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Textron, Inc. (NYSE:TXT)

Q4 2008 Earnings Call

January 29, 2009, 9:00 am ET

Executives

Doug Wilburne – VP, IR

Lewis Campbell – CEO

Scott Donnelly – President and COO

Ted French – EVP and CFO

Analysts

Nicole Parent – Credit Suisse

Jeffrey Sprague – Citi Investment Research

Cai von Rumohr – Cowen & Company

Noel Poponac – Goldman Sachs

David Strauss – UBS

Steve Tusa – JP Morgan

[Matt Vitoriosa] – Barclays Capital

Steve Searl – Conning Asset Management

Mike Meek – Atlantic Investments

Nick Riley – Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Textron Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). And as a reminder today’s conference is being recorded.

I will now like to turn the conference over to Doug Wilburne, Vice President for Investor Relations. Please go ahead.

Doug Wilburne

Thanks Glenn, and good morning, everyone. Joining us today are Lewis Campbell, Textron's Chief Executive Officer; Scott Donnelly, Textron’s President and Chief Operating Officer and Ted French, Textron's Chief Financial Officer.

Before we begin, I would like to mention our discussion today, we will include remarks about future estimates and expectations. These forward-looking statements are subject to various risk factors which are detailed in our annual SEC fillings and also in today's press release.

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

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

So, now moving to fourth quarter results, revenues in the quarter were $3.6 billion up slightly from a year ago. Our income from continuing operations excluding special charges was $0.40 per share consistent with our revised guidance of $0.30 to $0.40 per share offered in our December 22, press release.

Special items in the quarter included the following, a $293 million pre-tax or $0.86 per share mark-to-market adjustment against assets held for sale at TFC in conjunction with our exit plan announced on December the 22. A $169 million pre-tax charge or $0.67 per share to eliminate TFC’s goodwill, a $31 million tax charge or $0.13 per share, related to the change in investment status of TFC’s Canadian subsidiary and $64 million pre-tax charge or $0.18 per share for restructuring charges across the enterprise.

Also we close on the sale of our Fluid & Power business and recorded an after-tax gain of $111 million which is reflected in discontinued operations. A reconciliation of our reported GAAP loss of $0.87 is attached to our press release. For the full-year our manufacturing businesses generated $899 million in cash against capital expenditures of $542 million.

Textron received $142 million and dividends during the year from TFC and in December we made $625 million capital contribution into Textron financial to maintain the earnings to fixed charge coverage ratio under the support agreement between Textron and TFC.

Keep in mind that the contribution did not resolve and an increased to the total combined debt of Textron and Textron’s financial as the increase in debt outstanding of Textron was exactly offset by the lower debt outstanding at TFC.

With that I will turn the call over to Lewis.

Lewis Campbell

Thank you, Doug, and good morning everyone, let me set the stage for my remarks this morning by first pointing out the obvious economic conditions weaken further during the fourth quarter, but actually had a pace and degree that has not occurred in decades. The impact on our customers at Cessna Industrial and Textron Financial were particularly significant. Consequently as many of you have already observed, we believe 2009 is setting up to be the most challenging year ever for most manufacturing companies.

Furthermore, Textron, we have an obvious additional challenge related to our commercial finance business and we are addressing that. That being said we have developed plans for 2009 that’s squarely focus on two important goals. Improving cash generation and operating performance at each of our businesses and a markedly slower demand environment. And aggressively converting finance receivables at TFC to cash.

Frankly, we are taking a very pragmatic approach to every aspect of the business given this unprecedented economic environment. And we have implemented a very comprehensive liquidity plan for the company we will talk about that. And a cornerstone of this plan is the expanded TFC exit strategy announced on December 22nd, which calls for a liquidation of at least $2.6 billion in receivables by the end of this year. We have a detailed execution plan for achieving this liquidation target and Ted will describe this in more detail very fully later.

In addition to the portfolio run-off, we are also pursuing significant asset sales of individual TFC business. A variety of potential buyers are currently looking at various portions and combinations of TFC, TFC’s assets and we are working these possibilities vigorously.

We are also working on new securitizations. Our facility extensions similar to what we did last month, when we extended the maturity on a $550 million aircraft facility for about a year. At the Textron level, we expect positive cash generation from our manufacturing businesses plus we are evaluating a full range of potential capital markets alternatives as well as other asset sales.

Our recent successful closing of the Fluid and Power transaction which Doug mentioned is indicative of the kind of interest that exist even in these times from strategic buyers. To close this discussion, we believe that successful execution of our TFC exit plan combined with our other liquidity actions will raise cash efficient to meet or exceed our needs. You also know that we have a very strong leadership team on the field. The addition of Scott Donnelly to our team last year has proven to be very beneficial. And now, as our new President and Chief Operating Officer, he and I are keenly focused on running the business consistent with the quickly changing demand environment in which we find ourselves.

After I wrap up, Scott is with us this morning to provide some additional detail on the actions we are taking in our manufacturing businesses.

So, now let’s move to the specifics beginning with Cessna where we delivered 131 jets in the fourth quarter, bringing full-year 2008 deliveries to 467 units. That’s actually a new record for the both quarter and the year. Unfortunately, the economy is having an especially aggressive impact on the business jet industry including Cessna.

In the quarter, we only recorded 30 gross orders with about a 45/55 split by the way between the United States and International. In that same quarter, we also saw 23 cancellations and an unprecedented number of deferrals. Combined, these developments affected deliveries in the quarter and more significantly they will impact planned deliveries for 2009. Needless to say it is extremely difficult to forecast this year’s delivery number because ultimately they will depend on how the economy and other factors effect customer orders and cancellations.

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

To put our expected '09 Cessna plan in the historic perspective, remember that our previous big deliveries occurred back in '01 and in the '02 timeframe, I believe, with just over 300 jets and Cessna’s revenues then were about $3 billion. At a delivery level of about 375 jets for 2009, Cessna’s receivables will be $4.6 billion significantly higher. Coupled with the actions we are taking, we expect Cessna should have solid double-digit financial performance even while preserving critical components of R&D in '09. While Cessna is clearly a cyclical business, it does remain a premier franchise in what we believe an attractive yielded the young industry with a slight long-term growth as well.

Moving now to Industrial. The slowing economy had significant impact in the quarter on volumes in each of our businesses there. But, the largest decline came at Caltex where volumes were down 20% reflecting automotive OEM shutdowns literally around the world. Looking forward in 2009, we believe volumes across all of the Industrial will be down to about 20% to 25% on an average with the largest decline happening in the first quarter as our customers adjust their inventories and production to a lower demand.

On the other hand, a bright note inside Industrial’s '08 performance relates to the importance of pushing the R&D and consequently new products. Our RXV golf car and E-Z-GO introduced at the beginning of the year made up nearly 60% of '08 deliveries, contributed to a 13.5% and E-ZO-GO revenues last year in spite of the slowing economy.

Now, let’s shift to Textron Systems, where we were providing our US government customer essential capabilities critical in today’s conflict scenarios that keep America’s soldiers out of harms away. And the effectiveness of our products is beginning to attract business from foreign military sources as well. In particular, we are now selling our Sensor Fuzed Weapon product in United Arab Emirates and we are working a contract with another international customer as we speak.

Our ASV is now being deployed in a number of countries for their internal security missions. In fact, we expect to generate over $1 billion in foreign orders for a variety to Textron Systems products during 2009. Now that’s literally five times what we generated last year. These should begin to contribute to growth in 2010 and beyond.

Furthermore, we were recently awarded a contract to operate a performance based logistic program for in country operation of AAI’s shadow system in Iraq. On this basis we anticipate solid growth over the next several years at systems as US and international military interest in our products is expected to be relatively unaffected by the economy. We also are pleased with the execution and operating performance in systems. Given the amount of acquisition, integration activity that we had underway over the past two years there results there are even more impressive.

Okay to complete my discussion today, let's now move to Bell where execution is also a good new story and we made substantial progress over the past two years. I mean the V22 is probably the best example.

Last year we delivered 18 aircraft each ahead of schedule, actually most were one month ahead of schedule. In the fourth quarter, Bell added another $1 billion in the backlog of V22 reflecting next years funding of our multi-year contract which was approved last March.

On the operational side the V22 has performed extremely well in Iraq. Most recently this CV-22 which is the air force special version of the Osprey, recently self deployed with area refueling and 5000 nautical miles for a joint multinational operations involving special forces. Feedback from the customer already on this unique capability is that the CV-22 exhibited superb performance during the mission.

Likewise, earlier this month the first detachment of H1 Yankee utility units have gone into service as they set sale aboard the USS Boxer with US Marine Corp 13 marine expeditionary unit. We delivered 12 H1 units last year, which included an early delivery from 2009 again we are ahead of schedule and we continue to improve factory productivity.

Execution on the commercial side of our business also showed improvement last year, we delivered 167 commercial helicopters versus our beginning of year target of 160. On the demand front our US military business should experience significant growth over the next several years as we ramp the V22 and H1 programs and as we service and reset legacy aircraft that have seen heavy in theatre use.

On a commercial side of Bell, we actually saw a few cancellations and deferrals during the first quarter but nothing really severe. Nevertheless, we are going to take a cautious approach to commercial production for '09 with an expectation about 180 deliveries versus the 169 in '08. We obviously will watch this very carefully through the year.

So in conclusion, the economic environment has changed quickly and we are taking serious actions accordingly. We have three premier businesses in Cessna, Bell and Textron systems, which combined should generate 80% of our revenues this year at double-digit margins with strong cash flow even in the midst of this economic dislocation.

Our priorities this year are crystal clear, maximize cash flow and operating performance in our manufacturing businesses and convert finance receivables to cash at TFC. We believe we have a plan by which we can successfully navigate these difficult times and we are committed to execute that plan. We believe that we will emerge leaner and more focused and looking forward we fully expect that growth in our strong defense businesses will sustain us over the next several years and after the world economies recover this will be augmented by expansion at Cessna as well as within the remainder of our commercial businesses.

With that I will turn it over to Scott. Scott?

Scott Donnelly

Thank you, Lewis. Good morning everyone. Clearly our focus this year the manufacturing businesses to maximize cash flow of our operations while at the same time preserving the critical part development efforts that will support our future growth when we come out of this economy.

Accordingly we are aligning our '09 production to match expected lower commercial demand lowering our selling, general and administrative cost to headcount reductions, curtailing most discretionary spending includes some reductions in product development, freezing salaries across the company, aggressively reducing our working capital and eliminating non-essential capital spending. Specifically, we dramatically reduced our production plans in Cessna Industrial and to a lesser extent at Bell Commercial to ensure we reflect our current view of customer band to minimize our finished goods inventory.

Correspondingly today we announced an additional 2000 headcount reduction at Cessna, consistent with our reduced production level of about 375 jets.

Overall, we're targeting a 10% reduction in SG&A expense which is worth about $150 million in cost savings. With respect to R&D where we're originally planning an increase of nearly 10%, we are now committed to reduce net R&D spending by about 8% or $45 million less than 2008.

Looking at our working capital, primary source of cash opportunity here is our inventories which last year were $3.1 billion. We are working across all of our inventories and all of our operations to reduce that number by 15%, leveraging our lean activities deeper into our manufacturing processes and by resetting our supplier delivery schedules to align with our reduced order requirements.

To finish with CapEx we are planning to reduce our spending to about $315 million this year that's down 42% from last year's $542 million again consistent with our reduced capacity requirements.

In summary, we recognized our planning for reduced demand in our commercial businesses and we are taking appropriate actions to optimize our performance due to this down cycle. And our defense operations where demand remained strong, we're committed to efficiently building the foundation for growth as in our plan over the next few years.

With that I will turn it over to, Ted

Ted French

Thank you, Scott. Good morning everyone. Let me start with the discussion of the TFC exit strategy and then our overall liquidity plan. The exit strategy consists of two elements, liquidation of TFC's non-captive finance receivables and the sale of assets. We've developed comprehensive bottoms up account-by-account liquidation plan that targets a 2009 receivables reduction of $2.6 billion.

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

We are monitoring progress against weekly targets to ensure that we need our reduction goal.

Despite a minimum 90 day window from most contract terminations to become effective we do expect to achieve over $400 million in liquidations in Q1. We're only a few weeks into our plan, but we are having early success and tracking slightly ahead of target. As we passed the minimum notification period in the second quarter we expect a significant acceleration and liquidation has been.

In some cases we're able to assist groups of our customers and locating alternative financing. For example late last year we completed a customer transfer agreement with another inventory financing company.

Under the agreement this company will assume new funding requirements for approval of our consumer electronics and appliance for planned customers. We are pursuing similar transfer arrangements for as much of our distribution finance portfolio as possible.

The second part of our exit strategy involved sales of TFC assets, and in that regard we've designated $2.9 billion of our managed receivables as now being held for sales.

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

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

First, between Textron and TFC we continue to have daily access to the commercial paper markets, although, some days have been more difficult. TFC is using small amounts of its bank lines to supplement its CP program and currently has about $200 million outstanding. But clearly our committed credit lines are working just as they were designed to work.

By the way we typically see our heaviest issuance of commercial paper in the first quarter. As our manufacturing business is usually experienced a decrease in sequential deliveries.

Out of our $2.6 billion and expected '09 liquidations. Between $1.5 billion and $2 billion of that we will go to payoff bond holders of our securitization vehicles. That leaves an available balance of between $600 million and $1.1 billion for TFC to meet $1.6 billion of term maturities in 2009.

Our plan to address that short fall is as follows. We are pursuing a wide variety of sources to not only cover the '09 maturities but also to reduce our overall reliance on commercial paper. So we are driving to bring the balance down.

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

We're also expecting to generate about $400 million in cash from our manufacturing businesses after CapEx, and as Scott discussed, we're looking to bolster that through various operating initiatives.

We continue to closely monitor the corporate bond markets and as soon as practical, we'll access term capital to pay down commercial paper.

And finally, as the ultimate backstop, we have our $3 billion in committed credit facilities. So, we have a comprehensive plan by which we expect to meet our funding needs.

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

Looking at what drove the year-over-year changes, income from continuing operations, excluding special charges of $0.40, was down $0.57 from a year ago. $0.46 of the decline came from TFC, the details of which I'll go through shortly. On the manufacturing side, higher pricing of about 3% added $0.26 a share. However, this was offset by about 3.7% inflation, which cost about $0.30 a share.

Cost performance benefited the quarter by $0.12 and taxes provided a positive dine, primarily as a result of the foreign tax credit benefit from the repatriation of foreign cash during the quarter, which we discussed in our December 22 release.

Lower volume and unfavorable mix cost us $0.16, headwinds from engineering research, development and depreciation cost $0.12, and a variety of miscellaneous items were a penny.

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

Despite the late year fall-off in demand, the fourth quarter was a capstone or a record year at Cessna in terms of jets delivered and revenue and profit generated. However, Cessna's fourth quarter revenues and segment profit did decrease $64 million and $90 million respectively.

Revenues were down and in spite of higher jet units that primarily reflected a higher mix of Mustangs. This was partially offset by higher pricing and a benefit from the Colombia product line acquisition.

Segment profit decreased due to used aircraft and mark-to-market adjustments. The impact from lower revenue mix and higher product development and overhead cost. Cessna's backlog at the end of the fourth quarter was $14.5 billion, up $1.9 billion from the end of last year.

Looking to '09, based on revenues of about $4.6 billion, which would be associated with 375 jets, we estimate that we would be able to give full year margins in the 10% to 12% range.

However, the first quarter is going to be our most difficult at Cessna, as we anticipate less than 80 deliveries due to the inability to efficiently replace lost deliveries that affected the quarter. They should stabilize somewhat in the second quarter as we rearrange customer slots and cost savings from our downsizing action take hold.

Moving to Bell now, revenues and profits increased $98 million and $40 million in the fourth quarter. The increase in revenues was due to higher volume and pricing. The increase volume relates to higher V-22 and spares and service revenues, partially offset by a lower commercial helicopter mix and the absence of ARH program revenue.

Segment profit increased due to favorable cost performance, higher volume and pricing in excess of inflation, partially offset by unfavorable mix. The cost performance reflects the non-recurrence of program charges recorded in the fourth quarter of '07, in both military and commercial programs and higher royalty income this quarter.

Bell backlog at the end of Q4 was $6.2 billion, up $2.4 billion from the end of last year. Looking to '09, we believe revenues and segment profits would be approximately flat with 2008.

Sales for the year reflect a decrease in military revenue, primarily due to the absence of ARH development activities, lower V-22 spares and support and the temporary reduction in H-1 production which will ramp backup starting in 2010. Again, the first quarter is our lowest delivery quarter and we expect first quarter revenues and profits to be about the same as last year's first quarter.

Now looking at Textron Systems, revenues and segment profit increased to $180 million and $37 million respectively. The increase in revenues is due to the benefit of our acquired AAI business and higher volume for ASV spares and logistics, intelligent battle field systems and Sensor Fuzed Weapon. Segment profit increased due to the favorable cost performance, higher volume and the benefit from the acquisition.

Backlog at systems ended the year at $2.5 billion compared to $2.4 billion at the end of last year. This backlog should help drive an increase in revenues in '09 to just under $2.3 billion. We expect full year profits to be slightly down as last year's favorable cost performance on a number of completed government contracts gets reflected in this years new lot pricing. And they’ll have a fairly even distribution of our earnings across the borders.

Next we have Industrial where revenues and segment profit decreased to $135 million and $59 million respectively. Revenues decreased due to lower volumes and an unfavorable foreign exchange impact, partially offset by higher pricing and the favorable impact of the Paladin Tools acquisition at Greenlee.

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

As Louis, mentioned we expect volumes in revenues will likely be down 20% to 25% this year with the largest decline occurring in Q1 at these volumes and with our cost actions we expect to achieve slightly positive full year segment profits in 2009 with a first quarter loss approximately equal to the fourth quarter of '08.

Now finishing with finance, credit performance continued to deteriorate with 60 day delinquencies increasing to 2.59% of finance receivables up from 1.06% at the end of the third quarter. Non-performing assets increased to 4.72% from the third quarter level of 2.67.

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

Segment profit decreased to $171 million as a result of increased loan loss provisions, higher borrowing cost and lower securitization gains again partly offset by the interest rate force.

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

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

After $33 million in charge-off during the quarter our loan loss reserves rose to a $191 million or 2.8% of our current $6.9 billion worth of owned receivables held for investment. Managed receivables ended the year at $10.8 billion versus $11.4 billion at the end of the third quarter.

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

In that context we expect the TFC segment loss in the range of a $150 million to a $175 million this year. We expect to make additional capital contributions to TFC this year but we also plan to have TFC dividend cash back as we liquidate the portfolio.

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

In conclusion we are projecting full year earnings across year from continuing operations and before special items. We'll be in the range of a $1 to a $1.50 given first quarter volume considerations and the fact that many of our cost initiatives do not take full effect until the second quarter.

We're expecting only modest profits before restructuring charges in Q1. We're managing through this global economic reality with swiftness and intensity, bringing into bare the resources in the enterprise, the strength of our diverse business base and our commitment to take a hard line and stream lining operations.

We look forward to keeping you informed about our progress as we move though the year and with that operator we are ready to open up to call for questions.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions) And at this time we have a question from Nicole Parent, Credit Suisse. Please go ahead.

Nicole Parent – Credit Suisse

Good morning.

Lewis Campbell

Hey Nicole.

Nicole Parent – Credit Suisse

I guess first could we may be get a sense when we go back to the August, obviously the financial landscape has deteriorated rapidly for everybody but I guess in the context of the finance presentation that we got back in August, when we talked about the portfolio quality improving and kind of there was no way we were going to get back to the losses that we had, in the '02, '03 timeframe. At the end of the fourth quarter it looks like we wildly exceeded the charge-off ratio TMPA. When you think about passage for 2009 how much conservative put in to that forecast.

Lewis Campbell

Well, obviously Nicole the world did change in the fourth quarter in a big way for us and, we've taken substantial reserves in the quarter higher than what we had previously expected both as a combination of the changes in the world and the impact that its had on our borrowers and their customers. But also in the context of the fact that you know our business model largely blew up as a result of all of the changes that have happened with the financial crisis.

And we have changed strategies to move ourselves back to captive position. And we believe that, that will result in further losses higher levels of losses because of that. I think we have been reasonable and may be reasonably conservative. We have put reserves up in Q4 at levels that are as I said, depending on business two to four times higher than what we incurred in the prior downturn. We also have significantly raised charge-off expectations in our numbers for next year. As well as assumptions that we'll have to continue to put up significant reserves.

I just don't know where the economy is going to go from this point I think we're being conservative but time will tell.

Nicole Parent – Credit Suisse

Fair enough and just one follow-up on the cancellations and deferrals you are seeing 20% delivery forecast declined for 2009. Seems reasonable may be any read through that you can make on who is canceling who is deferring or is it. All customers all industry across the board?

Scott Donnelly

Well, Nicole it seems to be across the board fairly, broadly mixed I mean, we still have a good mix of international. We haven't really seen any single pocket of cancellations that makes you think, there is some kind of a very serious targeted problem for us, and is basically what President Obama and the rest of the world is trying to figure out. How do you stimulate the economy and up for the people who are out and borrowing money at rates taken before to buy business jets and other items.

So no I would say nothing noteworthy.

Nicole Parent – Credit Suisse

Thank you.

Operator

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

Jeffrey Sprague – Citi Investment Research

Thank you. Just on TFC, Ted would you actually envision continuing to build your provision balance over the course of '09, you provision well in excess of charge-offs here in the quarter. But should we expect the balance to continue to increase over the course of '09?

Ted French

No, Jeff. I think we have substantial charge-offs that we expect in '09. We will continue to put up additional provisions as we go to the year but we expect charge-offs will be higher than provision. So that balance will come down as will the overall asset balance come down, we're targeting to be down to just over $8.5 billion of receivables by the end of the year.

Scott Donnelly

Okay. Jeff, the mid point of our range assumes a mid point of charge-offs somewhere in the 3.5% area so that would not lead to an increase in reserves.

Lewis Campbell

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

Jeffrey Sprague – Citi Investment Research

And, Ted you kind of walked us through the liquidity with some of the pluses and minuses we needed to think about but just to be specific, where are the CP balances today and what are the timing of the '09 term maturities?

Ted French

CP balances today are around $1.7 billion somewhere in that neighborhood I don't have it this morning.

Lewis Campbell

Just below, 1.8 yesterday.

Ted French

Just below 1.8 yesterday, the timing of maturities are pretty much backend loaded the TFC maturities are, in the $200 million to $300 million range for the first three quarters of the year. And then about $800 million in Q4 for a total 1.50 for the full year.

Jeffrey Sprague – Citi Investment Research

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

Lewis Campbell

It will be a follow-up Jeff.

Jeffrey Sprague – Citi Investment Research

I know, but that’s the world we live in, isn’t it?

Lewis Campbell

Yeah.

Jeffrey Sprague – Citi Investment Research

Nicole asked the question a little bit as related to Cessna, but what is the '09 production implied for Mustang and is there any particular distinction between our Mustang customers are acting and others certainly a couple of months they were looking more resilient and I wonder if that’s changed?

Scott Donnelly

No, Jeff, I would say that, that still where we are. The number of enquires cancellation delays as we have gone through the Mustang backlog remains very firm. We have taken it down modestly from our original '09 plans but the reductions there are not as significant to some of the other larger effect.

Lewis Campbell

We are looking at about hundred first.

Jeffrey Sprague – Citi Investment Research

Thanks a lot.

Operator

And next we have a question from Cai von Rumohr, Cowen & Company. Please go ahead.

Cai von Rumohr – Cowen & Company

Okay, so you said a 130 Mustangs which would imply, I see you are up 30% there, is that correct? So, all of the decline is coming in the good stuff where you make a good margins?

Scott Donnelly

That’s correct. The Mustang is still and is still under ramp up.

Cai von Rumohr – Cowen & Company

Okay. And could you give us some more color on which of the models that are having the greatest difficulty and why the first quarter from the kind of a disappointing fourth quarter is going to be 80? Is that sort of delays or is it execution. I guess, I didn’t quite understand why the first quarter was going to be quite so low?

Lewis Campbell

Scott.

Scott Donnelly

Well it’s primarily a factor of the delays and cancellations that we saw when we went through the fourth quarter last year and went through and talked to all of our customers to backlog. So, those 80 units that we have forecast for Q1 delivery are all firm sold aircraft.

Lewis Campbell

I think it’s the speed in which the cancellation process and the late process happened in Q4, a lot of newer aircraft got cancelled and we are in a process right now of trying to reset the line, move customer slots around, move some customers up but there is not enough time to make a lot of that happen in Q1.

Cai von Rumohr – Cowen & Company

So, do we assume that you took about 30-35 Mustangs in the first quarter.

Scott Donnelly

Yes, it should be about that. Yeah it’s a linear run rate and the run rate that we had going out of the year supported the original plan to be able to do about 150 a year. So, you would expect that Mustang delivered pretty lengthier linear across the year.

Cai von Rumohr – Cowen & Company

Thank you very much gentlemen.

Scott Donnelly

Okay.

Operator

And next we have a question from Noel Poponac, Goldman Sachs. Please go ahead.

Noel Poponac – Goldman Sachs

Hi, good morning.

Lewis Campbell

Hello.

Noel Poponac – Goldman Sachs

You talked about the CP being available but more difficult on some days. Can you give us kind of what the actual cost is on average and comment on whether not the recent rating agency downgrades have impacted your excess at all.

Ted French

I’ll start with the first, we have average 4.5% but that’s very, we had got very expensive late December, we came back after the 1st of January, the cost plunged quite a bit and then I would say that as our ratings kind of reset here over the last few weeks, that have had some impact both on cost and quantity in the short-terms hopefully that’s all settling back down now and we will have better position going forward.

Lewis Campbell

And values by maturities, the overnight obviously is less expensively and that’s like in the 3.5% range and stuff that we are getting out in the March is more little bit over a 5.5% range.

Noel Poponac – Goldman Sachs

That makes sense. Quick follow-up the Textron System’s guidance, it looks like it implies that the margin percentage is down about 100 basis points year-over-year even though your volume is increasing in the upper single digits. Can you just walk us through the puts and takes on that?

Ted French

I think the big driver there is kind of a problem of great performance. During the course of 2008 we consistently over performed on a lot of our government contracts and continued to pick up big games on contract close outs and obviously as you see your actual performance and we negotiate new contracts which happens on pretty much on annual basis, with a lot of these businesses; you got to recent your margins back down into the more acceptable level for our customers. So, we really outperformed in '08 we expect to have good solid performance at traditional margins in '09 but just not repeating the over performance we had in '08.

Lewis Campbell

Yes, one comment I would add there just quickly is that systems for, say a decade has been probably our most aggressive in employing lean tactics and just creating a improvement mentality and improvement mentality for the entire workforce, right from the engineers to the factory floor. And we have historically quoted fixed price contracts which can be risky in our case they have never been. And then we have historically found ways to beat those prices over the contract periods. So, you actually incur more profits than you estimated and that’s what they have talked about, so I would expect that what you are looking at going forward to be conservative not aggressive

Noel Poponac – Goldman Sachs

Okay. Thanks a lot.

Lewis Campbell

Yes.

Operator

And next we have a question from David Strauss with UBS. Please go ahead.

David Strauss – UBS

Good morning. Thank you.

Lewis Campbell

Hi, David.

David Strauss – UBS

The 375 delivered that you are forecasting for assessment, can you just give us an idea of coverage or you completely sold out on those given the deferrals, or do you still have it's tough to take some more it's actually hit that kind of number?

Scott Donnelly

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

David Strauss – UBS

80%.

Scott Donnelly

80%, little above 80%.

David Strauss – UBS

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

Scott Donnelly

It varies a quite a bit, but I mean suffice obviously most of the folks that are '09, we are talking about deferrals that one we pushed '10 and they are looking at the economy, trying to understand where they will be. So I think that's sort of fluid when you look at deferral you negotiate with customers and we will continue to work with them and until they want commit from date.

David Strauss – UBS

Okay. And the interest expense forecast for the year, $180 million can you be maybe give us some color on what exactly is baked into that?

Ted French

We are assuming and that number that we will term out a sale, one of our strategies for taking the CP balance down so we have less reliance on that market will be to term out that and we have assumed that we will term it out at some fairly high prices. It maybe a conservative number but we wanted to have covered what might happen.

David Strauss – UBS

Okay. Thanks guys.

Operator

And next we have question from Steve Tusa with JP Morgan. Please go ahead.

Steve Tusa – JP Morgan

Hi, good morning.

Lewis Campbell

Hi, Steve.

Steve Tusa – JP Morgan

I have a quick question for you. Couple of weeks ago GE, Tyco couple of others took advantage of the small window in the bond market. Were you guys around for that, will you exploring doing a deal with that stage of the game, can you talk about whether you explored doing something in the market at that stage of the game? And I am also just curious everybody kind of beat up on GE when they look at their finance business and in August they did an equity offering and it's seems like they been actually ahead of the curve relative to you guys as far as taking down their exposure in financial service and I haven’t seen any management changes here. So, I am just curious as to why we are continually, strategically behind the curve here, whether this is the function of you know what unprecedented environment, if you just comment on both of those items I appreciate it. Thank you.

Lewis Campbell

I don’t think we are behind the curve, I think we had a strategy to continue to refine and focus this business when the world was going through a more normal looking recession, but when we went into the September, October timeframe and had Lehman Brothers and other things happened it become apparent at that point in time that whole model or wholesale borrowing or kind of business was broken.

And we pretty quickly made a decision that we need to take more aggressive action to do that and obviously we have been working that for lot of that quarter and so we came public with it on the 22nd of December. So, I don’t think we are behind the curve. Obviously, if we knew what we know today we would have starting doing this a long time ago. As to the capital markets I think you can safely assume that we are valuating a whole range of and have designed a whole range of possible directions that we have taken and when we think the markets are amenable to doing so we are ready to strike on moment to notice.

Steve Tusa – JP Morgan

Thanks.

Operator

And next we have a question from Matt Vitoriosa (ph) from Barclays Capital. Please go ahead.

[Matt Vitoriosa] – Barclays Capital

Good morning. I want to just get a little more clarity on liquidity for Textron Inc. specifically. And then more specifically looking at Q1, so if we take into account that the way you are talking about Q1 being probably the toughest quarter, on the Cessna side. So, I would think there is going to be some build up of inventory there which quickly to our cash outflow or free cash flow negative for Q1. So, if we think about the possibility of free cash flow negative for Q1 versus, having new contributive cash to Textron Finance, just could you lay out what your liquidity at Textron Inc is, which would tell us what your ability in Q1 to support Textron Finance?

Lewis Campbell

Yes. First of all, supporting Textron Finance largely happened in Q4, with the capital contribution to be made there. We will start during the course of '09, bringing some net balance back. We will have to make small capital contribution at the end of each quarter, but we will also be taking dividends back out of TFC as we liquidate the portfolio. So, it's our expectation that we will have a net flow back to Textron in '09. It will all depend on how well we execute the liquidation but based on our rundown $2.6 billion somewhere north of $50 million of net should back up to Textron if we are able to execute on any asset sales which we are working hard on during the course of the year. That number could be bigger. So, we don’t expect a further slowdown. In fact with the 625 that went down, TFC's leverage are down to just over five to one. So, there is a lot of room to bring some of that money back up.

We do have, always, first quarter is a challenging quarter, but incorporating all of our business plans for the operation to business, obviously, we are shutting up inventory flowing into the house on the manufacturing side as best we can. We think, we can still operate in Q1, our CP balances under the $2 billion, $2.1 billion kind of range. So, we are all comfortable with our credit lines.

[Matt Vitoriosa] – Barclays Capital

What's today if you look at the credit line at Textron Inc.? It's, I think, the $1.25 billion credit line. What's the availability considering the CP balances and other borrowers?

Ted French

I think the piece of CP outstanding at Textron is 7 something. I don’t know the exact number today. 700 or 800, somewhere in that range.

[Matt Vitoriosa] – Barclays Capital

Okay. Alright. Thank you guys.

Lewis Campbell

And again, though, just to make follow-up on that point, the entire $3 billion of our credit lines are available to TFC. There is a sub limit for Textron.

[Matt Vitoriosa] – Barclays Capital

Okay, thanks.

Operator

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

Steve Searl – Conning Asset Management

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

Ted French

About 7 billion.

Steve Searl – Conning Asset Management

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

Ted French

The pension plan is most of pretty good last year. We did better than many but were down 20% or so. Actually the hit to equity is about $800 million, little under $800 million. EPS wise and yes I know others will be interested in that, I think we have a headwind of somewhere around $0.04 to $0.05 a share or higher pension cost in 2009 versus 2008.

And we have fairly minimal funding requirements in '09. We have our normal ongoing. We have a little bit of a DC plan that we pay cash into, we have some foreign plans that we put 15 million to 20 million of cash a year-end that’s normal an ongoing. The Master Trust which is where the largest portion of pension assets are and where the decline occurred will put less than $10 million in '09. Depending on how the stock market performance in '09 we could have requirements to put significantly more cash into those plans by the September 2010 timeframe.

Steve Searl – Conning Asset Management

Thank you.

Operator

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

Mike Meek – Atlantic Investments

Hi, just want to make sure I understand your guidance at Cessna assumption.

Lewis Campbell

Say that again, I am sorry, you broke-up.

Mike Meek – Atlantic Investments

Yeah sorry, I just ant to make sure I understand your guys Cessna assumptions. You have got 80% of the projected deliveries in hand, so the assumption is, you will be able to move customers who are further out in the backlog up to take those slots.

Lewis Campbell

Yeah there will be a combination, so if you look at the number of aircraft that are unsold in terms of '09 delivery slot, some of those quite possibly will come from customers that are in at later delivery dates and fair number right now or potentially new customers.

Mike Meek – Atlantic Investments

Okay, great.

Ted French

We’re looking about 30 moves up from 2010 and we actually have a pretty good order forecast for 2009.

Lewis Campbell

But Mike, clearly that’s a risk in our plan which is why we have such a wide range of guidance, but we have gone through this with our sales force and based on what they see out there in the marketplace and we can't say that churn in the backlog that we have, that they feel we should be confident that they can fill those space, is something that we are going to have to track very closely and react to as we go through the year.

Mike Meek – Atlantic Investments

Great, thank you.

Operator

And next we have a follow-up from Davis Straus, UBS please go ahead.

David Strauss – UBS

Just to clarify that 2.6 billion decline in receivables that you are talking about this year. Is that just all run off or is that any sales in there.

Ted French

The 2.6 has a little under 200 of sales that are kind of right in our scope. But the vast majority of that is, yes all just run off.

David Strauss – UBS

Okay thanks.

Operator

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

Noel Poponac – Goldman Sachs

Hi yes, when you talk about keeping your eye on the term market. Do you think you are more likely to issue out of the parent or the FINCO?

Scott Donnelly

More likely to issue out of the parent.

Lewis Campbell

Yeah, it's part of the stagger parent first and then possible follow the BFC.

Noel Poponac – Goldman Sachs

Okay and then you also mentioned looking at further asset sales outside of the FINCO. Can you talk about maybe what some of the assets you are looking at as candidates are?

Lewis Campbell

No. We never do that and we always get that question in some form or the other. And its just I know you would love to have an answer. And obviously we did make a statement, that said we have, we are setting that and pursuing that. But we don’t really announce things until they are done.

Scott Donnelly

It's not in anybody’s interest to do that so, you can appreciate that.

Lewis Campbell

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

Noel Poponac – Goldman Sachs

Okay. Fair enough, thanks a lot.

Lewis Campbell

Yeah.

Operator

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

Nick Riley – Goldman Sachs

Hi guys, this is actually Nick Riley for Brian. Just a technical question. You mentioned earlier you had about 200 million drawn on your revolvers, I was just wondering where that 200 million was drawn from, is it Textron Fin or Inc.

Scott Donnelly

Yeah it at the financial company.

Nick Riley – Goldman Sachs

Thank you.

Doug Wilburne

Alright Glenn, if we have no other calls we will conclude today’s call. And thank everybody very much for joining us.

Lewis Campbell

Thank you for joining us. Have a good day.

Operator

And Ladies and gentlemen this conference will be available for replay after 11 am today through midnight April 28, 2009. You may access the AT&T Teleconference replay system at any time by dialing 320-365-3844 and entering the access code 896349. That number again is 320-365-3844, access code 896349. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Textron, Inc., Q4 2008 Earnings Call Transcript
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