plan which I believe is very good progress.

Okay.

Moving to operations, we continued to focus on managing our commercial businesses for the slower economy.

Our efforts are evident in the fact that industrial generated positive profits and cash in the quarter in the face of volumes being down 36%.

At Cessna, market weakness continued with net cancellations consisting of 74 Columbus orders, 59 from large fleet operators, 58 from our authorized sales reps and finally 52 from across the remainder of the order book.

If you look at the balance of the year, we now have 124 sold positions remaining for delivery during the second half.

So including the 84 deliveries made in the second quarter and 69 deliveries made in the first, that bring us to 277 sold aircrafts for 2009.

So we are now basing our 2009 operating forecast on a delivery expectation of about 275 units.

And as we look at the quality of the remaining 2009 backlog, we believe we should be able to offset any further cancellations or deferrals with new 2009 orders.

With respect to order flow we saw 2009 cancellations stabilize somewhat in June.

That's good news.

Also we also saw a modest improvement in new orders in June and let me give you the figures.

During the first five months of the year we averaged about three new gross orders per month.

However in June we booked seven, all for delivery in 2009.

Now seven gross orders remains low obviously and one month's experience does not establish a trend, but there were other points from the marketplace that we're carefully tracking that also look a bit positive.

For example the number of used citation transactions also picked up in June and we saw stabilization in used pricing.

Correspondingly the availability of used citations dropped slightly to 17.3% from 17.6% in May which is actually the first time this measure has dropped in over a year.

The daily usage declined within the fleet also leveled off in June.

In fact ADUs were up in Europe.

One final point on demand our XM financing facility while improving liquidity will also support international purchases.

So, we are not quite ready to call the bottom yet, but based on that data we are sure hoping that a period of stability is around the corner, which should lead to improved visibility at Cessna.

As I've said when I began the call, fortunately Bell and Textron Systems which are heavily defense and civil service oriented have been largely unaffected by the economy.

They continue to perform well and are very well positioned for solid growth.

We're executing the ramp-up of the V22, VH1 and the unmanned aircraft systems and a host of other programs.

For example, the Bell commercial model 429 has just received Canadian and FAA certification earlier this month.

We believe that with 30% greater cabin volume than any other model in its class, the 429 should be well received in the EMS and other utility markets and should contribute to Bell's future growth over long period of years.

My final topic today concerns two important executive announcements we are making this morning, actually they were made with releases that came out at the same time as our earnings release.

First I am very pleased to announce that Frank Connor will be coming on board as Executive Vice President and Chief Finance Officer effective August 1st.

Frank is a 22 year veteran of Goldman Sachs and Company, where most recently he was Managing Director and head of telecom investment bank there.

He's advised many companies across a wide range of industries and executed numerous public and private financings and strategic transactions.

Frank will be based right here in Providence.

He will also oversee all the Company's financial activities including the business unit CFOs and their respective organizations.

One final note.

TFC will continue to report to Scott Donnelly.

I believe Frank will be a great addition to the Textron team as we focus on improving operating efficiency, enhancing cash flow and preparing the Company for future growth over the long term.

I'd be remiss if I didn't take a minute to thank Dick Yates for the great work he's done not only as a Senior Vice President and Controller, but he stepped in as our acting CFO for the past six months and he's done a magnificent job there on liquidity, cash flow and just plain running the operations.

Today we also announced John Garrison, who was previously heading our industrial segment, as the new President and CEO of Bell Helicopter effective August 1st.

He's replacing Dick Millman, who's retiring after 43 years with the Company.

Scott will have more to say about this later but I wanted to take the opportunity to also acknowledge Dick.

He's been with us for 43 years.

He's certainly accomplished a great deal and he's provided excellent leadership during his long career at Textron especially while he's been at Bell.

Okay.

Let me wrap up.

Our liquidity plan is clearly working and we demonstrated meaningful progress once again in the second quarter.

Even though we expect to incur $150 million of pre tax cash restructuring charges we are now forecasting 2009 manufacturing cash flow in the range of $300 million to $400 million.

As we offset a portion of lower expected cash at Cessna, with higher expected cash from the rest of our manufacturing unit.

We are maintaining our EPS outlook from continuing ops before special charges between $0.33 and $0.63 per share for the year.

I'll close with the following point.

We obviously are focused on cash generation and we remain committed to improving our core manufacturing capabilities and efficiencies.

In combination with our continued investment in new products, we should position ourselves to generate significant shareholder value when we emerge from this downturn.

With that I'll turn it over to Scott.

Scott?

That's great.

Thanks, Lewis.

Good morning I'd like to start talking about our manufacturing businesses, as Lewis referenced we did generate $27 million in free cash flow in the quarter, again ahead of our plan.

I think this reflects the improvements that we continue to make in working capital and overall operational efficiencies.

In fact our inventory programs in particular are getting traction as we reduced inventory in the quarter by about $300 million.

We look at Cessna, Cessna revenues down 42% driven by lower volumes.

Profits down also again primarily driven by lower volume but also we incurred a $38 million charge in the quarter for lower used aircraft values.

This is partially offset by $38 million benefit from forfeiting customer deposits.

I believe that used valuation appears to be stabilizing in June so we would expect that number in terms of loss to moderate through the balance of the year.

Similarly we would expect fewer benefits from forfeited customer deposits again through the balance of this year.

As we discussed in the first quarter call, Cessna consumed a considerable amount of cash in both the first and second quarter as we continue at an accelerated production rate.

We now expect Cessna will generate a significant amount of cash in the third and fourth quarter as we burn off that inventory particularly through finished goods.

Clearly cash flow obviously will depend on the actual number of new and used aircrafts that are delivered.

Again we expect a significant improvement over the next couple of quarters.

We did take two major actions in the quarter at Cessna.

As previously announced we have elected to cancel the Columbus program.

This is very unfortunate but the realities of the marketplace creates enough uncertainty around that aircraft we felt that at this time in this market we were better to spend our R&D to really defend our core in the small to mid size business jet market.

Second we have continued our further production rates and layoffs at Cessna to make sure we align our capacity with the demand in the marketplace.

Our teams have just returned last week from furlough and we now have what we believe is a workforce and a production rate that will maintain through the balance of 2009 and 2010 consistent with what we believe our deliveries will be.

We have a lot more work to do obviously but I think the fact that we now appear to be a stable point in the market and have a good feel for the actually production demand, we continue to make -- we can continue to make operation efficiencies and the right moves in that business.

In industrial segment, revenues were down 40% primarily driven by volume with some unfavorable foreign exchange.

Despite this we were able to drive $12 million in profit in solid cash flow.

This is a restructuring of the reflection of the team's work in restructuring and cost out and last year's commodity pricing actions.

Caltex in particular returned to profitability in the quarter and we believe that we've seen some stabilization and actually a potential for some increasing volume reflecting the bottoming of the global automotive market.

So industrial margins we believe as a result of the restructuring activities, when the volume returns would be good performing business not just at Caltex but also E-Z-Go, Jacobsen and Greenlee.

The Textron systems business revenues were up 2% in the quarter primarily driven by higher defense volumes offset somewhat by lower Lycoming volumes reflecting the slowdown of the general aviation market.

Even in the general aviation market, we feel pretty good about where we are positioned right now with Lycoming.

In fact, this week at the Oshkosh air show we are introducing the new electronic engine which gives us terrific breakthrough technology and differentiation in that market going forward.

The defense business continues to grow.

We see strong demand by both the ASVs and our shadow unmanned air vehicle from the US government, as well as increasing opportunities in the international marketplace, and we have a couple of lifecycle products namely Scorpion and Spider in the ground weapons systems area that we think will continue to generate good growth into the future.

Clearly I think we are all expecting to see top line acquisition budgets decline in the coming years, but we believe that our products and the nature of how our products are used in the conflicts today, that we'll continue to see growth in these businesses despite an overall top line decline.

Bell had very solid results in the quarter despite a slight revenue decline.

Military revenue was down primarily as a result of the cancellation of the development program, and some lower support for the H1 program offset by V22 higher volumes.

Commercially, while revenues were down slightly, the number of deliveries was actually up, 35 aircrafts versus 31 a year ago.

The slight decline in revenue was just a mix shift away from 412 aircraft to 407s and 206s.

The margins were strong.

Solid performance in the business.

We are actually generating solid cash generation out of Bell despite the fact that we continue to ramp the V-22 and H-1 and now the commercial 429 program.

We also reserved certification from the Defense Contract Management Agency for our earned value management system.

This is a significant milestone for the business as it demonstrates the right management program systems are in place at Bell which supports our ongoing program as well as credibility for future program opportunities.

We also reached agreement with our unionized employees who have been out on strike for about six weeks in UAW 218.

That team returned to work yesterday.

We are glad to have them back.

We can all now focus on the competitiveness and capability in that business.

As Lewis mentioned we also made an announcement this morning with the change of leadership.

Dick Millman will be retiring after 43 years.

He's done a great job at Bell the last couple of years.

He leaves that business very well positioned in terms of our execution in our military programs, the new certification of the 429 and obviously the important milestone of getting our union contracts negotiated.

John has been with us for a number of years, most recently running the industrial segment, has great leadership skills, and I think he will be a great long term leader for the Bell business.

Let's talk about TFC.

As Lewis mentioned our liquidation plan is continuing to make meaningful progress.

The receivables now are at $8.6 billion versus $10.8 billion at the beginning of the year.

So we remain ahead of plan in terms of the run off rate of liquidation.

As expected our seeing continuing challenges in the credit markets as a result of our liquidation and the ongoing softening of the economy.

60 day plus delinquencies were up 6.62% compared to 4.29% in the first quarter.

Nonaccruals rose to 10.04%, up from 6.11% in the quarter -- first quarter.

This increase is primarily driven by $149 million of increased nonaccruals in our reserve portfolio, $95 million of which came from one single account and also a $32 million nonaccrual out of our structured finance.

It's important to mention that nonaccruals don't typically have full value losses.

Generally these are accounts that are supported by substantial collateral values.

We try to maintain a very conservative policy with respect to nonaccruals, so we don't just have accounts that have gone nondelinquent, but in fact accounts that we believe have a probability of not returning their full principle in interest.

In fact, just as a note, of the $683 million that we have of nonaccruals in the second quarter, $400 million of those accounts are not delinquent.

The good news on the credit front is that our actual charge-offs in the quarter were only $23 million versus $47 million in the first quarter.

In the second quarter it was a loss of $99 million which reflected several things, higher loss provisions, higher portfolio losses and securitization impairments.

These were partially offset by a $37 million gain on the early debt retirement.

Loss provisions were $87 million.

We increased our reserves by $64 million including one large $32 million structured finance account.

Our portfolio losses were $50 million.

This included $22 million in discount pay-offs from redistribution program.

It is important to note as we've been going through these reductions we are tackling some of the tougher assets to make sure that we do the right thing in terms of timing in these liquidations.

The marine distribution program is a good example of that.

There's $22 million in pay offs were incurred as we ran a special program to clear out 2007 and 2008 boat inventory on our basic belief that it's better to remove these older boats from the inventory rather than to wait for another season where likely the assets will achieve even lower values.

So in the marine portfolio we started the year with $585 million.

We finished the quarter at $300 million and these liquidations continued fairly strong into July as well.

So our success has not just been in boats, but all our across all of our distribution finance assets.

In fact if we look at repossessed assets, they were actually reduced by $19 million in the quarter.

This reflects our ability to take those repossessed assets, mark them accordingly and actually move those into the marketplace.

Slide seven I think is very important if you look at our large liquidations continue to be at a distribution of $800 million and our asset base business of $230 million.

In the quarter we did reach agreement with two of our private brand customers to move those relationships to other financial institutions.

At the time we negotiated those arrangements, we had $320 million of receivables.

These instruments allow us to put all the forward-funding to the new financial institution and then we run off the balance of the receivables.

Just to give you an idea we signed those agreements in the beginning of June and we've have since been able to reduce that $320 million by $50 million in June alone.

We also had one portfolio sale in our ABL business.

$109 million sale at a value that was consistent with the mark-to-market when we put those assets into our held for sale account.

In the golf business we had 12 mortgage payoffs and one of our owned golf courses sold in the quarter for a total value of about $50 million.

Slide eight as you look at all these liquidation receivables you can see that our cash conversion rate in the quarter was 94% even with the discount programs.

This is ahead of our expectations.

We still expect conversion rate will decline but we are certainly very encouraged by the results in the quarter.

So in summary I would say that we continue to make excellent progress in terms of the rate of our liquidation and it demonstrates substantial collateral liquidation value that we have in the portfolio and we believe strong cash conversion rates for such an aggressive liquidation.

In summary I want to talk about our restructuring program.

We have announced that we are increasing the program charges in 2009 to $200 million from $75 million.

This reflects some non-cash items such as the Columbus and the pension curtailment programs, but also more aggressive reduction in terms of employees across the Company and primarily incurring employee severance expenses.

So we'll have a total headcount reduction associated with the program now through the balance of the year of about 10,000 people.

So in summary I think if you look at our businesses balance systems, continued to have a very strong performance.

The TFC liquidations are ahead of schedule with strong cash conversion.

Industrial business returning to profitable is a great sign of the strength that we have in that business and the potential going forward, and also late in the quarter we did see early signs of stabilization in the business in the business jet market.

So I don't think any of us are bullish at this stage of the game, the fact that it appears to be stabilizing bodes well for the start of the beginning of the recovery.

So Q2 demonstrated we have the right programs to maximize both our operational efficiencies and our cash generation and clearly we will continue to take those actions to improve the business going forward.

Okay.

Thanks, Scott.

We'll wrap up today.

I just want to point out that everybody that we have got three additional slides in our pack.

Slide number nine is the chart that lays out segment revenue and profitability forecast associated with our EPS guidance.

Slide 10 contains our forecast for corporate items, and then finally on slide 11 we have our quarter organic sales growth breakdown.

So, Didi, with that we are pleased to take calls at this time.

Operator?

Operator, we're ready for calls, if you could open the lines, please.

I apologize, sir.

We do have a question from the line of Steve Tusa with JPMorgan.

Please go ahead.

Hi.

Good morning.

Hi Steve.

Just a quick question on the longer term Cessna outlook.

Where would you expect, under the assumption of a very muted recovery, I'm wondering what your longer term margin target would be for Cessna.

Where would you be under a reasonable volume scenario?

Where would you be kind of happy with the normalized type of margin number at Cessna?

Steve, I think the recovery question is a tough one.

We are still predicting that we'll have lover deliveries next year than we had this year and that that would be the bottom of the cycle and that you would start to see a recovery, which obviously that's going to be very highly dependent on the what the economics look like.

We think the margin rates for the total year this year is going to be somewhere in that 5% kind of range.

Obviously our expectations are to try to sustain that or even grow that as we go into 2010, given somewhat lower volumes.

and then continue to see that growth as we get better leverage as volumes return to business going forward.

And I guess my question is more about, you are making these cost reductions, you must have some sort of view on even at lower volume levels what you want to do.

Is it -- I'm trying to get a sense, is it modestly above where it is today?

Is it double digit?

How do we think about it longer term?

You guys must have have at the top of mind as you're making all these moves on the cost side.

Well longer term obviously we would expect this business to get back up into the mid teens where we've seen it before where we had higher volumes.

Our expectations here in the next couple of years, again obviously this is highly volume dependent as things start to turn, but I have to say that we want to achieve better margins obviously but we are making substantial investment in the R&D of this business over the next couple of years.

So we have a lot of work yet to do, frankly, on how we are leveraging the base cost, the fix cost that we have in this business in terms of our manufacturing footprint and we'll continue to take more action there I believe.

But we'll also have to be sensitive to the fact that when unusually low volumes and we can't let that influence our R&D investment or we won't have the right products in the right places as this thing recovers.

So I would expect, Steve, you'd see this thing come from the 5% and slowly grow back up towards those mid teens as we've been in the past.

How many jets in the backlog now, and what is the pricing like in that backlog?

Is there any movement on the price of those jets?

We haven't moved anything on the pricing obviously as customers have come up with their deliveries.

There's been discussion and we've been trying to help some folks in terms of service and things like that but we are trying to stay away much of the way of pricing.

Obviously aircraft in the backlog were priced at the present time the deals were done.

So we have contracts for that.

Pricing was still up somewhat this year, and we are going to try to hold that.

I don't think this is a market where this is all about pricing.

This is really more about where is the demand and the economic recovery, and as we look at June, we actually saw customers come in at reasonable price points even for 2009 deliveries for guys that weren't even in the backlog.

Hi Steve.

It's Lewis.

Let me just add one more point to Scott's points.

I think they're perfect.

You remember our strategy at Cessna is still rock solid and very sound, and remember it's undercore or underpinning in two areas.

One, keep the Mustang selling at above 100 if you can, because what that does is it brings people into the fleet.

And our customers [sat] numbers have never been better.

So we know that once we get someone in a Cessna, they are probably going to buy another one.

Remember our number used to be seven out of 10 are repeat customers.

So we have got a flock of people getting into the Cessna family.

That's number one.

And as Scott said, we are continuing to invest in new products and improved products so when this market comes back, we will be particularly well positioned to write it up at a pretty good rate.

I'm not happy the volumes where it is but it is where it is, and we just have to manage it carefully until it starts to come back.

Okay.

Thanks a lot.

Thank you.

Thank you.

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

Please go ahead.

Good morning.

Hi, David.

Based on your manufacturing free cash flow forecast, it looks like you are expecting the second half to generate about $600 million.

How does that break out between Q3 and Q4?

More Q4 than Q3 always.

It's always a little bit back-end loaded, but you are probably in the one third or two-thirds or 40/60 kind of range, David.

Okay.

Can you give us an update exactly what you are expecting in terms of debt paydown and the securitization in Q3 and Q4?

David, I'll follow up with you if you want a break down on the quarterly.

We'll give you what's coming due contractually, but in terms of what we might do opportunistically of course, we won't discuss that publicly.

Okay.

And then any additional color as far as you said the production rate you are looking at lower deliveries in 2010.

Any additional color?

It looks like on the X Mustang you would be down like in the 150 range for 2009.

Is that going much lower in 2010 or just a little lower or could you just help a little there?

No, David, I think it's probably too early to start calling the numbers on 2010.

We'll know an awful lot more here in the next four, five months as this goes through what appears to be at least in June and July, stabilizing and customers coming back into the market, more customers taking delivery of their aircrafts.

So I think we are seeing positive trends, but I think we can be a lot more accurate in terms of our view on what's going on in the market here in the coming few months.

Okay.

And last one, on the used aircraft side can you tell us what you are holding in terms of inventory on the used aircraft side?

In terms of numbers?

Numbers and value or whatever detail you can give us.

Right now we have got about 48 aircrafts.

We have about 38 that are Cessna inventory and about 10 that are citation share used aircraft inventory.

And that actually in terms of units went down a few in the second quarter as we were able to sell more used aircraft than we took in and trade and again hopefully that will be a trend that we'll see had in the balance of the year.

David, we're (inaudible) at just a little over $200 million, which represents a net of about $100 million in write-offs that we've taken so far this cycle.

So that's one of the reasons that we are expecting less of an impact from used in the second half of the year.

Okay.

Thanks, guys.

Thank you.

And the next question comes from the line of Jeffery Sprague with Citigroup.

Please go ahead.

Thanks.

Good morning, everyone.

Scott understanding that the nonaccruals don't come through the charge-offs, would you expect charge-offs to be moving up in the back half of the year regardless and into next year?

Yes.

I think there's going to be a general trend that we'll see increased charge-offs and I think what we are doing right now is appropriate.

We take the loss provision and reserves is up consistent with our expectation that we'll start to seeing higher charge-offs and frankly going forward.

And you'd also indicated on the run off you are actually trying to focus on some of the tougher stuff first, but the cash conversion actually looks pretty decent.

What is it about what you are seeing in the pipeline that might make you a little more cautious on the cash conversion looking out say six to 12 months?

Well, I think we get into some of the asset classes which when you look at resort, when you look at golf, again I think not so much in the next quarter or two but as you get further out, these are some of the larger accounts.

There's not as much liquidity let's say in some of those industries.

So I think what we'll be able to do in distribution finance and AVL as capital is returning to the market, we see all the financial institutions that are willing to take some of those account and we saw that for instance in some of those private accounts.

So this is generally relatively good business and it's the first place that capital is returning.

Now we don't know yet exactly what's going happen with some of these longer tail results.

In the market strength and money keeps coming back into the market, we're hopeful that more capital will go into some of those markets.

If they do, then obviously we'll incur lower loss.

But as we go through this and have to release some of those assets if we don't have as much liquidity for instance for securitization and the timeshare resort kind of businesses, then we would expect to see higher losses and therefore lower cash conversion rates than we've seen on the shorter cycle, shorter tail receivables that we've been running off so far.

I understand you don't want to go on a limb on 2010.

I wonder what the complexion of the conversations are maybe as you reach out to customers and it's time to start paying progress payment on 2010 perhaps.

Are you seeing some slippage out there as people reconsider?

The trend has been positive.

Again I try to couch this and say this is a June and now July phenomena that we are seeing more customers that are making their payment, that are taking the delivery of the aircraft as opposed to cancelling at the last minute.

But again it's a full month of June and the trend is continuing into July, but I think we still have some time here to play out to see whether it truly has stabilized.

We'll see that trend going forward.

But we are taking orders for delivery for 2010.

Absolutely.

The good news of what we've seen is sort of interesting, Jeff.

It's almost a spot market has started.

You have customers that were not in the backlog.

These are guys that have sort of been on the sidelines that are now looking and are saying, is this time to make the move.

So as Lewis mentioned, we got orders in June 2007 that were for 2009 deliveries, and we continue to get a few more in July.

These are actually customers not in the backlog that are stepping in and taking 2009 and we are starting to see also interest in taking some slots in 2010 as well.

Alright.

Thanks a lot.

Thank you.

And the next question comes from the line of Scott Kincaid with Davidson Kempner.

Please go ahead.

Hi, it's actually Scott Vogel.

Hi, Scott.

Hi.

Can you guys just help me reconcile slide number five, the $1.282 billion of receivable liquidations with the cash flow statement in the 8K that was filed that looks like you generated $500 million in cash?

Okay.

Now.

I'm sorry.

Can you do that one again, Scott.

Sure.

The $1.3 billion of managed receivables decreasing with the cash flow statement in the first -- for the second quarter that was filed in the 8K that shows $1.1 billion of receivable repaid $745 million of receivables originated.

The primary difference is the difference between managed receivables and owned receivables.

We present the managed receivables number here because we have to look from a total liquidity point of view whereas the Q presents it on its on an owned basis.

So those numbers will not match, but they do reconcile.

So is the right way to think about is that you had $700 million of receivables that were managed but not owned?

Yes.

$648 million is the right number.

We paid down $648 million of securitization debt in the quarter that came out at $1.282 billion.

Okay.

And then my second question is if you look at the golf balances, looks like that decreased pretty significantly in the quarter.

Golf, did you say?

Golf.

Right.

We did have 12 payoffs and we did sell one of our other assets, because it was an owned golf course.

So we are seeing a fairly positive trend in the golf portfolio, and I'd say there are people interested in picking up golf courses in the case of those that we owned, and a positive trend I would say in folks that we talked to and say, look, when you come due or even as a prepayment we would like to discount you to redo your mortgage somewhere else, and people are doing it at reasonable discounts.

Thank you.

And the next question comes from the line of Cai von Rumohr with Cowen & Company.

Please go ahead.

Yes.

Thank you very much.

Good operating performance, guys.

So the preowned losses equal to the forfeitures in the second quarter, what was that number in the first quarter and can you also comment on the trend in R&D in the second quarter?

Where is it relative to the first and where would you expect it to be for the year?

Give us the first question again, Cai.

This is Lewis.

The first question is I guess you indicated that preowned losses were $38 million and that was the same as forfeiture gains in the second quarter.

Where was the net of those two numbers in the first quarter?

That's the first part of that question.

The preowned was about $13 million in the first quarter, and the forfeitures was around the same number.

I am looking that up.

And what was your second half of the question?

The second half is R&D where was it in the first and second quarter and where do you expect it to be for the year?

We would rather not talk about specific R&D at Cessna that is competitively sensitive, but let's do the year, let me trace the year out for you Cai.

This is total Company, $553 million.

Cessna is always as a percentage of sales higher than anybody else, but that's just another point.

In January we thought that number should be a little bit south of $500 million, and we've now firmed up everything which take a lot of work to know where to invest to get the most bang for the buck.

So we basically let Cessna free flow back to us where they thought they ought to invest in order to keep our products, not only new ones coming but also fresh in the fleet, and we've settled for total company R&D of $450 million.

So if you compare about $550 million to $450 million, it's about 20% which is about right.

But keep in mind, we really -- now don't underestimate my point.

We didn't say, okay Cessna instead of $10 you get $5.

We said freeflow back to us what you need to freshen the fleet to make sure we're as competitive as we need to be when the market comes back and we put that number in.

And Bell is the same way.

Bell's got a good future there too from a competitive standpoint.

Terrific.

And you mentioned the seven orders in June went into the deliveries in 2009.

Where will the orders -- if we get orders in July and August, presumably we will, will they go into 2009 or will they go into 2010?

There's a mix.

So we already have some that we are talking in July that would be 2009 aircraft and we have a number that will slot in 2010 deliveries.

So really the mix here is if you have got a customer that really wants to take a 2009 delivery, they are willing to take the aircraft as configured, or with minor modifications, which is what's happening, we'll do that, but there are some customers that want to do a full custom configuration to their requirements and specifications, and those are largely folks that will take a 2010 deliveries.

So if some of these are going into 2009 should we take the 275 as the number that has upside?

If you want to, Cai.

That's up to you.

It's gone up and down, Cai.

I mean, we really chose our words, I did chose my words on how to talk about this and I know Scott did too.

Look, for the first month in I don't know how long nine months or thereabouts, we are seeing nine months organization thereabouts, we are seeing positive signs.

They are not flashing green lights but they are certainly a lot better than they've been in months and months, and we are basically sold out to reduce to deliver more than 275.

We can get more cancellations which would take the 275 down, but we have have net plus orders going forward and if we do that we would do more than 275, which we would love to do.

Last one, you hired an investment banker as a CFO as opposed to a guy financial operating guy.

Why did you make that decision?

Sorry.

I am sitting across the table from a great financial operating guy.

If you look at what's going on in the last six or nine months, Dick has done a phenomenal job and always has, as the Controller of the Company and really running the finance and working the numbers and working with the business CFOs on a day in and day out basis.

So we have an outstanding talent in the Company to run that day in day out finance operation, and we came across Frank and here's a guy that has a lot of expertise and experience in both capital markets kind of work and also in M&A kind of work.

And so I look at a guy like Frank and say this is having a complimentary talents of both what we already have and a very solid finance arm and being able to bring in a talent, because obviously we still have work to do going forward in terms of the capital structure of the Company.

And ultimately once we get all the stuff behind us and markets get back to normal and the world moves on, having a CFO that is an experienced and savvy M&A kind of a guy I think is the right talents to have in the Company.

So it was an opportunity to bring somebody who have complimentary skills with the skills we already have in the Company.

Terrific.

Thank you.

Thank you.

And the next question comes from the line of Noah Poponak with Goldman Sachs.

Please go ahead.

Hi.

Good morning.

Hi, Noah.

Was the cancellation number in the second quarter excluding Columbus if we add up everything you gave us was it 169?

We have the exact number, it's 243 minus 76.

Yes, it's 243 minus 76, whatever that number is.

I'm not being funny with you, that's what it was.

So I am struggling if there was over 150 legacy cancellations in the quarter, I'm struggling with how the 2009 number's only coming down by 20 aircrafts.

That kind of implies if they are not coming out of 2009, you said order activity but it's pretty modest.

I know you guys are reluctant to talk about 2010 but does that imply that 2010 is a little bit worse than what you previously talk with the down 15%?

No.

I don't think so.

What you are getting is absolutely right.

If you look at the cancellations that came out, again forget Columbus which is out in the 2014, 2015, 2016 and on kind of time frame, but the bulk of the other cancellations that we brought out in the quarter was really going through and looking at large fleet slash fractional customers.

And so when you look at the nature of those kind of orders that we took out in the order book, they do spread out in 2010, 2011, 2012 and beyond.

So we had one case with one large aircraft, which actually we normally would not have been a cancellation, but it's a modeled aircraft that we are just not going to be build in that time frame, so we took those out, and then we had a couple of other fractional customers that we just don't believe they are going to be taking aircraft any time in the near future, and we didn't think it was appropriate to have those orders sitting in the book when we don't think there's a probability that we're going to realize them and so we worked with those customers and took them out of the book.

Okay.

So these are cancellations coming out of the next three, four years?

Yes.

Exactly.

That's right.

Some are 2010, but there's a lot that are 2011, 2012 and beyond.

And Noah, if we are going to plan on getting our margins up, you have to have some kind of stability in predictable order.

So for example if we are having a discussion with a large guy that has 24 jets on order, which is one we did, we basically said, hey, guy, if you have got a big doubt right now we just assume pull you out so we can plan on making whatever volume of that plane we plan on making.

If he wants to come back in later, great.

But we're trying to make the book as predictable as possible.

Then when the market comes back the orders will come back and they'll come back to us.

So it's not to our benefit to have a big order number that is not strong.

So I think orders are less orders than we had but I believe they are more certain than they were before.

That's very helpful.

How many Mustangs in the 275 number?

125.

Okay.

See, that spreads over a long period of time.

And one more question on systems.

The full year guidance implies that the second half growth really takes off, but the margin guidance kind of also implies that the second half margin is a lot weaker than the first half.

Can you guys walk through the puts and takes on that business for the rest of the year?

Well, we had a big first quarter, but the third and the fourth quarters are pretty consistent with the second quarter Noah.

There's nothing remarkable going on there.

I don't see a lot of movement in terms of the ratio in the balance of the year.

It varies between 10 and a little over 12 depending on the quarter, which ebbs and flows depending on what we're delivering as far as ASVs and what contracts expire and VACs you book and which ones you don't.

Systems is hard to call quarter after quarter because you are using contract or a lot of accounting in the sense that you have EACs which are based on how you price to the government, and once you price at fixed price then you make more money or less money and that accumulates until you know that you can book a higher profit rate and then that all flows in on a given month.

So the margins vary slightly because of that fact, but I believe you'll see systems in the year end up a very good place margin wise, not quite as strong as last year, but pretty darn good.

Thanks a lot.

Thank you.

And the next question comes from the line of Shannon O'Callaghan with Barclays.

Please go ahead.

Good morning, guys.

Can you give us a feel what do you think has enabled you to really track so far ahead on the liquidation plan and where are people finding alternative financing?

Give us a little color on that.

Well, I think the nature of the assets that we are talking about specifically in the distribution finance business, the fact of the matter is people are actually buying boats and RVs and stuff like that.

And so that business is obviously well collateralized, so we have the collateral of that asset that's been financed, and the dealer sells it and we get our money back.

We put a lot of feet on the streets in terms of people checking accounts and ensure that when an asset is sold, we do get our money back.

Again I think the fact that other folks have been stepping into that and picking up some of these accounts and financing these dealers by and large has allowed them to stay whole.

Obviously some dealers have gone bankrupt and when they do that, we frequently end up repo repossessing those assets.

But we saw repossessing that kick in in the first quarter and continues in the second quarter but we've actually been able to take those assets and market them and sell them through alternative distribution channels and actually get them sold off.

So we actually saw a reduction in that class in the quarter.

I don't think there's any magic about it.

It's just blocking and tackling and out there letting dealers know that we are not advancing anymore and in the case of private brand customers, we've been working with those customers to jointly go help find them someone to take over that relationship, and we've been successful in a number of cases in doing that.

Would you say, obviously I don't think RV sales or boat sales were better than your internal plan.

Were you pleasantly surprised that all by your ability to find other people to lend to these customers?

Not really.

Actually if you look at classes like boats and RVs, it's actually been ahead of our plan.

The number of turns in inventories is lower than what historically been, but they are still moving assets.

And again in terms of these private brand relationships, these typically are relationships where not only do you have the collateral value of the asset, but in many cases you have the manufacturing takeback provisions and these are good manufacturers.

They are credible companies.

They are accounts that do pretty well.

So even in a stressed time as people are looking to put capital to work, we see people coming into the space.

And then on the jumps and the nonaccruals, can you flush that out a little bit more about the recovery dynamics and what you are expecting to happen there?

Well, the class of asset that worries us the most, and again these judgments in terms of nonaccruals where we have the belief that we may not get our full principle interest back, as we look at the resort class, that's the one that added the most to the nonaccrual because it is the one that for us is most uncertainty in terms of how that industry plays out.

And again I would say that is reflective of the fact that unlike some of these other assets classes where we do see capital coming back into these areas, we remain concerned on areas like time shares that have historically been dependent on doing a lot of securitization to finance their operations.

Until that securitization market comes back, we are going to need to hold and manage our way through a difficult time with some of these customers.

So I think that's where we are seeing the biggest add in the quarter in terms of nonaccruals and frankly that is where I would expect to see going forward most of our increases in nonaccruals will come from that portfolio.

Okay.

That helps.

Thanks a lot.

And the next question comes from the line of Ron Epstein with BOA.

Please go ahead.

Good morning, guys.

So just a couple of quick ones.

One for Scott.

You mentioned that you guys had laid off about 10,000 employees.

How far do you think that deep enough is?

I guess what I'm trying to say is when the economy does turn, how can you be prepared that you maybe didn't let too many people go or you are not prepared when things turn?

Obviously, that is something we try to be very helpful about as we look at all the businesses.

We have tried where possible in a number of our industrial businesses, Cessna is a another good example, and we've done some at Bell, when we reach that point, when we worry that we are leaner than that we would have a hard time responding as the market starts to come back and a number of those businesses we've used actually furloughs.

In terms of taking a further reduction in the permanent number of employees, we actually, we shut Cessna for instance for a month, furloughed all of our workforce, we basically shut the factories.

Obviously we are doing customer deliveries and support, but we basically shut the production lines down for a month because we felt that was a more prudent thing to do to protect our capability as things start to come back.

We've done similar things in Bell and across in virtually all of our industrial businesses and we'll continue to try to do that frankly to modulate going forward with furloughs to the extent that we can.

But we've been realistic about some of the businesses like Cessna in terms of what is the rate of recovery ask when you think it will be a longer flatter recovery, we have to take those permanent actions in terms of layoffs.

Okay.

And then another one on Cessna, if I can.

I don't think anybody asked this one yet.

When we look at white tales, what is the outlook on white tales for this year going into next?

How has that gone?

You had some last quarter and how does it look now?

We have been accumulating.

As we've said before, the first and second quarter we did build at an accelerated pace because we had all the material coming in.

We had the workforce in place and the most optimal thing in our view was to go ahead and build the aircraft.

So we've been doing that.

So if you look at classifications let's say of inventory, even though Cessna has been going up, we actually moved that inventory.

We went from raw and in process and to work and now it's moved into finished good and that manifest themselves as white tales, which now we expect to (inaudible) that number back over the third in the fourth quarter.

How far that goes, it goes back to our earlier discussions we had around how many customers do step up to take 2009, to place 2009 orders, and how many people stay in the backlog that are current for 2009 deliveries.

So that's -- when we get do that, the 275 kind of number, that is the base plan that we are working around and that assumes obviously that we are working down a number of white tales that came out of the second quarter versus what we have when we get to the end of the year.

And Ron, the way to think about it is not so much where we are now, where are we at the end of 2009, but where are we at the end of 2010, and our plan is to have none by the end of 2010.

We're basically managing a two-year demand window here, as well.

Right.

Absolutely.

To Doug's point, when I say we stabilized our production rate for 2009 and 2010, when we look at deliveries for 2009, 2010, we take into consideration those white tales that we would assume we have at the end of 2009.

Those all sell off --

So how many do you have today?

I don't think we want to put that information out there, just from a competitive standpoint.

Okay.

Fair enough.

A question for Lewis.

Having lived through this horrible economy, can you look at how (inaudible) what have you learned?

When you look forward, what have you learned on how you would run the Company different having lived through this?

That's a tough question.

That's the first page of your book.

Yes, right.

I'm not writing a book.

Well, when we went through 2001, 2002 and 2003 and remember our stock went down to [$26] -- which was just a very dramatic thing, we launched a very significant transformation effort which was uncertain as to whether or not it was going to work, but we felt it was the only thing we could do that had a chance of working and it really did work.

So now we have the benefits of that.

We are a network enterprise.

We do so many things better than we did.

So one thing we've learned is that what we put in place in 2001, 2002, 2003, that first part of this decade is really saving our bacon even when you look at our EPS and cash flow you say, gosh, you could be doing better.

But you take a look at cash flow, for example, and I think we've demonstrated that we are now doing a much better job of turning in manufacturing free cash flow thanks to Scott and Dick and all the guys working on that.

I wish we had made the cuts sooner.

It's so tricky based on the question that just got asked, how do you know you are not cutting too far.

We should have done these cuts six months ago, but in hindsight that is crystal clear, and everybody that's every had to make cut out -- we've cut over 8,000 people this year already.

I wish we would have done it sooner but we just did it in chunks.

So I learned that the hard way again.

I don't whether I'll learn it permanently, maybe Scott will learn it from me, and maybe the next time it happens he'll move more quickly than we both did.

On the positive side I've learned that people will do unbelievably heroic things that are very contrary to what you think they'd do.

You take TFC has been making money for decades and decades and then grow, grow, grow, grow, grow, and basically that same outfit with the same people primarily in line are now totally focusing on running off the very businesses they put in place, and what motivated people to do that is just amazing.

So I think the fact that people are aligned to drive Textron profitability ahead of their own unique subelement of the businesses is quite testimony.

And I wish we'd been smart enough not to have such a big TFC, but that is something you can't really know until you get into this financial crisis.

Didi, I think we have time for -- actually we don't have time for one more question, but we'll take one and then wrap it up.

Alright.

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

Please go ahead.

Good morning.

I was wondering if you could just comment quickly on what this COLI advance is all about, $410 million seems like a significant amount of money.

Say again.

COLI?

What was your question about it?

What is it all about?

It's a very large amount of money.

Yes.

In the fourth quarter we borrowed against corporate owned life insurance policies that we had in place, which are available.

I say borrowed it.

It's technically an advance on an asset, and you have to pay an interest on that on the advance, and so given that we've improved our liquidity so significantly we were able to pay that down.

And as Lewis mentioned, that is still available to us where we get into a situation we need to tap back into it.

What was the interest rate on that?

Like around 7% or so, 6%.

It was 6% nontax deductible.

Right.

And that is paying it down to zero.

Half of it nontax deductible.

And that's now a zero balance?

I believe so.

Yes.

Yes.

Okay.

Thank you.

Okay.

Thank you very much, ladies and gentlemen.

Thank you, everyone.

Have a good day.

Thank you.

And ladies and gentlemen, this conference being made available for replay starting today after 11:00 AM eastern time until October 26 at midnight.

You may access the AT&T executive playback service at any time by dialing 1-320-365-3844 and the entering access code 991793.

Again those numbers are 1-320-365-3844 and the access code 991793.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.