達信公司 (TXT) 2009 Q3 法說會逐字稿

Welcome to the Textron third quarter earnings call.

All participants are in a listen-only mode.

Later we'll conduct a question-and-answer session.

(Operator Instructions).

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

I would now like to turn the conference over to Mr.

Doug Wilburne, Vice.

President of Investor Relation.

Please go ahead.

Thank you, and good morning everyone.

Before we begin I would like to discuss -- 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 in today's press release.

You can find our earnings call presentation and supplemental data accompanying today's data in our website.

On the call today we have Lewis Campbell, Textron's Chairman and CEO, Scott Donnelly, Textron's President and Chief Operating Officer, and Frank Connor, New York City Textron's Chief Financial Officer.

Moving to third quarter results which appear on Slide three of the earnings call presentation.

Revenues were $2.5 billion down 27% from a year ago which yielded GAAP income of $0.01 per share.

Adjusted earnings from continuing operations including special charges were $0.12 per share down $0.71 from a year ago.

Textron recorded third quarter pretax special charges of $42 million, associated with the Company's restructuring program.

Manufacturing operations provided $327 million of cash flow during the quarter bringing our year-to-date manufacturing cash flow to a positive $68 million which by the way, included $107 million in manufacturing restructuring cash outflows so far this year.

And with that I'll turn the call over to Lewis.

Thank you, Doug, and good morning, everyone.

Given the economic environment we're still in, we had a positive quarter operationally and we accomplished a great deal to further improve our capital structure.

Before I turn the call over to Scott and Frank, I want to provide some context for today's call.

As you look back to where we were late last year, the combination of the global economic downturn and a major disruption in the capital markets, created a set of unique business challenges for us.

To counteract these challenges we aggressively and relentlessly pursued a four-pronged approach that secured the future of Textron.

First, we took actions throughout our manufacturing businesses and across the enterprise to take out costs to match our lower volumes.

We also attacked working capital to generate stronger cash flow from operations.

That should be evident this quarter.

We aggressively took steps to rapidly liquidate our TFC noncash receivables and as you know we're well ahead of plans.

And finally, we strategically maneuvered our way through the disrupted capital markets.

And as a result we successfully completed equity, convert and debt offerings at relatively attractive terms.

And at the same time we continued to invest in new products.

So now as we see additional signs of economic stability, the enterprise is solidly positioned for profitable growth when economic expansion returns.

As most of you know already, today is my last Textron earnings call and I will be passing the CEO leadership baton to Scott on December 1st of this year.

As I reflect back on my 17 years at Textron, I think about two distinct phases of shareholder growth and our ability to weather the economic storms that occurred at the end of each phase.

Our first phase transpired during the decade of the '90s as we were able to capitalize in a very strong way on the vibrant economy.

Combined with a renewed focus on operational excellence and numerous successful acquisitions which began with the purchase of Cessna in 1992, our share price grew steadily through the '90s.

Then we had an economic retrenchment at the beginning of this decade.

This was exacerbated by the events of 9/11 and our stock price contracted accordingly.

Fortunately, we launched our major transformation initiative in early 2002 which you will remember focused on the twin pillars of portfolio management and enterprise management.

This major undertaking provided the momentum to produce the second growth phase in shareholder value that began in 2003.

This phase continued until the latest economic downturn took its toll on our enterprise.

I believe we've now weathered this latest storm, as well.

We've done this due to the foundational strengths now in place as a result offer the transformation initiatives, the specific actions I outlined earlier in my remarks, and, finally and obviously most importantly, the strong leadership team we have in place at the top of the enterprise as well as across each of our businesses.

Ladies and gentlemen, we are poised to begin our next cycle of growth.

I have the utmost confidence in Scott, Frank and the rest of the team to lead this company into the next era of significant shareholder value creation.

They have what it takes to win and are focused on doing just that.

I'm also looking forward to working with Scott and his team as their non-executive chairman during the transition period that begins in December.

And finally and sincerely, I also want to thank everyone on this call for your support and interest in Textron during our numerous interactions over the past 17 years.

Now it's my pleasure to pass the call over to our CEO-elect, Scott Donnelly.

Scott?

Thank you, Lewis, and good morning, everyone.

I want to thank Lewis for his leadership of the Company.

It has been a real pleasure working with him over the past year and I certainly look forward to the opportunity to continue to do that in our new roles and to maintain the momentum we've built behind the Company.

As Doug mentioned, we delivered strong manufacturing cash flow of $327 million in the quarter despite manufacturing volume declines of approximately 25%.

These improvements reflect our cost actions and our continued focus on working capital management.

Inventory in particular was the biggest driver of cash flow, contributing $285 million in the quarter or $377 million year-to-date.

If you look at the industrial segment, our cost actions were evident again in the quarter as a segment posted positive cash and positive profit despite volumes being down 27%.

Obviously the economic environment remains challenging, however, we are seeing signs of improvement and expect to return to growth next year.

In particular, global auto production is likely to increase as a result of a national replacement cycle.

Our Caltex business also continues to win on new platforms.

For example, our next generation fuel system was selected for several North American Ford models and we'll also experience growth in traditional plastic fuel system for Fiat's popular European micro car as that vehicle is introduced in the North American market.

It has been a very difficult 2009 and we believe golf courses are likely to increase their capital budgets for both replacement and maintenance of equipment at the courses.

We also had a nice winter at E-Z-Go, capturing the fleet business of one of the world's largest golf facility, Mission Hills.

These courses located in China consist of 12 18-hole courses, four club houses, three academies and have already hosted over 50 international events.

We expect to continue to pursue growth opportunities such as these across all of our businesses in this and other emerging markets.

Systems also posted another excellent quarter of execution with solid margin generation of 13.5%, volumes were up 14% reflecting strong growth in our defense business, offset by (inaudible) volumes which were down by a third reflecting softness in the general aviation market.

We see solid long term growth over the next several years as the US and foreign military demand for our products is expected to remain strong and we continue to invest in new products.

In Bell our profits were up on lower revenues reflecting continued progress on execution.

Frank will go through the puts and takes on the revenue line, but Bell is still very much in the long-term ramp-up mode.

For example, this quarter we delivered four V-22s and two H1s, compared to our expected full rate production targets of 10 V-22s and six H1s per quarter.

This is a tremendous amount of activity, producing components, subsystems and assemblies for increased deliveries for next year and beyond.

On the commercial side, we have seen continued softness in the commercial helicopter market over the past three quarters.

However, we have recently seen a pick up in interest levels in sales inquiries particularly in our light helicopter lines.

Our new 429 introduction continues to go well.

We do not show 429 orders in the backlog yet, pending completion of contract conversion processes, but we have already received second deposits on 50 units and are working on another 50 or so at this time.

We will be ramping 429 production delivering several additional units this year, growing to about 25 in 2010 and 40 in 2011.

Overall the strong long-term growth outlook at Bell for both commercial and military is intact.

At Cessna, I think we've had a pretty good quarter.

Most importantly, we continue to see encouraging signs in the marketplace and as we previously forecast Cessna delivered significant positive cash flow in the quarter.

We had a few additional jet deliveries late in the quarter indicative that markets are stabilizing, customers are taking scheduled delivers and new customers are placing 2009 orders.

Improved used aircraft performance is also a factor as we're also seeing stabilization in that market.

In fact we actually had a slight positive profit contribution in the quarter for used aircraft activity.

Q3 used aircraft sales were 17, about 10 of those in our [WARS] program bringing our year-to-date total of 39 used aircraft, 24 of which ongoing in the WARS program.

As a result, used Citation availability is down to 16%.

That's down from 17.3% at the end of the second quarter.

ADUs were also stable at 0.65 hours and that's flat with Q2.

On the order front, we had 119 cancellations.

It's particularly important that we understand the dynamics in the order book.

If you look at 2009 in the quarter, we had 11 new orders and only two cancellations.

For 2010, we actually had no cancellations and five orders.

And therefore, all of the bulk of the cancellations -- the vast majority of the cancellation activity in the quarter was in the 2011 and beyond, reflecting customer uncertainty as you look two, three years out in the future.

There's no question as we look at those numbers in terms of near-term '09 and 2010, orders and cancellations were incorrigible as in the market place.

As a result, we feel confident about the 275 deliveries that we forecast for this year, and practice even potential for a few more, assuming the momentum we see in the third quarter continues.

Longer term, we do expect the relationship between corporate profits and jet deliveries to hold, accordingly our anticipated still a soft 2010 to '09 recovering in 2011.

We continue to make good progress collecting cash and liquidating our non capital portfolio with TSC.

If you look at Slide four you see the Q3 liquidations were $704 million.

That's a year-to-date total of $2.9 billion, bringing our managed receivables down to $7.9 billion from $10.8 billion.

The largest reduction again was in distribution finance at $452 million.

We also saw a $63 million reduction as a result of 18 prepayments and our sales in the quarter and our golf portfolio.

If you look at Slide five, you can see the cash conversion is still very strong.

Our cash conversion ratio in Q3 was 95%, bringing our year-to-date total to 94%.

While we still expect to see a decline over time, it was certainly an encouraging quarter.

Slide six reflects our credit performance and is consistent with our expectations and involving challenges our customers see in this economic cycle.

Non-accruals added about $155 million bringing down accruals for a total of $838 million.

The additions in the quarter were primarily driven by resorts of two-thirds of those increases and about one-third increase in our aircraft portfolio.

On the other hand, 60-day delinquencies were essentially flat with Q3 coming in at $440 million, down modestly from the second quarter of $447 million.

The delinquency percentage went up to 7.3% from 6.6%, reflecting the smaller portfolio.

Charge-offs in the quarter were also flat with Q2 at $23 million.

Certainly we expect to see these charge-offs increase as we go forward and continue our liquidation.

Loss provisions were higher in the quarter at $18 million strengthening and in the quarter at $302 million.

Looking forward, we certainly expect non-accruals and delinquencies will remain high but still well within the expectations embedded in our long-term liquidation plan.

Accordingly we fully expect liquidations and cash conversions to proceed consistent with our plan.

Frank will go through the specifics.

We're making good progress on our balance sheet and our liquidity position.

We were encouraged by our improved access in the capital markets as we successfully executed new term debt while tendering for current debt.

This reflects our balance in trying to extend our maturities while minimizing our cost to capital.

In summary, we delivered a solid quarter with many encouraging trends.

We believe these trends alleviate a number of the risks we look at as we start to think about 2010.

In the meantime, we will continue to prepare for the future by focusing on our operating performance and continuing to make the appropriate investments for future growth opportunities.

I'm extremely pleased to lead this company at a time of great opportunity.

I look forward to working on behalf of our shareholders to build long-term value.

With that, I'd like to turn the call over to Frank.

Thanks, Scott, and good morning, everyone.

Let's begin by examining the major drivers of the $0.71 year-over-year reduction in adjusted EPS which is outlined on Slide seven.

As you would expect, the largest item was lower manufacturing volume which reduced EPS by $0.91 per share.

PCF's lower earnings cost $0.22.

Manufacturing achieved positive pricing of 1.5% which added $0.10 per share.

This was offset by $0.11 of inflation, reflecting an inflation rate of 1.3%.

Overall cost performance including reduced SG&A benefited the quarter by $0.40 per share.

And taxes and miscellaneous items added $0.03 per share.

Moving to our restructuring program, we've added a number of additional actions around the Company to further eliminate overhead and consolidate facilities.

We are now expecting total 2009 program charges of about $240 million, which is $40 million higher than our previous estimate.

Now let's discuss the year-over-year drivers in each of the segments starting with Cessna.

Cessna revenues decreased $293 million, primarily reflecting delivery of 68 Citation jets compared to 124 last year.

After market revenues were also down 16%.

Incidentally, this was a less severe reduction than the 28% decrease experienced in the second quarter.

On the other hand, as Scott mentioned, we had fairly significant used aircraft sales in the quarter with used aircraft revenues up $31 million from last year.

Cessna profits for the quarter decreased $206 million, primarily due to lower sales volume and the related costs associated with idle capacity and temporary plant shutdowns.

The impact of lower volumes was partially offset by lower engineering and SG&A expenses which included the net impact of furloughs taken through the summer months and the impact of customer deposit forfeitures.

Backlog at the end of the third quarter was $6.9 billion, a decline of $1.3 billion from the second quarter.

Looking forward to the fourth quarter, even with the potential upside Scott mentioned, margins will be somewhat challenged relative to our third quarter run rate as a result of lower deliveries.

And this applies to next year as well, as we produce at volumes below this year's level and expect deliveries to remain low.

We're working closely with Cessna to identify additional opportunities to improve our cost structure, but we're still working on some of these plans.

So don't expect to see the benefit of those activities until later in 2010 and into 2011.

Looking at industrial, revenues for the segment decreased $203 million, largely due to lower volumes.

Profit was unchanged from last year as the impact from lower volumes was primarily offset by significantly improved cost performance.

Moving to Textron systems, revenue increased $61 million primarily due to higher volume on unmanned aircraft systems which was partially offset by lower Lycoming aircraft engine volumes.

Segment profit increased by $1 million and margins were strong at 13.5%.

The increase in profit reflected the impact of higher defense volumes, substantially offset by the impact of lower aircraft engine volumes and an intangible impairment charge.

Backlog at the end of the third quarter was $1.8 billion, down $130 million from the second quarter.

Moving to Bell, third quarter revenues increased $74 million primarily as a result of lower commercial revenues.

Lower commercial revenues reflected lower after-market activity in the delivery of 31 helicopters versus 49 last year.

On the military side, revenues were up slightly with higher revenues for the V-22, H1 and Kiowa Warrior reset programs and after-market activities, at which offset the loss of last year's $32 million of revenue for the cancelled ARH program.

Bell segment profit increased by $16 million due to lower SG&A, a gain from the termination of an FX hedge contract, higher customer funding on R&D and pricing in excess of inflation.

These increases were partially offset by lower volumes and an unfavorable change in mix.

Bell backlog at the end of the third quarter was $5.6 billion, down about $250 million from the end of last quarter.

Finally let us cover TFC.

Revenues decreased $113 million and segment profit was down $82 million, primarily due to higher portfolio losses, lower other income and securitization gains, and the impact of lower average finance receivables.

These items were partially offset by the accretion from previous mark to market adjustments and gains on early debt extinguishment.

Revenue was also impacted by lower market interest rates while segment loss reflected an increase in loan loss provisions.

With respect to liquidation, we remain on track to meet or possibly exceed our previously communicated 2009 target of $3.4 billion.

Now, let's discuss Textron's overall capital structure for which we made significant additional progress during the quarter as Lewis noted.

Most notably, we issued a dual tranche offering of $600 million in senior unsecured notes in September, which extended our overall debt maturity profile.

The offering consisted of $300 million of notes due in March 2015 with a coupon of 6.2% and $250 million due October 2019 with a coupon of 7.25%.

We were very pleased with the market receptivity for the offering which was very heavily oversubscribed.

We also continue to retire debt through open-market repurchases in a series of tender offers.

In total, we have early retired about $1.25 billion of debt this year-to-date at an average discount of 2.6%, roughly $662 million via open-market repurchases and $587 million via tender offers.

Specifically in the third quarter, we had $265 million of open market repurchases and just under $125 million of tender offers closed.

The remaining portion of the tender offers, about $465 million, did not close by the end of the quarter so the impact of this portion of the tender offer will not be reflected on our balance sheet until year-end.

Finally, we commenced international funding of Textron aircraft through our new facility at the end of the quarter, which also extends the maturity of our capital structure as we originate new captive receivables from international sales activity.

Looking longer term at our capital structure, we plan to continue to extend maturities and reduce enterprise debt as we downsize TFC.

To conclude, we are continuing to make solid progress with our liquidation plan at TFC and our liquidity position and capital structure.

And with the actions we've taken to reduce our cost structure on the manufacturing side of the business, when the economy R recovers we expect significant operating leverage as we ramp up volumes.

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

Thanks, Frank.

If you will now turn to Slide eight, you will see given our performance in trends in the third quarter we expect that our full year EPS outlook will be in the upper end of our $0.33 to $0.63 per share range.

Likewise, we're on track to deliver full-year manufacturing cash flow in the range of $300 million to $400 million.

This estimate includes approximately $130 million in 2009 cash costs per manufacturing restructuring activities.

Turning now to Slide nine, you'll see our segment outlook items.

On that page you'll notice that we've widened the range of pretax loss for the finance segment.

As a result, there could vary to the extent we exceed our liquidation target for the year.

There are also two items we want to note that arise from recent higher stock price.

First is you'll see that the corporate expense forecast is now $165 million, $20 million higher than before.

This is primarily due to increased stock based compensation expense resulting from our higher share price.

The second stock price item relates to share dilution resulting from our $600 million convertible debt offering that was executed in May.

As you will recall, we entered into a call spread transaction that increased the effective conversion premium on the convertible from 25% to 50%.

Slide 10 provides an explanation of the accident accounting and economic share dilution related to the transactions, as the accounting treatment does not reflect the anti-dilutive benefit of the purchase call option from the call spread.

And also I have to point out, if you downloaded the presentation materials before 8:00 AM, a couple of numbers were wrong on Slide 10.

Specifically, fully diluted shares should read 278.4 million shares and the non-GAAP diluted shares should read 273.6 million.

Going on then, the obviously the level of dilution is going to change depending on what our share price is.

To help facilitate calculations of future dilution, we posted a downloadable schedule on the IR section of our website detailing the dilution calculation and demonstrating delusion impacts at various share prices.

A this point, operator, we're pleased to take calls at this time.

I would just please ask people to limit your questions to one question and a follow-up to be fair to all the callers.

With that, we're ready.

Our first question will come from the line of Noah Poponak from Goldman Sachs.

Please go ahead.

Good morning.

Good morning.

Guys, the Company has several management changes all taking place at the same time; Scott moving to CEO and Frank coming in, and calling up Warren to TFC and you're had John Garrison move from industrial to Bell.

Can you just talk about why investors should not be concerned that all of these management changes are going on at the same time and what the two or three big focus items are here?

I'll take a shot at it.

First of all, in terms of my role in the transition with Lewis, this has been going on for almost a year and a half, since I got the Company.

He and I have been working very closely.

And most of the issues that surround both the operational aspects of the Company and the TFC liquidations, there has been a year and one-half pretty good overlap in there so I feel pretty comfortable about that.

Obviously with Frank coming in, that's a transition that we thought was appropriate.

I think he is proven here in a short period of time to dive into the details of the Company and knows it very well and is transitioning extremely smoothly.

And I think we have a very strong team behind Frank.

Dick [Yeats] in the time when he was acting in that role as controller did a great job and is also one of Frank's key guys at this point.

We are not going to drop any balls as we make that transition.

John going down to Bell, that was a transition that had been planned for some time.

Dick went down there with the expectations of a couple-year role to secure things operationally and get the business back into a profitable growth mode.

I think he did that.

He did a great job of it.

We also recognize we need to put a good long-term player at Bell.

Right now with the V-22 multi-year, with DH 1 coming to full rate production, 429 certifying, it was a perfect time to make the transition and get somebody new in there that has the time to get to know the customers, ramp up the business and be in position for some time.

When you look at the key roles, there's no question, it is several key assignments all at the same time.

But given the overlaps that happened and the key players we still have supporting some of those roles, that takes the risk out of it.

That's helpful.

And I know you guys aren't giving 2010 guidance today, but the consensus revenue number has you down in the mid single-digits up on the top line.

You just mentioned the programs at Bell that can look like they can drive growth there.

You've talked about systems being the fastest grower in the Company.

I think in your prepared remarks you said industrial is growing again in 2010.

The only -- one of the manufacturing businesses you think is down in 2010 is Cessna.

With everything you know today, do you think the 2010 top line is up or down?

We haven't given 2010 yet.

But I think if you take the constituent parts you're right.

I think we'll see some upside with industrial with some of those businesses coming back.

No question Bell will see top line growth as V-22 and H1 continue to ramp.

Systems, again solid backlog, good defense businesses.

I would like to see there will be some recovery in the GA market and the Lycoming side, but even without that we'll see some good growth there.

Of course the wild card here will be Cessna and where the business jet market goes.

We're still working through -- and frankly with the way the year has been and the market right now, a couple more months of understanding where that market is headed and what the ores look like, will give us a more refined view of jet deliveries in 2010.

And that's really what is going to drive that top line.

What impact that has in terms of balancing against the growth of the other segment.

I'm not sure I can answer a lot more for you right now without being pretty explicit about 2010 guidance and we just don't have that yet.

I really do think we have a couple more months here to get a good feel on where the year is going to finish for Cessna and what our expectations are for next year.

Thanks a lot.

Thank you.

Our next question will come from the line of Cai von Rumohr from Cowen & Company.

Please go ahead.

Thank you very much.

Could you give us a little more color on Cessna?

You mentioned you had some used aircraft profits.

You had some deposit for [fitchers].

Just so we can get a sense of the profitability there and as you look at the fourth quarter you had a terrific mix with a lot of [solverens] -- whether the mix looks a lot leaner in the fourth quarter.

Let me first addressed the used issue.

If you look at some slight profitability in used aircraft in the quarter, that was obviously particularly strong in the contrast of the previous quarter where we're taking write-downs based on the fair market value of the assets.

That is the simplest thing, where we see not just our own used aircraft sales but in the industry, stabilizing of the used aircraft pricing.

And in some cases seeing some early signs of beginning to see some increases in the used aircraft pricing which is obviously a positive sign.

It's good in terms of our used aircraft business and it's certainly bodes well in terms of a lot of our customers -- our new aircraft customers that need to have a liquid market to sell their used aircraft.

I think that's the primary driver and obviously our expectations are -- having hit the bottom of the trough on used aircraft pricing, we expect to see that to be stable and at least be a breakeven if not continue to be a net profit generator here as we continue selling used aircraft.

I don't -- I won't give you a whole lot of visibility yet on the mix in terms of specifics around the fourth quarter, other than to point out that obviously the volume of jets will be lower than it was in the third quarter.

That's what we expect to see, frankly, going through 2010.

I think we've hit the bottom of this thing, but we're going to be running at a lower rate of production deliveries than we saw even through the first couple quarters of -- few quarters of 2009.

Just to be specific on that little bit, Cai.

In the fourth quarter with the lower jet deliveries, our jet revenues will be down $50 million to $75 million, depending on the exact number we ship and the mix that we have.

That is what is going to pressure margins a little bit in the fourth quarter.

Thank you.

You had this terrific performance at both Bell and system businesses that are very heavily defense and margins that are at levels.

It looked like they're difficult to improve upon.

As you think about Bell next year with the mix shifting toward the V-22 that's ramping -- that at one point had margins I think in the mid to high single-digits, are those margins sustainable at Bell?

There is no question that in this particular quarter, as Frank already mentioned , we had an unwind of foreign currency of $11 million in there so that inflated it a little bit in the quarter.

But still the underlying performance in the business is quite strong and you can expect it even with a significant amount of reinvestment we'll be making in our product lines that we can maintain that business in a double-digit condition.

V-22 profitability is solid.

H1 is coming around.

It used to be obviously quite a drag for us, but I think it will get to be a respectable profit.

We know on military contracts you're not going to see high levels of profit.

But then you take those as a good solid base of business and our commercial and military spares business which are good businesses which tend to be higher profit margin businesses, we'll be able to maintain numbers in that

Thanks so much and good execution.

Thanks.

Thank you.

Our next question will come from the line of Heidi Wood with Morgan Stanley.

Please go ahead.

Good morning.

Good morning.

Question for you, Frank.

At the low end of the 5% to 6% range for margins on Cessna for the year, it looks like there is to be losses in the fourth quarter.

Is that the right trajectory for us to set expectations that seem to be mildly in the red in 4Q and extend that way for the first couple of quarters into 2010?

I would say in terms of the fourth quarter, as we indicated, we are expecting low single-digit margins, But we're hopeful with the activities levels that we're seeing right now that we're going to be profitable there, but that we're not going to dip into the loss position.

But our expectation is that those margins will be low.

And as we've said, we expect that to continue into the first half of next year before we begin to ramp in the second half of the next year, as a result of hopefully a continuing improvement in market conditions and the cost measures that were put into place.

Just as we visualize it, if we think of you being potentially mildly in the red for the first half of the year heading into the black and -- but restrained a bit by rising R&D but you net-net in the black by year-end 2010.

Is that the right way for us to think about it?

Certainly in the black by year-end 2010.

Again, we're still in the planning process for next year.

In terms of the quarterly progression, I think we'll stick with what we said which is the same type of drag we're experiencing or expect to experience in the fourth quarter, first half of the year and then ramping from there.

All right.

And Scott, take a stab at this.

From a high level can you give us any color on how you're thinking about managed receivable into 2010?

Do you see -- how do you see it declining or do resort and golf financing stay flattish in 2010?

Heidi, we've started to do see some of the golf run off and I think we will see that.

If you think about receivables, in the next year the bulk of the liquidations will still come through the shorter cycle distribution finance and asset based lending businesses.

And those will run down pretty dramatically to the end of 2010.

But I think you would expect to see golf becoming a stronger portion over the course of the year.

In fact, we had a fair bit, $63 million in the third quarter this year so that will become a stronger piece as we move toward the end of next year.

And resort, we still see that staying flattish.

We are looking for opportunities to make moves there, but that is one market we don't see a whole lot of capital coming back in yet.

I'm thinking we'll maintain our receivables range in 2010 in the resort area.

That is great color.

Thanks very much, gentlemen.

Thank you.

Our next question comes from Ronald Epstein from Merrill Lynch.

Please go ahead.

Good morning, guys.

Good morning, Ron.

Scott, when you think about all of the changes that have gone on at Cessna, in terms of the manufacturing work force, isn't it about 40% have been let go?

How do you think about managing that company into the next upturn?

How do you prepare yourself for that when that happens?

Ron, this is -- obviously we took out almost half of the labor there -- is the only way to rapidly scale the business.

Now the good news is that the fundamental capital equipment, the capability to ramp that thing up frankly, over 500 jets which is what we put in place going into 2009, is still there.

When you think about hard capita, and metal bonding and paint shops and assembly capacity, it is all there.

Obviously a big part of any ramp-up will include our supply base.

An awful lot of the technology, the engines, avionics systems and what not, are source products.

As we think about our 2010 forecast and based on where the market is going and we think about how that is going to grow as it goes through its normal cycle -- corporate profits, an awful lot of the work will have to be done with work with our supply base in anticipation of that ramp.

I suspect if you talk to those guys you will find the same story.

The physical capacity is in place and we've all had to ramp down in terms of our employment just to scale it back.

I think as you think about ramping this up, frankly we think we're a long way from where you're testing the capacity that's in place either at our shop or the supplier shop.

It is going to have to be a reasonable job of forecasting and basically a -- plans put into place to do it.

Do you expect for the next ramp up that Cessna will be less vertically integrated than it is today?

Are you going to try to do some more outsourcing -- Cessna notoriously has been vertically integrated, right?

As you move into the next ramp up, will you try to do more outsourcing?

One of the things that we want to focus on here as we go through the cycle is making sure that we improve our cost position so we're going to put a lot of energy into that.

Whether that's outsourcing, whether it's changing our footprint.

These are all things we have to look at in terms of making sure we are gong to be very, very cost competitive as we go into the next cycle.

If the right answer is to outsource in order to get the right cost position, then that is certainly something we're open to doing.

But again, in the end it all comes down to being what's the right decision to really reduce our cost base and make sure we're still competitive.

Hey, Ron.

This is Lewis.

The thing I would add there, this is not the first time we've had to do this.

It is a more major downturn that we've seen relative to the volume and the work force we had in place when we had to take it down.

But, Jack [Helms] has been through one cycle and many of the Cessna guys have been through two.

If you put on a worry list the top 10, I wouldn't have the ramp-up on a worry list because we're good at that.

We're a preferred customer by our suppliers.

We're a preferred place to work for our employees.

I think as we ramp back up -- actually as Scott said, we'll end up being more efficient as we ramp back up because when you're turning it down you find areas of waste that you just overlooked or didn't have time to get to.

We pretty much got rid of all of those.

I expect us to come back a lot more lean and mean than when we went into the downturn.

Okay.

Thank you.

Thank you .

Our next question comes from the line of Robert Stallard from Macquarie.

Please

Good morning.

Good morning.

Just to follow up on Ron's question on Cessna.

I was wondering if you could comment on how the international versus domestic demand has been shaping up.

Because, Scott, you said in the past, corporate profit tends to be the major driver, but overseas it could be slightly different (inaudible).

Absolutely, Robert, no question that as we've seen customers coming in and placing orders for 2009 aircraft and 2010 aircraft over the last few months as it started to strengthen.

The bulk of that has been driven by international customers.

And I think it is just a phenomenon that if you look at the countries around the world whose economies are recovering faster going through the cycle, it is those who are driven by either energy or commodities.

If you look at where the demand is coming from, as you expect, that is where we're seeing the bulk of the folks coming back into the market the fastest.

I would expect the US economy, if it's really going to recover on what most economists look at, that's what we would say you would start to see strengthening in that order book really not until mid to late 2010 for 2011 and on deliveries.

But I think the -- if you look at just the corporate profits and how that drives the jet cycle, and you make some allowance for the fact that some economies recover faster than others, I think that's the behavior we're seeing.

It is largely internationally driven, but we're starting to see inquiries on the US side.

Quickly the follow-up on the Textron systems.

The margins in the quarter is (inaudible) saying that is very good.

You said Lycoming is down and Cessna is up.

Are there any other unusual items we should be aware of there, you don't expect to be there going forward?

Nothing in particular, Rob.

(multiple speakers) 13.5.

Nothing detectable, Rob.

Do you think that is a sustainable rate then going forward from here?

13.5 is awfully strong in a military business and there is no question we have some contracts that you are multi-year deals where we've been able to drive a lot of cross productivity and drive improvement that put that out there.

I would say that is at the high end of the range.

But the business is going to clearly stay a solid double-digit business.

Thanks very much.

It is just above the upper end obviously of the longer term profitability ranges that we've given to you before.

Yes.

Thank you.

Our next question will come from the line of David Strauss from UBS.

Please go ahead.

Good morning.

Good morning, David.

I know you haven't given us your deliveries specifically forecast for Cessna for 2010, but can you give us a sense of -- whatever that forecast may be, how actually sold you are on it?

We are able to, but we're not sure we want to.

We really don't at this point.

We haven't -- honestly as we've got a couple months here left in the year, the market is changing -- certainly has been strengthening here over the past few quarters.

I think this month, this past quarter where we saw five orders in 2010 and no cancellations in 2010, is a positive sign for us.

We would really like to take the next couple of quarters of information and come out with a much more credible view of what we think is going to happen in 2010.

In terms of our sold positions, depending on how things play out if you look at what we consider high-risk aircraft, are they going to stay in the sold or turn into some cancellations, there is a lot of variability around that.

But I would sat this point, it is probably not different than a lot of historical years.

That's right.

When you look at Cessna, we're coming through a period here where you had years of sold out which is quite unusual for the market.

We would expect to go back into a mode here in the future where it is more normal, where you might have 70% or 80% of the backlog sold out and the remaining 20% or 30% is done along the year.

Okay.

That's good color.

The $838 million in non-accruals, how reserved are you against that?

I know you talked about the $302 million lost provision, but what about mark to market reserves or anything else beyond the loss provision?

The mark to market is a separate account, not covered there.

You want to pull that number?

It's like -- the reserves -- the general provisions of $302 million are only against those assets that are held for investment.

The mark to market number, we're looking up for you right now, but -- we'll have to get that back out here for you later.

But just to give you some color on the non-accruals, it is important to understand that non-accruals can get in there because they're either 90-day delinquent or because we are using our judgment based on our belief that we may not recover full principal and interest on the account.

If you look at those non-accruals, we're still sitting in a position right now where we're about half of those non-accruals are actually performing accounts.

They are paying, but we're concerned that in the future that we may not get full principal and interest.

Beyond that of course, we sit down and look at every single one of those non-accruals and a portion of corporate reserves, based on underlying collateral value and what we believe a workout scenario would result and in terms of our actual losses and that is the reserve we would post.

When you look at that $302 million, that's reserves that we have posted against -- the bulk probably of our accounts are non-accrual, but also from our general reserves.

Last one on the cash flow side, what are you assuming now for cash restructuring spend?

And then also pension in '09 and maybe into 2010 as well, if you have that.

The pension, as we finished the year here, doesn't require cash contribution until 2011.

There is no cash requirement in 2010.

We have our normal cash contributions, like $75 million or $80 million.

Right.

There's no required commitment to put more cash in to cover the obligations, based on the way the pension accounting works.

That is a 2011 requirement.

In terms of cash in 2010, we don't have that number for you yet.

Frankly, we're still working and looking at what the total restructuring program would be.

That's something that -- we'll probably give you guidance on that when we get to the January call.

Okay.

But I think you had said $150 million in cash spend in '09 on $200 million, but now you're at $240 million.

I assume that bumped up a little bit.

In terms of the amount of cash?

Yes, cash '09.

I'm sorry.

I gave the cash.

That was the $150 million for the year.

That's right.

Okay.

No change.

That's total, reflecting the $240 million.

Right.

Program.

Okay.

Thanks.

Yes.

Thank you .

Our next question comes from the line of Shannon O'Callaghan from Barclays Capital.

Please

Morning, guys.

Hey, Shannon.

Couple of questions on TFC.

The cash conversion actually got better this quarter.

I know you keep saying that we expect it to trend down, but we're still at in 95% now for the quarter.

And then you look at charge-offs, and you guys earlier in the year were talking about charge-offs of 3.5% this year.

We're still nowhere near that.

When do you really expect to see these things to head in the direction you're talking about and why do you think they have been better so far?

I think that if you look at where the bulk of the liquidations come from in the distribution finance world, we've done better than we would have expected in terms of realizing value on those assets as we have done liquidations.

When you think about going forward and looking at things like golf and resort, those are the asset classes that we think will be a little bit more challenged, in terms of the value that we get compared to the receivables balance.

That's what led us to strengthen the reserve, the loss provisions and as we think about the total unlined, we certainly expect that we will see some higher losses and lower cash conversion rates going forward.

That's arguably probably a conservative view, but we don't have as good an insight yet in areas like golf or resort.

We want to make sure that we set the right expectations in terms of what the overall losses are, as we continue this multi-year liquidation.

And we just want to make sure that we're clear with you guys and make sure we're staying in the box is how I think about it in terms of making sure we never get into a position where we have to infuse any equity into TFC.

Okay.

And then on Cessna, in terms of the production, when do you get production down to -- when does production trough essentially on a quarterly basis at Cessna?

I think we're there now.

As we came out of the shutdowns in the July timeframe, we really set production rates at what our expectations were on a go-forward basis.

Now a lot of that is also managed through furloughs in specific model lines and stuff like that.

As we go through the balance of this year to determine what is really going to happen in 2010, one of the things we have to look at is what happens to the whitetails this year.

It is a possibility we could eat into a few of those.

If we continue to see some of the strengthening that we've seen in 2009 and as a result we would make appropriate adjustments in the production lines going into 2010.

But I think they would pretty modest to be honest with you and largely would be achieved by some of the furloughs on the specific lines.

For the most part, we have the materials, our suppliers have the materials so we could flex a few jets here or there.

Okay.

Great.

Before we go to the next question, I just wanted to respond to David's question about the mark to market reserve.

We're at $212 million in that category.

Cynthia, we're ready for the next question.

Thank you.

That will come from the Steve Tusa from JPMorgan.

Please go ahead.

Good morning.

Good morning.

Just quickly on TFC, the cash flow statement, you have $745 million of finance receivables repaid and then $660 million of receivables purchased or originated.

What are the dynamics there?

What is the $663 million represent to cash outflow?

I think primarily it relates to aircraft and private brand and other captive originations, Steve.

But then when you look at the captive receivables, they still went down, I think.

That's the net number.

Got you.

Okay.

For example --

Okay .

When you look out for Cessna, could you just give an update on the whitetails?

Is there any change as to -- given that you're getting a few more orders now which is pretty encouraging.

Is there any change in the details around the whitetails you'll have at the end of the year?

And also I know this is crazy to be asking it at this stage of the game, but any orders that you're seeing from China at all?

I know one of your competitors talked about a few orders.

Anything

First of all, the guidance that we had around the $275 million was -- left us with about 30 white ails for the year.

And I do think if we do continue to see the deliveries, the orders, the overall market condition that we seem to have seen here for the last couple of quarters, I do believe that we can beat the $275 million.

We're talking about maybe three or four airplanes, something like that.

That would eat into the30 whitetails we have at the end of the year.

Obviously, there is still a lot of moving pieces there in terms of what's going on with delivery, but I think we will probably exceed the $275 million modestly.

In terms of China specifically, Steve, I know we had an order here just recently of several sovereigns into China.

There is no question that the government over there is -- they're taking deliveries of some aircraft and they continue to be very vocal in supporting growth of GA in the marketplace.

And several means what?

We had three Sovereigns that are 2010 deliveries at this time.

Got you.

Don't forget, we've sold single-engine piston aircraft in there for their training schools.

We've got some pretty good future orders we expect, based on the fact that pilots learn to fly on our aircraft.

Is there any way to get a level of inquiries, anything like that, to give us a look at whether this is a one-off or if there is something a little more sustainable here?

Steve, there probably is.

I don't have that data in front of me, but it is certainly something that we can take a look at, maybe talk about on the next call if you would like.

Okay.

One last quick question on TFC --

Let me mention one thing qualitatively.

This China story might be getting a little ahead of itself.

It is a huge potential market.

There are early things beginning to happen over there that may signal that over time the skies are going to open up and that that business will develop.

But that's going to take time, not only from a regulatory perspective, but also from an infrastructure and pilot availability and all that sort of thing.

It's a very excellent long-term story, but it's going to take some time yet.

Certainly agree with you there.

One last question on TFC.

Are you extending some of these receivables with the customers you have, either in distribution finance or some of the other things you are winding down.

And if you are extending some of these deals, are you pricing appropriately for risk of maintaining a relationship with these guys going forward?

If you could give us any idea of the magnitude of that pricing or is it just you extend -- the guys who can't pay today, extend them at similar terms until they can get the cash or until they can find somebody else to fund their business?

Generally speaking, we put the letters out there telling folks that we weren't going to be there and we are not going to do any more financing.

And we've pretty much held to that.

If you look at originations in DFG, those have been limited to the contractual obligations we had in our private brands business.

And the pricing was as negotiated in those terms.

As you know, those are either ending or we've been successful at trying to transition those to other sources of funding.

But generally speaking, other dealers with whom we did not have a contractual, private brands type of relationship, we have not been financing them.

In fact, that has resulted into obviously some difficult business decisions, but we are exiting and not participating in that forward funding.

Thanks a lot.

Lewis, congratulations again.

Thanks, Steve.

Appreciate it.

Cynthia, we're getting close to the top of the hour here so I know we have several folks in queue yet, but we only have time for about one more call.

The folks that are in the queue, if you call us at the IR office, we'll be happy to service your questions as well.

Go ahead, Cynthia.

That will come from the line of Steve Levenson from Stifel.

Please go ahead.

Good morning, everybody.

Good morning.

You talked about outsourcing at -- or lack of outsourcing at Cessna.

Could you tell us what the strategy is at Bell?

It looks like there's some contracts you've been awarded that might be getting bigger there.

I want to be clear on this notion of insourcing or outsourcing and whether it is Cessna or Bell or all of our businesses for that matter, as we look at our cost structure, obviously we have a big focus on trying to reduce that on a go-forward basis.

We look every time or make buy decisions that -- is it more cost effective for us to do something inside or outside.

That is a pretty rigorous process.

I would say I necessarily have a bias to say, I'm going to do things outside, I'm going to do things inside.

We look at it on a pure economic basis.

If we can find a way to get the cost and drive the cost lower that uses capability we already have inside, that's great.

If it is a cheaper, more cost effective way to do it on the outside, then we'll absolutely support doing it on the outside.

That takes care of it then.

Thanks very much.

Thank you , ladies and gentlemen.

Have a

Thank you.

And ladies and gentlemen, that does conclude your teleconference call for today.

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