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Executives

Doug Wilburne – VP, IR

Lewis Campbell – Chairman and CEO

Scott Donnelly – President and COO

Tom Cullen – CFO, Textron Financial

Analysts

David Strauss – UBS

Cai von Rumohr – Cowen & Company

Ron Epstein – Banc of America

Steve Tusa – JP Morgan

Noel Poponac – Goldman Sachs

Heidi Wood – Morgan Stanley

Robert Stallard – Macquarie

Textron Inc. (TXT) Q1 2009 Earnings Call Transcript April 29, 2009 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Textron earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session. (Operator instructions) As a reminder today’s call is being recorded.

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

Doug Wilburne

Thanks Kent, and good morning, everyone. Before we begin, I would like to mention our discussion today will include remarks about future estimates and expectations. These forward-looking statements are subject to various risk factors which are detailed in our SEC fillings and also in today's press release. You can also find a slide deck containing key data items for today's call in the Investor Relations section of our website. And we will be specifically referring to many of these charts during today's discussion.

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

We will begin our call today, with a brief discussion of first quarter results, then Lewis Campbell, Textron's Chairman and CEO will follow with comments on our liquidity plan, the excellent progress we made in the first quarter and how today's public offerings support that plan. After that Scott Donnelly, Textron's President and Chief Operating Officer will review key operating items in each of our segments. We will wrap up with additional analysis of our first quarter results and a few comments about our outlook and we also have Dick Yates, our Acting Chief Financial Officer present to participate in Q&A as needed.

Moving now to first quarter results. Revenues in the quarter were $2.5 billion down 24%. GAAP earnings were $0.35 per share, and adjusted earnings from continuing operations excluding restructuring charges were $0.26 per share compared to $0.88 a year ago. Our results included a $0.13 per share after-tax gain from the sale of CESCOM, our aircraft tracking service at Cessna. That’s our air company and it's tracking service at Cessna.

On a pre-tax basis, the gain was $50 million and was included in Cessna's first quarter segment profit of $90 million. On the cash front, we have adjusted our definition of free cash flow to enable a better understanding of cash generated by the manufacturing group separately from the cash generation of TFC. By the way Textron Corporate cash flows are included in the manufacturing group.

Looking at page 3 then of our key data schedules titled manufacturing group cash flow, you see the manufacturing operations used $286 million in cash during the first quarter. It's important to note that this was favorable to plan as cost savings and cash conversion actions were taking have already began to take gain traction. Nonetheless, the manufacturing cash usage reflected a significant build of inventory at Cessna, as we delivered 69 jets versus our plan of about 80. As well as significant seasonal payments made across the company during the quarter, including about a $100 million in cash to settle our 2008 stock-based compensation hedge.

Also keep in mind that the inventory build at Cessna which was about $250 million in the quarter should begin to reverse itself during the second half of the year as our production flows reach their new target levels. Scott will speak in more detail about the actions we have taken at Cessna to address the inventory build as it's been a key focus area for us.

And one last item regarding accounting convention at TFC. We have decided to report non-accrual finance receivables separately from hard assets we own that were received in settlement of troubled finance receivables. This separate reporting reflects the increasing proportion of recovered assets and the difference in characteristics between owning part assets versus finance receivables.

With that I will turn the call over to Lewis.

Lewis Campbell

Okay, thank you, Doug and good morning everyone. The industrial and financial sectors of the economy continued to be a challenge for us this quarter. And as a result most of the company's commercial markets experienced further softening and TFC credit quality weakened. On the other hand we had continued solid results at Bell and Textron Systems. And importantly we had strong execution on our liquidity plan.

Specifically, we liquidated $926 million of managed receivables at TFC about twice of what our planned calls were. As you know we also completed the sale of HR Textron for net cash proceeds of about $275 million. And we took steps to right size our manufacturing businesses and improve working capital efficiency.

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

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

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

Okay, let's discuss our overall liquidity plan starting with a review of the planned objectives which we have listed on page 4 in our schedules. And it is going to be important to follow these schedules especially for page 4 and 5.

Okay, we intend to complete our plan without selling any of our core assets including the captive finance business. In addition we looked to maintain a minimum cash balance of at least $1 billion to ensure operating flexibility. Over time, we look to restore efficient access to the unsecured debt markets. And finally, we are targeting to accumulate sufficient cash to pay off our bank loans and to be in a position to re negotiate those lines well in advance of the April 2012 maturity.

Now to reach our planned objectives we have many different initiatives most of which were already executing. And there are others which are currently being pursued.

Well that as a backdrop. Let's look at our updated base liquidity plan which is shown on page 5 of the schedule. So, I am going to spend some time on this. So turn to page 5.

We have changed the format of the schedule somewhat from what you have seen previously. We started with a commercial paper balance we paid that off now. So we now show a starting unit as cash on the balance sheet show at the top of the page. Additionally, our forecast now reflects first quarter achievements as well as refined estimates of future cash flows. So, let me first look at the column for the first quarter.

We begin the year with combined cash balance of $547 million shown at the top there. To that we added our managed receivables reduction of $925 million then we subtract the $286 million use of cash for manufacturing operations.

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

Any of you that saw our previous chart now that the dent payments were slightly more than what was originally and contractually required as we made some early retirements of debt. Continuing there is the $376 million in gross cash from the HRT sale. Keeping in mind this transaction should net about $275 million after we pay cash taxes later in the year you can see that on column 2 under the 2009 full-year.

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

Looking now to full-year. We are increasing our '09 forecast of TFC liquidations from our original $2.6 billion to $3.1 billion. And we are doing this while maintaining our original 2010 plan of $1.9 billion of liquidations. We have total debt payments of about $1.6 billion for bond owners and $2.3 billion for securitization investments. With our projection of cash for manufacturing still at $400 million we are now estimating an ending '09 cash balance of about $1.3 billion.

And moving to 2010, our base plan now shows ending cash balance of about $700 million up from the previous plan of about $225 million. So, obviously we are pleased with our progress so far.

And today as we announced last night we are taking advantage of favorable capital market conditions to raise capital to an offering of convertible senior notes and common stock. Net proceeds are expected to be approximately $470 million net of fees and those of course, depend on marketing conditions and our stock price. This will significantly increase our cash liquidity bringing us to an end of 2010 cash balance of nearly $1.2 billion almost a $1 billion improvement from our original forecast you can see that at the very bottom of page.

The offering also has a benefit of strengthening and extending the maturity of our capital base. Operationally, we are focused on managing for a slower economy. For example, we expect the business jet order environment will take considerable time to recover. Accordingly, we have regionally reached the very difficult decision to suspend the Citation Columbus program. We are obviously disappointed that we will not be bringing this product to market in the timeframe originally planned, however, at this point of cycle it's more important for us to invest in our core, light and mid-sized product lines.

On the other hand as I said earlier we are fortunate to have two very well positioned businesses, Bell and Textron Systems. Their solid growth outlooks are evident when looking at the 2010 DoD budget outlined recently released. And longer term with a ramp up of the V-22, the H-1, the Bell Commercial 429, Unmanned Aircraft Systems and host of other programs we expect solid growth from these two businesses for years to come. To wrap up our liquidity plan is working and we have been able to demonstrate progress on every front.

With today's actions we are significantly increasing our flexibility to meet our funding needs under a variety of scenarios. Clearly, cash is the key metric to watch this year. On the other hand '09 earnings will depend in large measure on the economy and to what extent business jet demand recovers. In any event our earnings performance is going to jet [ph] this year. As a result we have adjusted our outlook to reflect this challenge. We now estimate earnings from continuing operations before special charges will be in a range of $0.45 to $0.75 per share.

I am going to close on one final point. While we are focused on cash we remained committed to improving our core manufacturing capabilities and efficiencies and continuing to invest prudently in new products across the businesses, so that when we emerge from this economy we will re-poise to resume growth and to generate very significant shareholder value. I look forward to keeping you informed and updated on our progress, and with that I will turn it over to Scott. Scott?

Scott Donnelly

Thank you, Lewis. Good morning, everyone. I would like to start a discussion this morning on manufacturing side of the business where our focus remained on driving productivity, improving our working capital efficiency and generating cash from these businesses. We achieved and had plan cash flow position in the first quarter as we saw early results from our efforts to reduce our inventories and conserve cash. Our only inventory growth which we will talk about later is in Cessna.

Perfect demonstration this was evident our industrial businesses were despite significant volume declines of 35% led by nearly 40% decrease in Caltex, resulting from the reduction in global auto production reductions. However, we were able to offset much of the profit impact and post a solid improvement in sequential profitability and more importantly industrial posted a sequential improvement in cash flow as well.

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

Textron Systems, we think about the Textron System's business while revenues were down on a year-over-year basis primarily reflecting slight reductions in unmanned aircraft systems and military training simulation systems as well as Lycoming commercial engine volumes. We do continue to see strong demand for this products. It's important to point out that, although, we had a lower comparison in the first quarter we will ship more UAS in 2009 than we did in 2008.

The comparison only reflects a slippage of units from 2007 to 2008 in the first quarter of last year. So, despite this we still see very strong demand for UAS, our armored security vehicles and our Textron defense products for both US government as well as growing international opportunities. And so we had a very strong quarter, it's clearly our strongest business in the quarter where revenues grew approximately 29% and cash flow also solidly positive.

The increased revenue reflect a strong demand in the military side as we delivered five V-22 versus four last year and nine Kiowa Warrior retrofits under the safety enhancement program. We also had a higher military spares in H-1 program support revenues.

On the commercial side of Bell, deliveries were also up by 15 as we delivered 37 helicopters. This included three 407s that we delivered to the US Army for prototyping ultimate delivery to the Iraqis. We recently signed the contract for additional 24 units to be delivered in 2010 and 2011 with an option for additional 26, 407 beyond that.

Commercial spares and service revenues were also up in the quarter by 8% and finally our commercial (inaudible) made a significant contribution of revenues in the quarter as well. While we have seen some demand weakness on the commercial side we been able to offset this with customers moving forward in our backlog, new orders and paramilitary demand. As a result we remain on-track to deliver about 180 commercial aircrafts this year.

Importantly, the long-term outlook at Bell remains solid, especially in US government, homeland security and paramilitary segments. At Cessna we continue to experience weak order demand. We are taking all the right actions to maximize our cash generation over the next two years while continue to support an appropriate amount of product development as Lewis referred to.

In the quarter, we recorded 92 net cancellations about half of those were pre-deliveries in 2009 the balance being out to 2010/2011. The customers agreed to move forward from their related over slots, plus orders in the quarter and the 69 aircraft which we did deliver in the first quarter, we have for the total year 295 sold positions in March.

Therefore, as we did announce last month we are further reducing our production plans and currently held production target to build about 325 jets this year. Our production goal is to minimize white tails at the end of the year, while protecting our sold slots new order book. And please keep in mind that any white tails or finished goods inventory that we do have at the end of 2009 obviously we would expect to sell in the early part of 2010.

With respect to 2009 deliveries it certainly it’s very difficult in this market to forecast accurately. However, we do analyze our backlog and identify those risks and look at remaining orders on a very regular basis. We continue to pursue opportunities to move additional customers forward in our backlog and of course, our sales teams are working on prospects for new orders. Given this environment we believe we will deliver somewhere in the 209 to 300 aircraft this year.

Importantly, from a cash flow perspective we are working very aggressively on our working capital. We are starting to see reductions in process but continue to see growth in the first and second quarter in terms of finished goods as a result of aircraft royalty [ph] in the production schedule. However, we are confident that in the third and fourth quarter those aircrafts will turn to cash and significantly reduce our inventories.

To wrap up, on Cessna we are monitoring our ordering and cancellation activity on a daily basis, we have extensive programs underway to continue to restructure and reside the program to meet appropriate demand and we do expect to generate maximum cash this year and next.

Finally, let's cover TFC, where we did a meaningful progress for liquidation of our non-cap to finance receivables. Importantly, we took the opportunity to work with many of our lower credits early-on as we had a contractual right to do so in the case where many customers were in technical default. In other words, the reduction was not accomplished primarily from our better credits within the portfolio, but we reduced a larger percentage of our weaker credits than our better credits, so we believe our progress is all the more meaningful.

In terms of where the run off occurs in portfolio the two large projections came in our distribution finance and asset based lending businesses as shown on page 6. And earlier this month we signed an agreement with P&C [ph] subsidiary that will allow them to originate a portion of our new E-Z-GO financing which in turn reduces our funding needs and improves our liquidity position.

(inaudible) about the quarter our first quarter reduction while these liquidations are certainly easier at the beginning of the process, historically liquidations are highest during the spring and summer months due to cyclical seasonal nature of many of the parts financed in our distribution finance business. This pattern may not necessarily be so strong in 2009 due to decline in balances but the seasonal trends are in our favor.

On a credit performance front results worsen in the quarter reflecting continued deterioration in the general economy to some extent our decision to liquidate. Non-accrual finance receivables, total receivables held for investment increased to 6.1% compared to 4.0% at the end of the year. Charge-offs did increase to 2.82% on an annualized basis compared to about 1% in 2008.

Deterioration of credit quality was most prevalent in the aircraft portfolio reflecting deterioration in used aircraft prices and related collateral values and our resort business where we saw increases in customer defaults and general lack of liquidity in that industry. If you look at page 7, you can see our new charge-offs projections for the full-year.

Now let's talk about liquidation progress and the impact it had on cash flow of TFC starting on page 8. The reduction in receivables of $926 million was offset by net increases in hard assets we now own such as our net decrease in total finance assets was $838 million in the quarter. I want to point out that the repossessed assets fall in two categories those that we will immediately seek to monetize the disposition such as RVs, boats and other consumer durables and in fact we have reached a point now where we certainly are repossessing every week but we are also selling assets out of that at a light rate every week. And assets we will operate and improve for future dispositions and better markets such as golf courses. While we are foreclosing those golf courses, we hire professional management who will continue to operate those forces until we can sell those assets at a reasonable price.

Actual cash generation from finance assets at discounts and other non-cash reductions in $779 million which represents cash conversion rate of about 93%.

To summarize, TFC were well ahead of schedule with our receivables reduction and cash generation and we are very please with our cash conversion rate. Looking forward as distribution finance portfolio notification window is now behind us, we expect to see second quarter liquidation will be about as large as those in the first quarter. By the way, with deceleration of liquidations, we expect an acceleration of losses as well. Therefore, we are now estimating finance segment losses ranging between $225 million and $250 million for the full-year, reflecting the impact of pass due liquidation and a tougher credit environment.

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

Before I conclude, let me take a moment of update you on our expanded restructuring program. With softening demand across our commercial businesses, we are now taking out additional capacity and overhead costs, most notably at Cessna. Correspondingly, we now estimate full-year restructuring charges will be approximately $75 million, up from our previous estimate of about $40 million. This brings our total headcount reduction to about 8,300 employees or about 20% of our global workforce.

To conclude, despite continuing headwinds, we believe first quarter results demonstrated that we are taking necessary actions and have the right programs in place, to maximize cash generations as we manage through this difficult times. And with the actions, we are now taking to streamline our cost. We do believe when economy recovers we will expect to see significant operating leverages as we ramp up commercial volumes.

Now, I will turn the call back to Doug.

Doug Wilburne

Thanks Scott. Going now back to our Q1 EPS from continuing operations excluding restructuring charges of $0.26, let's examine the major drivers that drove the $0.62 reduction from last year’s result. We are now on page nine of our schedules. As you would expect, the largest driver on the manufacturing side was lower volume which costs $0.67. We achieved positive pricing of 2.6% which added $0.16 per share. This was partially offset by $0.09 of inflation reflecting an inflation rate of 1.2%.

As we mentioned, the CESCOM sale was worth $0.13. Overall cost performance benefited the quarter by $0.10, taxes provided a positive $0.04 on a year-over-year basis. And this reflects a $0.09 in discrete items this year compared to $0.05 in discrete items in last years first quarter. Discreet items this year were primarily due to benefits from a tax election enabled by Canadian legislation enacted in the quarter and the recognition of previously unbenefited capital losses as a result of the CESCOM gain.

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

On the negative side of the ledger, used aircraft valuation adjustments at Cessna cost $0.03. This reflects 51 used aircraft on the balance sheet at the end of the quarter, with a carrying value of $247 million. Headwinds from engineering, research and development and depreciation cost $0.03 and the remaining $0.28 of the year-over-year decline came from TFC.

With respect to TFCs managed receivable portfolio, schedule 10 shows ending balances among the categories of captive held for investment and held for sale. The schedule reflects the fact that we move two portfolios worth about $650 million from held for sale to held for investment as we determine that this assets would generate greater value if we were to perceive orderly liquidation there instead of outright sale.

Turning now to our full year outlook, you can find forecast of segment results on page 11 of the schedules and page 12 provides forecast of corporate P&L items. You can see that our new outlook incorporates lower interest cost reflecting net savings from having drawn our bank lines and our outlook also includes a number of tax benefits expected to incur during the balance of the year.

We will wrap up by mentioning that our manufacturing free cash flow outlook of $400 million includes expected pension plan contributions this year of about $70 million and cash restructuring cost of about $100 million. With that, Kent we are pleased to take calls at this time.

Question-and-Answer Session

Operator

Great. Thank you very much. (Operator instructions) And our first question in this morning comes from the line of David Strauss with UBS, please go ahead.

David Strauss – UBS

Good morning, thank you.

Lewis Campbell

Good morning, David.

David Strauss – UBS

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

Tom Cullen

Hi, this is Tom Cullen. The total liquidation is going to about billion in the second quarter and it's reduced about $900 million in the third quarter than finally about $500 million in the fourth quarter come up to the roughly $3.1 billion for the full-year forecast.

Doug Wilburne

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

David Strauss – UBS

Great, thanks. Moving to Cessna, Lewis on the 290 to 300 revise production schedule, what portion of that you actually sold on and could you also just comment on how the service business is performing?

Lewis Campbell

Sure. Well we have sold possessions of 295, so right in the middle of that spread. So that's fact number one. Fact two, the service business is doing well. The only comment I have to make though is that we are doing well for the business we are getting. We still have strong service business but on the other hand with aircraft usage down you do have necessary less opportunities to do overall and repairs etcetera, so I think rolling will be up slightly this year versus last.

David Strauss – UBS

Okay. My last one on the $400 million forecast for manufacturing free cash flow. Does that assume the working capital is basically neutral for the full year?

Scott Donnelly

No, it doesn’t. It reflects significant reduction in working capital across the businesses. Most of which we are already starting to see. The one area where we have not yet seen in a reduction in working capital, Cessna and that’s really just a function of the fact that our production plan because it was so high coming into the year declines over the course of the year, so we have a fair bit of finished good inventory that’s been manufactured in Cessna in the first and second quarter. But that will play out as those aircraft were sold in third and fourth quarter, but in net we are seeing reductions and would expect to see further reductions in working capital over the course of the year. That are part of that $400 million plan.

Lewis Campbell

David it's a plus or minus is around $225 million in working capital fees.

David Strauss – UBS

Okay. Thanks guys.

Operator

Thank you. And our next question comes from the line of Cai von Rumohr with Cowen & Company. Please go ahead.

Cai von Rumohr – Cowen & Company

Yes, thank you very much. You mentioned suspending the Columbus program, what does that mean for R&D assessment, where was it in the first quarter and where should we expect it to be for the year?

Lewis Campbell

We are going to get that, we are out of schedule. We just got dig it up. Let me just give an overview on this of though and that is don’t write the Columbus of your radar screen because we have decided that we need to be careful with our R&D spending across a company and that program was going to take effect and be sold in the commerce about 2013 or so and until we know much more about the market it's going to be selling into we thought it was more prudent to suspend it and then to redirect all of our efforts to invest in our existing core products at Bell and Cessna. So that’s what we have done. Now I don’t know math, do you have math on the actual R&D spend.

Scott Donnelly

Yes, if you looked at 2009, we would have forecast the funding this year around 285 that’s ramping down obviously we were probably in the year now depending someone on Columbus and we will have some close our cost associated with it. We will taking that down to run-rate more or like $242 million a year.

Cai von Rumohr – Cowen & Company

And where was it in the first quarter?

Scott Donnelly

Hold down just a second while I have to get that for you.

Doug Wilburne

While he is digging that up, Cai can we talk about anything else, while we will address that.

Cai von Rumohr – Cowen & Company

I have, yes, a very quick question, in your 10-K you mention I think that you are going to have to make $370 million in pension contribution in 2010 and 11, what does that number look like today given you had more layoffs, any guidance on that or rough color?

Lewis Campbell

Yes, as we said in our prepare remarks, we are looking at about $70 million this year, next year it's drive to about $50 million to $55 million.

Cai von Rumohr – Cowen & Company

Yes.

Lewis Campbell

But we are still looking at that higher level going into 2011 and that’s all reflected in our liquidity outlook.

Tom Cullen

Cai, one of the things on our liquidity model is, it takes about two pages in order show all the line details that we show or for our own use. So some of these things are collapsed in other line item, so apologize for that.

Scott Donnelly

Hi Cai, its Scott, actual spending in the first quarter at Cessna was just a little over $82 million.

Cai von Rumohr – Cowen & Company

Excellent, thank you very much guys.

Scott Donnelly

Yes, okay.

Operator

Thanks. And we have a question from the line of Ron Epstein with Banc of America. Please go ahead.

Ron Epstein – Banc of America

Hi, good morning guys. How many white tails do you actually have right now and how big is your inventory of used Cessna jets that are on waiting to get sold?

Lewis Campbell

We said, we gave already numbers prepared remarks in terms of used and for market reasons we are not going to give you an exact white fair number that we’ve got now and obviously, we are building inventory in the first half and hopefully to see that flow through in sales in the second half.

Ron Epstein – Banc of America

Well, I think I am curious, how that happened? I thought, you guys had all process and managing the backlog, it control over your sales force. I mean how did we getting up in a situation when you do have any white tail.

Scott Donnelly

Well, I think if you are remember, going back to, middle to later part of last year, production forecast were one point around 500 jets and so you had a whole supply chain, suppliers, internal production, in terms of number of labor and production line rates were designed to do that. And so that team has been scaling back in terms of both our in-house workforce and going out working with our suppliers but the fact the matter is, the relatively long lead associated with a lot of that material.

So the most efficient way to manage this ramp down has been, you do what as we take our own internal labor down as we are able to turn off that incoming supplier material. So if you look at the year and again as we did taking labor out and saw incoming stream it doesn’t happen overnight. So as we ramp this thing down, you are obviously, you have a lot higher build rates in the first quarter and second quarter than the third and fourth quarter, so, the plan that we have right now and we obviously just announced in other round of way off, in the business, is to continue to bring that production rate down but it does take those periods bring those curtail and again we had an off a lot of long lead material that was in the pipeline through our supplier.

So, obviously we take that in consideration, so as we continue to try balance production versus demand but it will result in old production the first and second quarter.

Ron Epstein – Banc of America

Now, Scott, I mean how should we think about, I guess the margin in Cessna if you normalize out the $50 million (inaudible) of the CESCOM asset or just under 5%, I mean when we think about where should Trauff [ph] margins be in that business, when you are add say Trauff delivery.

Scott Donnelly

Well I think, we probably are in that Trauff, I mean, cost as coming out, I think we probably bottom on that margin rate, he saw that we will maintain, out or above that rate even with lower volumes through the balance of 2009 and lower volumes in 2010 as well.

Ron Epstein – Banc of America

Okay. And then just one last question follow up, when David ask how should think about you are getting to your cash flow guidance given that you had such a cash outflow this quarter, I mean, I just don’t understand how you are going to get there, help me understand that?

Scott Donnelly

Sure, I mean, if you look at the balance I mean I think we had at or better than what we have planed pretty significantly in fact out of most of business in terms of reductions and working capital and overall cash efficiencies the only thing that offset it was the build up on inventory coming through Cessna, I know, you know first quarter was always difficult quarter for us from a cash perspective just because – that number reflects not only the operating businesses but all the corporate cost things like hedging against stock based compensation things like that, which were cash outflows in the first quarter. So there is some unusual things that don’t occur in this first quarter, which obviously was factored into our plan, but I would say from an operation perspective, the big swing is really the reductions of those inventories Cessna in the third and fourth quarter.

Lewis Campbell

Yes, let me add one more comment to that, because I know that Scott mind when you look at the charge we put up you here in the numbers we've talked about obviously we are pretty strong in that $400 million number for the end of the year and just another fact which you may know about I just I said in my opening remarks but you may have missed it, we had because we change the way we incentive pay the top 1000 managers. We changed our annual incentive compensation or our bonus formula if you will and I should have mentioned that 50% of the top 1000 managers in the company, 50% of their bonus which is always targeted as a percentage of their base salary lets say its 30% and then half of that 30% or 15% will be based on them making their stretch cash targets.

We never done that before but we have had experience in redesigning the comp system to gain improvement and a metric most notably ROIC [ph] when we went from 8 to 21. So I would be very surprised and disappointed if we don’t see the kind of improvement that our managers are signing up for.

Another point may not be obvious, Cessna is still a strong cash generator in '09, '10 and '11. And so our balance system, so 80% of the company are very strong positive cash flow generators.

Ron Epstein – Banc of America

So, just want to following to those comments.

Lewis Campbell

Yes.

Ron Epstein – Banc of America

With the Textron Six Sigma, the engineering of Textron I would have expected in the downturn that may be Cessna would do better but it looks like you kind of going back to the historical performance of Cessna in a downturn. I mean how should I think about the impact of the both that whole program for the company and in industrial downturn. I mean to me it doest look like its paying off in the downturn.

Lewis Campbell

Well if you would remind me to respectfully disagree with you in front of about 160 people I would like to, because –

Ron Epstein – Banc of America

That’s fine, that’s great.

Lewis Campbell

I know, I know, look it takes a Herculean effort to be planning to run at about 500 plus deliveries in October of '08 for the calendar 2009 and then take that number down to 290 to 300. That is a tough thing to do. Secondly if you think about it although we manufactured planes about (inaudible) more efficiently in most others. When you think about it you can't just stop, and you cant just change the production and pull plans out of the sequence. You get stuck actually making a plan if someone cancels on in the first quarter so then what we have to do to move up someone out of the second quarter, third quarter or 2010 which we been pretty successful in doing. So although it would appear to you and I don’t blame that they are saying that our numbers are different than you might have thought. I'll give you another interesting comment. Back in 2001 when our margins, 2002 and '03 when our margins dropped as a result of 9/11 we were not production any Mustangs, Mustangs have a very low profit contribution.

So if when you take a look at the mix of businesses we have to factor that in to, when considering the number we are producing I would say our margin has held up pretty darn well in fact most people believe that had we not had Six Sigma and Lean in place we'd have been much worse off.

Ron Epstein – Banc of America

Great. Well thank for all the comments guys.

Lewis Campbell

Yes.

Tom Cullen

Before we go to the next question I just want to follow up Ron because I think your question about cash flow is one that is on the top of a lot of peoples mind and even though in the overall scheme, our overall liquidity plan it’s a small piece. I really want to understand, if you look at the mid point of our range that results in manufacturing net income of about 255 million. And when you go down through the map to get the 400 that’s going to require an increase or a contribution from working capital of about 225 million. So its not that big of a stretch when you think about it in those terms because obviously as Scott explained in the first half of the year we've got the momentum in the production process at Cessna and to a extent that we saw those in the second half of the year that working capital is going to recover.

Not to mention all the programs that we have underway to just streamline our supply chains. So if you doubt that we are going to able to sale al those planes in the second half of the year then you just move it out to 2010 again as Scott kind of explained. So the cash flow from manufacturing operations over the next two years I think we feel pretty comfortable about the cumulative $900 million on our schedule there.

Lewis Campbell

The other items for the quarter we talked about interest and taxes and comp programs and various expenses the run rate for the year is $500 million to $600 million. We will have spent or we did spent close to 300 in Q1. So, essentially you will see substantially less cash used than those categories in remaining three quarters than you did in the first.

Ron Epstein – Banc of America

Okay.

Doug Wilburne

Yeah. Al right next question please.

Operator

Great thank you your next question comes from the line of Steve Tusa with JP Morgan.

Lewis Campbell

Hi Steve.

Steve Tusa – JP Morgan

Hi, good morning.

Lewis Campbell

Good morning.

Steve Tusa – JP Morgan

Just a question on the can rate going into the second quarter, how front end loaded was toward cancellation in the quarter and where you are seeing as you kind of get out of first quarter?

Lewis Campbell

Steve, the cancellation rates I mean its bit lumpy. So I think that what the trend we are seeing is that we are starting to see a tapering off of cancellations that relate to aircraft deliveries for 2009. We are still continue to see cancellations in 2010 and 2011 timeframe and frankly I think we will see than you should expect to see significant cancellations in the second quarter, although primarily associated with aircraft or related your deliveries. In particular, having announced the suspension of the Columbus program for instance you would expect to see quite a few cancellations of Columbus orders in this quarter across those are deliveries who are out in 2014, 2015 timeframe so.

Steve Tusa – JP Morgan

Okay. So you will take those at a backlog you consider those cancellations and those who come through mostly in the second quarter?

Lewis Campbell

Yes, that's correct.

Steve Tusa – JP Morgan

Okay. And on that front I am just interested when they go in a backlog I assumed that there was a deposit, what are the timing is to what you have to return those deposits?

Scott Donnelly

Well, I think if you look at something like the Columbus where it's result of customers' cancellations result of our suspension in the program you expect to see that cash flow virtually immediately back to our customers. Obviously that's a very different situation and our customer might cancel when aircraft is almost complete in which case mostly as we are keeping majority not all that the deposit account for remarketing and reconfiguration there.

Steve Tusa – JP Morgan

But you said that the $2 billion backlog you had of Columbus, is it fair to say that like 10% of that and that's kind of mostly you are thinking about?

Scott Donnelly

No, the amount of deposits that we have on Columbus it's still over date.

Lewis Campbell

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

Steve Tusa – JP Morgan

Okay. From the net manageable. And then just on commercial helicopters what was the orders in the quarter? And what was that year-over-year?

Lewis Campbell

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

Scott Donnelly

Generally the trend that we are seeing, Steve is we had some cancellations that have been primarily in the 407 and 206 of the lighter or smaller helicopters and where we seen the strength in the orders has been in the 412s, which is…

Steve Tusa – JP Morgan

You are saying slightly negative on year-over-year comp per basis, or all in that cancellations?

Scott Donnelly

All in that cancellations.

Steve Tusa – JP Morgan

Okay. And then one more question is on how quickly you noticed that production doesn’t really ramp down, so does that mean we are having other season where we done free cash period in the second quarter, I know cash is tough to predict, but you seem to be predicting it with a pretty good visibility here outside the year. Is second quarter also negative?

Scott Donnelly

Assessment, we will still have cash consumption assumption for it.

Steve Tusa – JP Morgan

And for the company?

Scott Donnelly

No, I would say that it could be closed.

Lewis Campbell

Close to even there.

Scott Donnelly

It's going to be closed.

Steve Tusa – JP Morgan

Okay. Great. Thanks a lot.

Scott Donnelly

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

Steve Tusa – JP Morgan

Okay. Thanks, guys.

Operator

Great. Thank you. And our next question comes from the line of Noel Poponac with Goldman Sachs. Please go ahead.

Lewis Campbell

Hello, Noel

Noel Poponac – Goldman Sachs

Hi, how are you?

Lewis Campbell

Good.

Noel Poponac – Goldman Sachs

Little more clarity on the assessment numbers, how many of the 290 to 300 are most tanks?

Lewis Campbell

The mostly of the 295 is probably going to be somewhere in the 120 to 130 range.

Noel Poponac – Goldman Sachs

Okay. So, that's not really changing?

Lewis Campbell

No, most tanks are actually holding pretty well.

Scott Donnelly

Most tanks are fairly easy because we have a such a big backlog, so as we seen the customer mix shift little bit that's can be our number.

Noel Poponac – Goldman Sachs

Yes, that makes sense. And gave us a sold out number for '09, can you tell us how many aircrafts are sold for 2010?

Scott Donnelly

We can't believe it. Actually right now we feel pretty good about 2010 on the order book, but I don’t think it's smart to put that number out there because until we see cancellation is stabilized and as Scott mentioned there attending to rate softening some, so that's good. Right now I will be happy if we went through the year and started from where we are and build slightly in 2010 that would be a pretty good year for us. We know exactly what our production schedule. We’ll be down that run rate by mid-2009 and that’s kind of how we see.

Noel Poponac – Goldman Sachs

Okay and you’re taking up the full-year target for the run-offs at $3.1 billion you know obviously it’s been successful to-date but you guys had sort of alluded to you know if you had early success you maybe want to pull back for collateral and had alluded to you know not wanting to take up the target because you know you would be pushing people into a greater loss position. Can you just tell us how that’s split out has made has the better credit market made it a lot easier to move people to other sources of financing and so the losses are as better, what’s your thinking in taking that target higher?

Lewis Campbell

Well there is a number of things on I think primarily our philosophy on this is that as we went through the first quarter we had originally set our target. We obviously more than – I mean we almost doubled it so we had a dramatic improvement like a couple of things one is that because the economy has still been pretty tough. A lot of the dealers that we work on finance are also being cautious about increasing their inventory. So, in many cases as those customers sold those assets. We got paid. So moved the receivables of cash and in many cases they didn’t finance up because they didn’t want to increase our inventory.

Now we have actually gone past the period where we're committed to phone them and so we don’t have a financing requirement going forward so when we laid out the original plan, we had assumed that we’ll have to do more financing in the first quarter until we had given a notice period to these dealers who’re not going to financing going forward. So, basically what happened is we're taking all of the improvements in the accelerated receivables reduction that we achieved in the first quarter and since we're making that additive to our plan for the year so right now really what we're doing is executing at the plan we would have expected in the balance of the year and by the way so far that’s going right on track. So, if you take what we over achieved in the first quarter and add that to the $2.6 billion with the $3.1 billion.

Noel Poponac – Goldman Sachs

Okay, thanks a lot.

Operator

Thank you and we do have a question now from the line of Heidi Wood with Morgan Stanley. Please go ahead.

Heidi Wood with Morgan Stanley

Good morning. I wanted to focus a little bit on, I understand that can you describe to us a bit your bookings policy and how that stands vis-à-vis other OEs in the industry, I'm just trying to understand you know given the decreased cancellations we've seen in the less-than-twelve month timeframe. How does that give us confidence that your contract terms are really and truly firm?

Lewis Campbell

I can start with it, we have had the same contract terms for (inaudible) since. I have been here and came in 92 basically the same. Let me say how they work and the basement when you put an order you actually make a non-refundable deposit or we do not count it as an order. That deposit is approximately a quarter of million dollar, okay, and then depending on the model and the price for the model you then have to make I’ll call it progress deposit payments all of which are non-refundable. For the large planes eighteen months prior to delivery you may have to put a million dollars. So now you’re a million and a quarter in.

A year prior to delivery you make another deposit of a million dollar so now you’re two and quarter in and six months prior to delivery you make another million dollars so you’re three and a quarter in and that will be true for the Sovereign Citation term. Now just to make this quick so I want to do is one item.

If you slide down to the XLS which would have a list pricing about $11 million you’ll have your first quarter to million in and then you would make nine months and six months pre-delivery payments of half a million each so you'll have a million and quarter in. if you cancel and you provide us a notification that you’re canceling we then follow a procedure where we have to inform you that we intend to keep that plane that deposit. If you’ve got a loan with the bank, the bank has the option to buy the plane and if they turn us down then we keep the deposit and you have no access to it and that’s been in-place and we use that religiously and we have to admit though that in a hot year if we are at a year of strong sales and something happened that we thought was reasonable from a good customer.

Now remember 70% of our customers. I repeat then we might make a deal with you to say look okay. We're going to keep your deposit. We're going to keep all the interest on your deposit but let’s see if you can book another order in 2010 or 11. Obviously, that’s not the case this year because the cancellation rates are higher and the production volumes are down. So, we keep the deposits.

Heidi Wood with Morgan Stanley

Alright, thanks. But it still, I guess, one would always think that the near-term deliveries would be firmer than the further out ones but, you talked about knowing exactly what the production schedule is for 2010 and yet again there has been a 50% decline in your deliveries for ’'09, between what you guide in October versus what you are guiding now here in April. What processes are you engaging and that gives you better visibility for next year than you feel that you had this year and can you also touch on what's been going with pricing because obviously was rising inventory. You got to be challenged on the pricing front.

Lewis Campbell

I mean these are pretty extraordinary times. So I think it is very hard to go back and compare how those process plays out versus how it is playing out today. I mean I don’t think that we have ever seen a period of time where you have customers to get to a point where they have actually picked interiors. They have don’t paint, everything and at the last minute want to walk with aircraft. And I think it is driven by the general economic situation. I think we have cases everyday. A customer comes in. They made all the deposits. They have actually come out. They have done the paint. They have done everything they want on the aircraft. And they try to turn around inventory of 10% to 20% of the workforce.

So, when they come back and say look we just can't – we can't fly in our new airplane in to our account, having just laid off a bunch of our employees. So, as we said. We work for the customer like that. Many of this are already customers and they probably would came back. But it is not going to be this year. So, I think these are pretty extraordinary times. We talked about where we are in '9 and what are our visibility is into 2010, again not a process we had to do in the past but we are trying to maintain very regular communication with our customers. If you look at our production schedules both for this year and next year, we look at every quarter number, we talk to every customer, we try to assess the risk, is the customer going to stay in the backlog, is the customer going to cancel. So we are talking to them. We are talking to some cases to their financial institutions, understand and make sure the financing is solid. So, I mean I wish I could tell you that we had perfect visibility and clearly we don’t. I don’t think anybody in the industry does.

Heidi Wood with Morgan Stanley

No, I am just trying to understand if this process is giving you additional insight to better know how to base line 2010. I mean, obviously, 2009 is going period. That’s clear. But obviously there is a learning process as well. So, I am just trying to understand if there is a new aspects to the conversations. It does give you a reason to have confidence for 2010, that would be greater than 2009. And also please touch on pricing.

Scott Donnelly

I am sorry. So, anyway, I think what the new process is that the number of contacts, we had communication with the customer to understand where they are, are they really in the backlog, are they really going to move out, or are they really going to cancel is much greater than it is ever been before. It is not a perfect process. We still have customer that shows up when something change at the last minute. But I think the visibility we have on the balance for 2009 and then through 2010 is all derived by that level of contact in trying to understand exactly what's going on for every single customer situation, which we just never had to do before.

On the pricing front, clearly there is pricing pressure in the industry, used aircraft values in particular have dropped significantly. What we have been doing is on the new aircraft side, we are not moving on those pricing, we are working with customers to do special things, say maintenance and support kind of activities so we can give them some additional value to them to taking aircraft, to coming to order book, in some cases beyond what we would normally like to do, but we are trying to protect pricing of the new aircraft.

On the used aircraft front, obviously that’s a very dynamic market, and we do have some special programs, we are running right now, in order to move our used aircraft, where customers are interested but are concerned is it going to be a further reduction in the we value of that aircraft, in some cases ,we are actually going to guarantee that values so we will give the customer a several year window. They take the aircraft, they pay for the aircraft, right to put that aircraft back to us at the end of that term or deal the trade-in to something else and so where base could rise. We think that’s in the best interest of moving that used aircraft, bringing the cash in and getting customers back out there and using this aircraft.

Heidi Wood with Morgan Stanley

Alright. Great. Thanks very much.

Scott Donnelly

Sure.

Operator

Thanks. And our next question comes from the line of Robert Stallard Macquarie. Please go ahead.

Robert Stallard – Macquarie

Good morning.

Lewis Campbell

Hi Rob.

Robert Stallard – Macquarie

First question, you had obviously quite a few cancellations in the quarter. I was wondering if you could give us some flavor where it's coming from in terms of geographical distribution. And I think possibly industries that accounts (inaudible)?

Lewis Campbell

Well, Rob, the distribution as I said is roughly about half 2009 deliveries and half future deliveries. I know how the data thing puts in but I haven't seen any trend of specific segments or specific kinds of individuals or companies that are canceling. Obviously we get a very broad range of different sort of root causes for the cancellations. Many are the just general economic conditions and remember a lot of our aircraft because they are the small to midsize aircraft or small companies, I mean, in some cases work individual but generally they are registration new corporations and represents a small businesses.

I think in generally you see a lot of people that you have a difficult situation of their business which can either manifest itself, it difficulty getting financing. We certainly see some of that or as refer to earlier, just (inaudible) a lot of people and don’t feel like, it looks right for them to come in brand new aircraft when they are in the process of laying off bunch of employee, so which I think if you go back and you look at the trends which I think you probably as familiar as anybody with that business jet industries won the cycles very, very highly correlate US cope for profits.

So, in times are good, people are buying aircraft, when times are not they differ or cancel those aircraft. So historically that has been a very, very hard correlation factor and frankly we would expect that going forward. So as you see the economy strengthen people start brining employees back in and the company start doing better we would expect also to see the demand for the business just pick up again.

Robert Stallard – Macquarie

12 months ago, you were talking about the international side to be very strong. It came to by a 50% of orders, have these new international customers proved to be more speak even some of your US customers or picking the calls when you are trouble?

Lewis Campbell

I don’t know if there any particularly statistical difference at this point rather we can go kind try to chase that data down but you are seeing the situation both domestic and internationally. I know you pick up some international orders here in the quarter and we certainly shipping a lot of international aircraft but we’re still on balance or shipping a lot of US aircraft as well.

Robert Stallard – Macquarie

I just finally, Lewis, you said that you went looking to Cessna's core assets, are there any non core assets that you might be interested disposing on that the next 12 months?

Lewis Campbell

Well I don’t think it would be fair us to comment on that. I think it best for us to kind of keep things close until we announce we have got sign of distribution sales but I just couldn’t comment on that. If we were, if we weren't, I apologize for that.

Robert Stallard – Macquarie

Okay. Thanks very much.

Lewis Campbell

Sure. Alright kind understand there are no more questions in queue. I just want to do one clarification earlier I think David Strauss ask a question about the securitization and amortization to the rest of the year, and I think we misunderstood and gave a full manage receivables amortization. So, on the $2.262 billion of securitization it actually amortizes 490 in the second quarter, 757 in the third, and 335 in the fourth for the full year amount. So with that, that concludes our call, and we thank everybody for your interest in Textron and we will talk to you soon.

Operator

Great. Thank you very much. And ladies and gentlemen, that does conclude our conference for today. Thanks for your participation. Today's call will be available for replay starting today Wednesday, April 29 at 10:00 Am Eastern Time and it will be available through Monday, July 27 at midnight Eastern Time. And you may access the AT&T Executive playback service by dialing 320-365-3844 and then enter the access code of 991791 that number once again is 320-365-3844 and again enter the access code of 991791. And again that does conclude our conference for today.

Thanks for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Textron Inc. Q1 2009 Earnings Call Transcript
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