達信公司 (TXT) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron third 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 your host, Vice President of Investor Relations, Mr.

Doug Wilburne.

Please go ahead.

Thanks, Greg, and good morning, everyone.

Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today.

These forward-looking statements are subject to various risk factors which are detailed in our SEC filings and also in today's press release.

On the call today we have Scott Donnelly, Textron's Chairman and CEO and Frank Connor, our Chief Financial Officer.

We're originating today's call from the National Business Aviation Association conference in Atlanta, as Scott and Frank are here meeting with customers and industry participants.

Our customary earnings call presentation can be found in the Investor Relations section of our website.

Moving now to third quarter results which appear on slide three of the presentation.

Revenues in the quarter were $2.5 billion, down 2.7% from a year ago which yielded a GAAP loss per share from continuing operations of $0.17.

This compares to income of $0.02 per share a year ago.

During the quarter, we recorded $0.30 in special charges.

$0.25 of this amount related to the wind down of TFC's Canadian operation which we discussed on our second quarter call.

This non-cash charge eliminated the balance of a cumulative currency translation account which was triggered, because TFC's Canadian operation reached a substantially liquidated basis during the quarter.

The remaining $0.05 of special charges was related to restructuring cost.

Third quarter earnings from continuing operations excluding these charges were $0.13 per share, compared to $0.12 a year ago.

Manufacturing operations generated $157 million in free cash flow during the quarter, bringing the year-to-date amount to $174 million which compares to last years nine month cash flow of $68 million.

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

Thanks, Doug.

Good morning everyone.

Since we are here at NBAA, let me just reflect briefly on the mood at the show.

I would say generally speaking customers appear to be more optimistic and positive than they were a year ago at the show.

Many customers, as you talk to them, are reaching a point now where they're a year or two beyond when their normal replacement and upgrade cycle would be, so I think we have a fair number of customers that are genuinely looking at getting back into the market, and so while I'd say it's probably too early to conclude whether this really will be a turning point in the business jet order environment, we are encouraged by the level of customer interest.

The recently passed US Bonus Depreciation Bill is certainly a positive factor, and we'll see how much this helps to drive sales.

As we all know, new product announcements also stimulate demand in the business jet market.

In that regard, we unveiled our new Citation Ten aircraft earlier this week and it is generating significant attention at the show.

The new Ten is a really remarkable aircraft with attractive new features which we believe will reinvigorate demand for this uniquely capable jet.

The new Ten will be 15 inches longer and equipped with a set of new Rolls Royce engines, so it will be more powerful and efficient.

As a result, the Ten will be able to fly farther and faster and with more pay load.

Other features include new winglets, the entirely new Garmin 5000 avionics suite, a redesigned cabin with new interiors and cabin appointments, a new fiber-optic based cabin management system, including the latest interface options for greater in-flight productivity and connectivity.

We're particularly excited about the advanced technology incorporated with this special aircraft and the improved performance characteristics that will give our customers a more efficient and productive aircraft and cabin that are designed to meet the demanding requirements of business travel.

As we move back to the industry conditions, as we discussed on our last call, order activity in the business jet market slowed in June, and we did not see activity recover in either July or August.

In September, activity did pick up somewhat, as you would normally expect and we ended the quarter with new order value exceeding the value of cancellations, although our book-to-bill did remain below 1.

On the delivery front, we shipped 26 jets compared to 68 a year ago.

With this continued weakness in the demand environment, last month, we announced headcount and production cuts as we seek to reduce overhead costs and reduce our production build rate with Cessna.

On the other hand, lead indicators are improving or at least remaining stable.

For example, average daily utilization rate increased to 0.69 hours from 0.68 in the second quarter and 0.66 in the first quarter, and this is the highest level we've seen since December of 2008.

Also the FAA rolling three-month average for take offs and landings were up in both July and August.

As a result, Cessna's after market revenues were also up in the quarter, 11% on a year-over-year basis.

Previously owned Citations available for sale remained flat at 15.1%.

With respect to our outlook for the fourth quarter, we expect a significant increase in deliveries from the third quarter, the vast majority of which are already in our backlog.

As a result, Cessna should return to profitability in the fourth quarter.

In the industrial segment, revenues were up nearly 15% as Auto, Turf Care and Tool sales remained resilient through the summer months.

In fact, our organic growth at Industrial for the quarter was over 18%.

Looking at the fourth quarter, we believe the year-over-year growth rate in Industrial will continue but at a more moderate rate, as we run into more traditional comparisons.

At E-Z-GO, we've been working to expand our presence in the consumer industrial vehicle market.

Last week, we agreed to purchase an electric four by four hunting and outdoor recreation vehicle product line which adds to our specialty vehicle line and expands our distribution reach in that segment.

Moving to the finance segment, we had a really good quarter of liquidations.

If you look at slide four in the presentations, you can see we reduced managed receivables by $627 million.

This brings total reduction since the beginning of 2009 to $5.8 billion.

Distribution and finance was the largest area of reduction at $280 million and $75 million of liquidations was generated from our time share business as about 50% of that portfolio is now in the [amortizing] base.

As we look at the full year, we're targeting a total liquidation of $2.4 billion, which will bring us to a two year reduction of nearly $6.2 billion.

On slide five, you can see cash conversion came in at 94% for the quarter, bringing our year-to-date rate to 92%.

We expect liquidation pace and cash conversion rates will decrease going forward, as most of the high turnover, high conversion assets namely those in our distribution finance and asset based lending businesses, have been substantially liquidated.

In terms of credit performance, we saw reduction in 60 day delinquencies from $385 million to $357 million, while non-accruals were flat at $876 million.

While this trend is encouraging and reflects improvement in the general credit market, we do project 60 day delinquencies will go up in the fourth quarter as a couple of large time share accounts, which are already classified as non-accrual are expected to become delinquent.

Charge-offs in the quarter were $26 million, down from $57 million in the second quarter.

Moving to Textron Systems, revenues were down sequentially, primarily related to the timing of international SFW shipments.

We expect fourth quarter revenues will benefit from another significant SFW shipment, similar to what occurred in the second quarter.

Because customer acceptance of deliveries on international contracts like this one is often done on a lot basis, we do expect we will see some lumpiness in the revenue in this area.

Backlog was essentially flat at $1.6 billion.

Margins did come down sequentially, primarily driven by lower pricing on new US Government ASV contracts, and lower international sales on SFW shipments.

We continue to pursue a diverse set of opportunities both domestically and internationally.

For example, we recently won a contract to provide ground control stations for the US Army's long range, Long Endurance Multi-Intelligence Vehicle, the LEMV program.

Wrapping up with Bell, we had a good quarter both in terms of top line growth and operational execution.

On the military side, we delivered seven V-22s and five H-1s.

Performance on both programs continues to improve as we ramp up production.

This benefited our profit margins in the quarter, as we recorded positive program adjustments reflecting this trend.

On the H-1 program, the attack version, also known as the Super Cobra, was declared operationally effective and suitable and we expect to have a full rate production decision next month.

Moving to the commercial side of the business, we delivered 24 units including four of our new 429 model.

We continue to see significant customer activity and interest in Bell products.

For example, there was clearly high interest last week at the Air Medical Transport conference where we booked orders for 32 new helicopters from three of the largest medical transport service providers in the industry with a potential for additional opportunities from these and other customers.

Our 429 program is progressing with customer demonstrations around the world and generating new orders.

In fact, we're pleased that we've signed our first 429 customer in the People's Republic of China, so the overall outlook at Bell this year and beyond is strong in both our commercial and military businesses.

So to sum up the quarter, we think our results again demonstrate the earnings power of the Company, despite continued weakness in the business jet market.

As we indicated on our second quarter call, a positive business jet order trend appeared to be emerging earlier this year; however, that trend stalled in June, moving the market's recovery to the right, in my view, probably about six to nine months from what we would have anticipated.

[Bonus] depreciation and some stability in global economic expansion should provide a more positive environment for increased order activity going forward.

Our systems business continues to execute on its programs as we pursue several significant international opportunities.

Our industrial businesses continue to perform well as our markets recover.

Bell was successfully executing its military programs and we're seeing increased activity in the commercial sector which should lead to solid growth over the foreseeable future.

And in Finance, we made excellence progress liquidating receivables.

The cash we've generated allowed us to make substantial improvements in our capital structure, and with that I'll turn it over to Frank to provide some financial details for the quarter.

Thanks, Scott and good morning everyone.

Now turning to slide eight, let's examine the factors that drove results in the quarter, which yielded a $0.01 year-over-year increase in EPS before special items.

Inflation came in at a 2.3% rate, which reduced earnings by $0.12 per share in the quarter, while positive pricing of 0.7% provided a $0.04 benefit.

The combined impact of volume and mix cost $0.11 per share.

Increased pension expense was $0.04 a share.

Our restructuring and execution focus netted a cost performance benefit of $0.20 per share.

PFCs reduced losses benefited the quarter by $0.03 and interest expense, taxes and other miscellaneous items collectively provided $0.01 per share.

Now, starting with Cessna, let's look at the results for each of the business segments.

Cessna's revenues decreased $290 million in the third quarter, reflecting lower deliveries.

These decreases were partially offset by higher after market revenues, which were up about 11.5%.

Segment profit decreased $63 million due to the lower deliveries, partially offset by lower expenses.

These performance benefits were somewhat offset by lower deposit forfeiture income as a result of fewer order cancellations.

Cessna backlog ended the third quarter at $3.4 billion, down $321 million from the end of the second quarter.

Turning to Bell.

Revenues increased $197 million in the third quarter.

US Government revenues increased $172 million due to higher V-22 and H-1 deliveries.

Commercial revenues increased $25 million due to higher after market volume, improved pricing and favorable mix.

Segment profit increased $28 million, due to higher overall volume and favorable program adjustments, based on improved operational performance.

These were partially offset by a gain on a foreign currency exchange contract recorded in 2009, higher research and development costs, and higher selling and administrative expenses.

Bell backlog decreased $537 million from the end of the second quarter to $6.5 billion.

Moving to Textron Systems, revenues decreased $42 million, primarily due to lower volume.

Segment profit decreased $18 million due to the lower volume, pricing, and unfavorable mix.

Textron Systems backlog at the end of the third quarter was $1.6 billion, essentially flat with the end of the second quarter.

At Industrial, revenues increased $77 million due to higher volume, partially offset by an unfavorable foreign exchange impact.

Segment profit increased $31 million due to higher volume and improved cost performance, partially offset by higher inflation.

At Finance, consistent with our ongoing liquidation of the non-captive business, segment revenues decreased $12 million.

Finance segment loss improved $13 million, reflecting lower net portfolio losses, loan loss provisions, and selling and administrative expenses, partially offset by the impact of lower average finance receivables, lower accretion from previous mark-to-market adjustments, and a higher interest rate on debt and the non-recurrence of gains on debt extinguishment.

Now moving to a few corporate items.

Corporate expenses were $35 million, down $8 million from a year ago, primarily reflecting lower corporate headcount.

One quick comment on special charges.

Looking at slide nine, as you can see, we are still estimating full year special charges of about $0.40 per share; however, the mix has changed slightly.

The Canadian currency translation adjustment that we recorded this quarter was less than our previous estimate due to changes in the exchange rate, and we are now projecting some additional restructuring costs associated with our downsizing activities.

With respect to our balance sheet, as announced last month, we repaid the remainder of Textron's bank line in the third quarter, and we now expect to begin to repay the TFC bank line beginning in the fourth quarter.

Our consolidated net debt balance is now $5.4 billion and we expect to reduce it further by the end of the year.

Turning to our outlook on slide 10.

During the fourth quarter, we expect a few non-recurring international tax-related items that will benefit income by about $0.08 per share.

The exact amount will depend upon prevailing exchange rates.

Including this impact, our full year 2010 outlook for EPS from continuing operations before special charges is now expected to be $0.70 to $0.75 a share.

Our free cash flow for manufacturing operations outlook for the year is at least $400 million.

That concludes our prepared remarks for today.

Greg, we're now ready to take questions.

(Operator Instructions).

First we'll go to the line of Cai von Rumohr with Cowen and Company.

Please go ahead.

Yes, thank you very much.

So at Cessna, can you tell us were the forfeitures offset by used aircraft losses and was the R&D up from the second quarter?

Cai, we had a little bit higher residual value write-off than we had deposit forfeitures because the cancellation rates have been down, so we didn't have a lot that went into the forfeitures, but we did have some adjustments across the whole balance of the portfolio in terms of used aircraft that we did some residual writedowns, but it netted, Cai, on the order of a few million dollars.

It's not a big number.

Okay, and I know you announced the Citation Ten.

Can you comment, it looks like that's a relatively modest upgrade because the cabin while it's longer, it's not wider.

Do you have any other, can you comment at all on other new products that we might look for over the next 12 months?

Sure.

Well, let me first say that the Citation Ten is a pretty unique aircraft and always has been.

A 15-inch stretch, a brand new cockpit, and the dramatic refresh in both the interior as well as the winglets and things like that has actually been, it's a pretty major makeover to the aircraft and customer response has been very strong to it, so they're pretty impressed with it.

But the issue that I can also address around other new products is clearly we have a number of things in the pipeline that are other pretty significant refreshes as well as some clean sheet aircraft, and we'll be announcing those, Cai, kind of as we go from show to show here over the next 18 months to two years, as these programs are getting closer to launch, and we're confident that it's the right time, in terms of market receptivity to announce it, so the Ten, we've not done an upgrade to that program really almost ever so it was really time to do it and that's why that's the first one that we've announced out of the gate, but clearly there are others that are in there and we'll make those announcements as the time is appropriate at ensuing shows.

Thanks so much.

I'll let someone else go.

Your next question comes from the line of Jeff Sprague from Vertical Research Partners.

Please go ahead.

Good morning.

Thank you, Scott and Frank.

Just a couple of things on Cessna first.

Scott, can you give us some indication of the bump in deliveries, that we should expect into Q4?

And I guess more importantly, the essence of my question is just managing production and the factory here as you exit 2010 to prepare yourself for whatever 2011 is.

You're probably not prepared to give us 2011 guidance here on the call but trying to think about loading the factory here at year-end and the throughput in the factory and what that implies for next year.

Sure, Jeff.

So we have made as you probably saw the announcements in terms of reductions in staff at Cessna a couple weeks ago, and what we did when we took that into consideration was look at the inventory, the rate at which we've been building this year, what we forecast in terms of deliveries for the fourth quarter this year, as well as our kind of first estimate as what we think the deliveries, will look like for 2011, and adjusted the production rate, so that we think we have the right rate now moving through the balance of the year.

Now this is not the first time we've told you this, right?

We've done this before, but as I said earlier, I think the reality of given what happened in sort of that May/June time frame, at least up through now, we basically have kind of slid our forecast out around six to nine months in terms of what we think the recovery cycle looks like, so those adjustments we made in production rates and staffing align with that.

In terms of your first part of the question is, what do we expect in terms of fourth quarter deliveries, we aren't putting an exact number out there, but it will certainly be dramatically higher than what you saw in the third quarter.

Can you give us a little bit of a sense then around that -- how big the delta between production and deliveries were in the quarter, even if you didn't take stuff to final production, I would imagine there's maybe some significant whip.

Is that how you get the bump in Q4?

Yes, absolutely, and it's hard for me to give an exact number, because it really is as you said it's whip.

There's very few things where we take them all the way through the finishing center completion and then do the whole nine yards, so we basically what we've done is slowed down the rate in terms of the tack time, if you will, of what we move various models through the factory at, so we've slowed down as opposed to saying we're going to build them out and then stop, so it's -- we never, as you know, have perfect alignment in terms of sales to manufacturing core, because fourth quarters usually are stronger and you've got to kind of build into that, but so there's not an exact number.

It really is sitting in whip.

It's not let's say we've built this many airplanes and sold this many airplanes.

Right.

And lastly, and I'll pass it.

Frank, I was wondering if you could give us some early read on how to think about pension for next year, perhaps if we locked it down on today's returns and where we're sitting on current discount rates?

Yes.

We don't do that work finally until year-end, Jeff, and obviously things can happen between now and then.

I guess I'd characterize it this way, which is, we for 2010 were using a discount rate of 6.25, and a rate of return of 8.5, a 50 basis point change in discount rate impacts our expense number by about $26 million, and a 50 basis point change in rate of return impacts our expense number by about $20 million.

Now, there are lots of other factors that go into it in terms of comp rates over time and other things, but I think kind of that gives you a sense of order of magnitude of the sensitivity of our numbers at least, and we'll do that work as we move into year-end and we'll give you kind of the specific guidance on it when we give the 2011 guidance.

Just a point of clarification on that.

Separate from those changes and inputs, is there already some embedded headwind on 2011 based on where you closed at 12/31/09?

Yes, there would have been already some, kind of because of the averaging impact of just the way the calculations are done.

There would have already been some embedded headwind in the analysis.

Thank you.

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

Please go ahead.

Good morning.

Hi, David.

Scott, in terms of thinking about the potential for future cancellations, having been down to [NBAA] myself but the sense I get is a fair amount of customers still in the backlog are waiting to potentially cancel until they bump up against further deposits that they have to make.

How far of the way are we through that at this point?

Well, it's a good question, David.

We've been trying to work this thing out for a couple years, but I would say the rate of that phenomenon, which you're describing, which is absolutely right, I mean, usually people cancel when it comes time to write that next check, on most accounts really has been dropping pretty significantly, right?

So most of the volume or the number of cancellations which we had, which were really more in the first, second quarters of this year which were some of the fleet operators and things like that, have I think mostly flushed their way out so we have seen a real slowing in terms of the number of individual customers that wait until that next deposit is due and walk away from the aircraft.

So are there going to still be some?

Absolutely, and as we do our forecasts and look at our, both production rates and our sales programs, we anticipate that some of those customers who we kind of put in our book as a high risk customer, more and more of those are actually, we're now getting that deposit check, whereas a year ago, the rate of those that we identified as being at risk was much higher that we're going ahead and switching to a cancellation, so are there still some?

Absolutely, but the rate has really slowed down dramatically in that area.

Okay, and then at Bell, on the commercial side, could you give us an idea of what you're seeing there?

I think your delivery guidance for the year have been around 150.

You've only done 49 year-to-date, and then specifically on the 429, I think you've been talking about 25 deliveries, and you're at 4 year-to-date?

Sure.

So I think with respect to the 150 number David, I think we're going to be light on that but I think it's going to be principally in the 206 and 407 light side, and again, that's driven primarily by the market in terms of the high net worth individual, corporate is still slow, much like you see across the Cessna area, but we have still seen continued strength in the larger helicopters, the oil and gas markets, the emergency medical service markets, the international FMS markets, have stayed pretty robust so the way I see it is that we'll be probably light to that number, but it will be mostly in sort of the very small, the very light helicopters, so from a margin perspective, from a revenue -- it's not going to be material.

429 specifically, we shipped four this quarter.

We're a little behind where we would like to be just in terms of the time it took to get a lot of the kit certifications done and things like that, but you'll see a lot of deliveries here in the fourth quarter.

Will it get to the 25 number?

Probably not, but it's going to get pretty close.

And again the backlog is there.

The people, the customers are there so I still feel pretty good when you looked at our forecast of 25 this year, 50 next year which is kind of what our production rate was aimed at, I still think we're going to be pretty much on that 75 for the two years, and again, we'll get -- I don't think we'll get to 25 but we'll get pretty close to it this year.

Okay and last one, Frank, at TFC loss there has kind of stabilized in terms of what's running through the income statement.

Any framework you could provide about how to think about what that number might look like in 2011?

No, not at this point.

We'll include that in the guidance.

I think as you know, there's volatility around those losses just as we realize losses that we had previously reserved for and so there's always going to be a lumpiness and volatility to the loss activity.

I'd say kind of overall, we are tracking very much kind of within the framework that we've talked about in terms of adequacy of capital and cash conversion levels that kind of continue to support the overall framework of the liquidation schedule but we haven't gone through the 2011 planning process specifically for TFC and a lot of the loss realization will depend on the liquidation strategy that takes place through that period.

Okay, thanks guys.

Your next question comes from the line of Robert Stallard from Royal Bank of Canada.

Good morning.

Good morning, Rob.

Cessna again I'm afraid.

A couple of quick questions there.

I was wondering if you could comment on how the demand situation at Cessna has altered maybe on the geographic front or by customer type if you're seeing variances there and who is particularly responsible for this push out by six to nine months?

Well, I think as we looked at the last six months, it was kind of across-the-board, right?

When the European thing hit and the impact of the euro was, I think pushed a lot of customers away but the triple effect into the US so we really saw all the markets around the world shut down pretty significantly.

Latin America was an exception, that still was doing okay and some Asia Pacific was doing okay but it was pretty much across-the-board.

It was not all that localized.

Now as we see things coming back, right now I would say we're probably getting more interest and more customer demand internationally than US.

Now I think part of that is a lot of the US customers are sitting on the sidelines saying well, if I'm going to go, I'd like to have some certainty and understanding around things like the Bonus Depreciation Plan and whatnot so hopefully that will move some of these guys.

We know it's already moved a few of them, off the sideline and are going ahead and proceeding but right now, I'd have to say we have been seeing over the last sort of September, end of October time frame, foreign demand coming back faster than US demand.

And also, I was wondering if you could comment on the pricing situation, given there seems to be a fair amount of inventory in the system, how is pricing on new jets holding up?

As best it can.

It's a very competitive market out there obviously, and the used is still there.

It was stable this last quarter but it's down off its peaks but there's no question it's still a difficult pricing environment, but it's deal by deal, Rob as you can imagine.

And just finally on Cessna.

I was wondering if you could give us an update on how your restructuring is going there and your efforts to reduce your cost base?

Pretty well.

I mean unfortunately, we just went through another set of cost reductions, although I would say probably half of that was directly volume related.

The other half was continuing to make sure we get our cost structure aligned with the size of the business, and in general just driving base cost productivity.

Our activities and things like ramping up our Mexico operation actually are going very well on both the Cessna and the Bell side.

I was down there with a bunch of the team just a few weeks ago and that's ramping up very quickly, so I think we're in a pretty good position here that as volume comes back and we need to meet some of these requirements, capacity requirements, that we're going to have a better cost base than we've had in the past.

The other thing I would mention which obviously is here in the quarter we did finalize negotiations with our Union in Wichita.

I think it was a good outcome in terms of both the Company and the employees.

It's a seven year deal which is great and lets us get that behind us and focus on just getting the job done for the next seven years and we feel pretty good about where it was.

Obviously our employees agreed to take sort of more of their share of the healthcare costs on a go forward basis and I think in terms of economics, we all recognize where the industry is and where it's going to be here in the near term going forward and put together a financial package that in the end was acceptable to both the Company and the Union.

Thanks, Scott.

Sure.

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

Please go ahead.

Hi, good morning.

Good morning, Noah.

I guess it can be challenging to predict the exact timing of when business jet demand comes back, but I wonder if you're hearing anything from your customers that you're in conversations with, that are deciding not to buy aircraft.

If you're hearing any reasons that you're worried can be sticky through the entire cycle that can kind of cause a muted demand recovery, whether it be that it's just a generally do more with less environment, or it's a young inventory, a young used inventory or whatever it may be.

I mean, obviously it is hard to predict.

I've been particularly not good at predicting it.

The customers though you talk to, and I guess let me just (inaudible) by saying a lot of these customers are folks who were here at the show, folks that I interact with on an occasional basis that are -- they are our Cessna customers.

They are flying our aircraft, and so this is kind of a core if you will of a customer base that does refresh their fleets on a fairly regular basis.

This is what they're talking about, right, is the fact they are now a year or two years, some of them going three years beyond what they would normally do in terms of refreshing and updating their aircraft, so I think these are people that are, without a doubt, going to do it.

The question of the timing is obviously a little bit uncertain but it's going to happen.

The growth I think as we've talked to international customers, the desire, the demand to have business aircraft and the productivity that they are utilized for, you hear all of those same things that you've always heard.

I'm pleased that the politics side of it has certainly seems to have died out.

People aren't afraid of, will I be viewed as a bad guy because we have corporate aircraft.

That seems to be subsiding a little bit which is also encouraging, so I guess the bottom line is you don't hear customers talking about things, or feel things out there that says that there's a fundamental change in utility or the rationale for why you have a business jet.

It's all much more built around the confidence of knowing that their businesses are in a stable spot.

They are going to grow.

They are going to get back to a normal world, and they're going to go about their business, which includes either buying business jets or refreshing their existing fleets.

Okay, I guess one of the concerns we hear on the pace of the recovery for current players is the emergence of Embraer and we saw NetJets' order there.

Why did NetJets jump out of other backlogs and into theirs, and maybe if you can just give your latest internal view of what Embraer is working on?

Sure.

I think if you're NetJets, it's a pretty smart move, so you had backlogs of aircraft at price levels that have been negotiated in a good market and you negotiate at the bottom of the trough for new pricing for aircraft that you're not going to turn around and sell to fractional customers until 2013, 2014, 2015 or so, so I think they are pretty sharp.

They took advantage of a very down market and went out and tried to drive a very, very aggressive campaign that probably gave them some very favorable, I would say definitely very favorable pricing, and get that locked in and not have to take delivery for several years out, so I think pretty sharp on their part.

Now from our perspective, I think first of all I don't think anybody should be surprised to see NetJets offering as part of their suite of aircraft to customers Embraers.

They've had Cessna, they've had Hawker, Gulfstream, I mean it's -- if you look at their role as kind of a reseller of aircraft in the fractional market, it shouldn't be a surprise again they are going to carry a pretty broad range of aircraft.

Okay, I'll just sneak one more in.

Is there any potential -- or any update on the potential and timing for a second multi-year on V-22?

Absolutely, and negotiations and discussions with the customer have already started along that exact line.

And any sense on timing?

Well, the current multi-year goes out through deliveries, through 2014 so I don't know exactly, Noah, what they're talking about, but I would say in the next year or so is probably when they will want to get that definitized and nailed down.

Thank you.

Sure.

Your next question comes from the line of Peter Skibitski from SunTrust.

Please go ahead.

Hi guys.

Not sure if you said this or not but can you quantify for us the deposit forfeiture income this quarter at Cessna versus Q2?

What we said is that the net of the deposit and the used valuation was a negative couple million dollars.

Okay.

How about on the one-time gain in Bell.

Can you quantify that and tell us what programs they were on?

Well, it related to the overall kind of rate structure at Bell and just benefiting on the cost front from improving performance and leveraging the volumes that are going through Bell.

It benefits the quarter by about a couple hundred basis points, so we typically have said Bell should be in the 11%-ish area on kind of a run rate basis and obviously we're up at the 13% area for this quarter and that 200 basis points was kind of this performance improvement.

So not necessarily one specific program?

No, no.

It's really kind of across the entirety of the base.

Got you.

And then would you mind updating us on international opportunities for ASV and Shadow?

I think I saw a couple of notifications this quarter, I'm just wondering if there's anything else out there in the works.

Well, there are.

Shadow, we've announced a couple.

There's a couple that are still in negotiations of things we're chasing after.

The same with ASV, probably the most notable international which we have talked about before is the Canadian TAP B program, that decision is probably still a year or so away but there are also a number of other international ones which we haven't talked about yet, which are still in the negotiation phase which we're hopeful we would get closed here in the next six months or so.

Okay, thanks, guys.

Sure.

Your next question comes from the line of Steve Tusa from JPMorgan.

Please go ahead.

Hi good morning.

Good morning, Steve.

Just following on that Bell question and then moving on to D&I, same kind of question on the -- or systems.

The longer term margin there kind of ticked down as you guys would have expected, maybe a little bit more than we would have expected in the quarter.

What is the more normal longer term margin we can think of at the defense business?

Well, I still think the systems business is one, Steve, that we've talked about being kind of in that 11% sort of range.

I think we still feel like that's about where it's going to be.

The margin rates did tick down and we talked about the fact that we did have two big chunks of business in both the ASVs and the UAVs that were very high margin businesses that got renegotiated as you would expect and that's kind of what brought us down to those margin rates that we are -- where we are now.

I think there was a little bit of a challenge in the quarter just because of the nature of these SFW contracts because there's some quarters where you're going to have a big sale and associated margins, and other quarters where you're literally going to have zero on SFW just because of how the lot acceptance works out, but I would say that I think those are the kind of, we don't feel differently about those margin rates than the previous guidance that we gave you and I think we'll hang in that area.

So the longer term normlized margin for Bell and D&I both kind of in that low double digit range?

Exactly.

The only things that have changed, Steve, is they are putting more pressure on those numbers and obviously we're doing other things to make it up is what we talked about a little bit earlier.

These pension headwinds are tough.

In terms of both earnings and, obviously, cash contributions ultimately we'll need to make.

Will those margins be down in 2011?

They will be, there will be more pressure on the pension side and so the issue for us, of course, is the challenge of trying to go drive other means of productivity to try to compensate for them, but they are pressure points for sure.

Right, okay and then just on Cessna.

You had a real drying up of activity in the Summer.

Do you feel the market is still that sensitive so that if the euro moves like it did back then or if we have another little gyration here in the macro environment, are people still sensitive do you feel like?

So for every 10% to 15% move in the S&P 500 do we push out another six to nine months or have people kind of come to a resolution on how comfortable they feel in their financial situation that that was kind of the last bit of pressure on the mentality of the customer.

What's your sense there?

Steve, I still think this has an awful lot to do with confidence and I think what happened coming out of the Spring was there was a lack of confidence in the recovery and when that happens, people, consumers and businesses kind of quit spending money and it wasn't just airplanes.

It was any big ticket capital investments, and I think we saw that across most of industry certainly in the US and around most of the world, so I don't think we're immune to that.

I think people have gotten -- it appears people have gotten a little more comfortable that the recovery stumbled, but it didn't go into the so-called double dip and that's now bringing a little bit of confidence back that people can move on, but I think if there's another, if you have another European debt crisis, if you have something of that magnitude, there's no doubt our industry is still susceptible to those kinds of things derailing the economic recovery and more specifically the business jet recovery.

One last question, just on the margin at Cessna.

Would you guys expect a relatively significant snapback next year after you've kind of worked your way through the over production of this year?

How do we think about the Cessna margin for next year?

Well, again, it's all going to be based on what kind of volumes we get out there, right?

We still personally feel that we will see better volumes in 2011 and 2010.

I'm sure you read all of the various pundits and folks that are kind of all over the map as to was 2010 the trough or was 2011 the trough, and everybody is guessing, right?

Our guess and our sense of talking to customers and whatnot is that we're still expecting to have higher 2011 deliveries than 2010's, and obviously that will translate into better margin rates.

Okay, thank you.

Sure.

Your next question comes from the line of Ron Epstein from Banc of America.

Please go ahead.

Yes, good morning guys.

Good morning.

Scott, just a couple more business jet questions.

Sorry about belaboring the stuff.

That's okay.

I was down at NBAA as well as probably a bunch of my peers and you really did see a tangible difference between what's going on in the -- let's call it the large jet segment and then the mid and light so my two questions are one, why do you think that is?

What's peculiar about the mids and lights that they are just not being as robust as the large and then two, the Columbus came, it went, if Cessna were to have a product in that space, in your view was that a good form of diversification given how you're really seeing some different market dynamics between the different size segments?

Well, the first one I would say Ron, there's no question that the dynamics out there for the long haul, big large cabin jet market has come back faster than the light to mid size and I think you're talking about some different dynamics here in terms of who those buyers are, are they very large corporations or very, very high net worth individuals, families and such that tend to be the customer of that segment.

Now the reality is for the light to mid size jet market, we do have obviously some fleet operations in pretty big companies, but the bulk of our customers are small mid size business people and high net worth individual, not somebody that's the billionaire set.

So I think the confidence in that community and that little buyer is more economically sensitive than the multi-billionaire or the huge multinational corporation, so I think that's just kind of the world we're living in right now is that our typical buyer is more economically sensitive than the real big cabin guys, so that's where this confidence factor comes in, in terms of getting our customers confident to go spend $6 million, $8 million, $15 million, $20 million as opposed to being up there in the $50 million, $60 million kind of transactions that you see on the large cabin guys, and I don't know why that would change.

Just the light-mid will come back when our customer set feels more confidence.

And how about from a product portfolio point of view.

Down the road eventually, is it a place Cessna should go, to larger and larger aircraft?

Well, I think that the notion, to come back to, I'm sorry, your question on the Columbus side, is that we do have if you look at our customer set, that customer set is principally more of a regional customer right whether it's domestic US, domestic Europe, Latin American regions but that customer does have a need to do some international longer haul travel and that's really where Columbus was aimed so are we thinking about we should be competing with G550s and globals?

No.

That's outside of I think what is traditionally our customer set.

The Columbus, which we would certainly like to go back to at some point when the market conditions are right and the light mid world has stabilized is a nice add-on in terms of taking care of that customer base, because we do have a significant number of them that do have some international needs, longer haul needs and would like to stay in the Cessna family as opposed to needing going over to a big Bombardier or a Gulfstream product.

Maybe just one last question again on the business jet market.

How much of a factor has the availability of financing and financing terms and changing financing terms been in terms of a negative headwind in terms of people finalizing orders?

Well, it was a big headwind for a while but I would say things have been certainly loosening up.

I mean we've had credit availability for people.

We've seen some of the other larger guys that historically finance in the business jet world are coming back into it.

The money is clearly available.

There is a desire and a need for higher levels of down payment and looking to credit, but I think it's starting to loosen up and it is not as big as an issue as it once was.

That's great.

Thank you very much.

Sure.

Your next question comes from the line of Julian Mitchell from Credit Suisse.

Please go ahead.

Yes, thanks.

I had a couple of questions.

One was on the cost structure within Cessna.

I guess how you're thinking about the difference between the sort of permanent fixed cost reduction from the migration of production and then secondly, how much of your cost reduction is related to your six to nine month push out in terms of the business jet deliveries recovery?

And then secondly as well, just on the industrial business, you've had very high incremental margins there because of a steep revenue bounce back off of a fairly low cost base.

I guess how are you thinking about incremental margins in industrial exiting this year in terms of adding on capacity or raising R&D and how those effect the incrementals?

Thanks.

So if I go backwards through those, I would say that, first of all on the industrial side that margin leverage we've been seeing associated with the volume as we think about 2011 and those markets continuing to recover, I think we can continue to generate good leverage on those margins.

We are certainly, even though revenue and volume has come back, it's still nowhere near back to where it was historically, so in terms of capacity to produce, we're not at a point where we have to start thinking about making any kind of significant capital investments to support further ramp in those businesses.

I mean so some tooling here and there, there's obviously some capital but there's certainly no reason to think about a need to invest a lot of capital in those businesses as they continue to grow because they are still well below the levels at which they historically have seen.

At Cessna, the cost, you certainly have a fixed base cost, let's say, in Wichita in terms of facilities and capability.

I think as volume returns that we can effectively utilize that capacity.

I think we have a Union contract and a cost base that will allow us to be very competitive in terms of aircraft completions and customizing and interiors and delivery and things like that but as we talked about before, we still believe and are continuing to restructure in terms of where a lot of the sub level fabrication assembly goes on and that's been our strategy with Mexico where we have made some significant investments and continue to do that to make sure that we have capacity in that region at a cost that we think it needs to be for us to be competitive going forward.

So there's kind of a blend here of making sure you're effectively utilizing what you have in place in Wichita but also expanding capacity in those places where we know we have to have a lower cost labor base.

Okay, thanks.

Sure.

Your next question comes from the line of Steve Levenson from Stifel Nicolaus.

Thanks, good morning everybody.

Good morning.

Here is a non-Cessna question for you.

It appears that the Marine Corps is rejiggerring the makeup of their helicopter squadrons and if you do the arithmetic it sounds like maybe they are going to come up short some H-1s.

Have they come to you or do you expect to talk to them about revising that contract higher?

Well, obviously, Steve, we're in conversation with the Marine aviation folks on a virtually daily basis.

I want to be careful to comment specifically about your question because I haven't had a discussion with them with respect to overall number changes, but there are regular discussions around how many utility versus how many Super Cobra so as they are always looking at their deployment schedules and what the makeup for their squadrons are and how they operate, those are discussions that we have all the time with them, so obviously any time they want to add additional aircraft is certainly fine with us, and we're trying to make sure we're doing the right things in terms of the cost per unit to help allow them to do it.

We know they would always love to have more helicopters but obviously they have their own budgetary issues that they got to be careful about but sure we'll work with them, in terms of both the mix or the makeup of them and the overall total number.

Thanks and last Cessna question.

How much investment is likely to be required to do the revision on Citation Ten?

Pretty modest really because there's some modest changes to tooling because the fuselage stretch but the wing is virtually identical.

Obviously there's some minor modifications in the structure with the winglets.

There's no tooling change on the engines.

It's a redesign on the part of Rolls Royce for the fan which gives us some better thrust and better efficiencies but does not impact final assembly in terms of tooling and then of course the cockpit is -- that adaptation is mostly fabrication work and cable and harnessing.

So there's a lot of work but it is not a capital intensive change.

Thanks very much.

Your next question comes from the line of Adam Krajewski from Access 342.

Adam, you might be --.

Your line is open Adam.

Okay, we'll move on.

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

Please go ahead.

Yes, thank you again.

A follow-up to Jeff's questions on pension.

Could you tell us what your return on assets year-to-date is and what impact the very large layoffs you've had at Cessna would have on your pension expense next year?

Yes, we're a bit ahead of the overall market levels year-to-date, Cai, and obviously--.

But relative to your bench of 8.5.

Well, I mean, we're only part way through the year.

It's kind of nine months through the year, where on an annualized basis we would be on target.

We'll see if it annualizes out to that basis but on an annualized basis we would be on target.

And of course as you know, Cai, the actual return on the assets this year has a relatively small impact on what our expense headwind might be next year.

Right.

Correct.

But so what's the impact of the layoffs at Cessna and I guess another question would be what percent of your expense is in government areas Bell and Systems?

The Cessna impact will kind of not, that won't have a meaningful impact and I don't, do you --?

Well you're asking about how much is in military and the bottom line is that we have very little recoverability under the various programs available because we're in fixed price contracts that are already set, so in the immediate term, there's not a tremendous amount of relief that we can garner from our contracts.

Got it and in terms of contributions to your plan, I understand it's pretty modest this year.

Where is that likely to go over the next couple of years?

Yes, I mean, it's going to increase kind of it will depend ultimately on kind of what these calculations look like but it's going to be up in the $200 million or $300 million type level.

Now obviously a lot of this gets impacted by we're in a very, very low rate environment, so kind of all of this stuff needs to ultimately be looked at in the context of both kind of whatever the rate environment is when you're setting these numbers and then expectations over time and so for all of this to carry forward into the future, you would have to assume that this same rate environment was going to be maintained into the future which I think most people would probably think is unlikely, but it certainly will impact the near term calculations.

Terrific.

Thank you very much.

All right, ladies and gentlemen, thanks for joining us today and we'll talk to you in three months.

Ladies and gentlemen, this conference will be available for replay after 10 AM Eastern time today through January 25.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 138125.

International participants dial 320-365-3844.

Those numbers once again are 1-800-475-6701 or 320-365-3844 with the access code 138125.

That does conclude your conference for today.

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

You may now disconnect.