Doug Wilburne - Vice President - Investor Relations Scott Donnelly - Chairman and CEO Frank Connor - Chief Financial Officer.

Joe Nadol - JPMorgan Carter Copeland - Barclays Noah Poponak - Goldman Sachs Robert Stallard - Royal Bank of Canada John Godyn - Morgan Stanley Pete Skibitski - Drexel Hamilton Cai von Rumohr - Cowen & Company Miles Walton - Deutsche Bank Jason Gursky - Citi George Shapiro - Shapiro Research Sheila Kahyaoglu - Jefferies Ron Epstein - Merrill Lynch.

Ladies and gentlemen, thank you for standing by and welcome to the Textron Third 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). As a reminder, this call is being recorded.

I’d now like to turn the conference over to our host, Vice President of Investor Relations, Doug Wilburne. Please go ahead, sir..

Thanks Brad and good morning everyone. Before we begin, I’d like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors which are detailed in our SEC filings and also in today’s press release.

On the call today, we have Scott Donnelly, Textron’s Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Textron’s revenues in the quarter were $3.4 billion, up $526 million from last year’s third quarter.

The Beechcraft acquisition, completed at the end of the first quarter, contributed $398 million to the increase. Income from continuing operations was $0.57 per share compared to $0.35 in the third quarter of 2013.

Textron aviation operating results included a $10 million reduction to segment profit from fair value step-up adjustments to acquired Beechcraft inventories sold during the quarter, plus there was an additional $3 million charge related to Beechcraft restructuring costs, which were recorded on a separate line for acquisition and restructuring costs.

Together these items reduced EPS by $0.03 per share. Manufacturing cash flow before pension contributions was $144 million compared to $269 million in last year’s third quarter, bringing year-to-date cash inflow to $304 million, compared to a use of cash of 580 million at this point last year. Third quarter pension contributions were $17 million.

And with that I’ll turn the call over to Scott..

Thanks Doug and good morning everybody. Revenues were up 18% in the quarter, reflecting success of new product investments and our acquisition strategies.

For example, at Industrial, we saw growth across all our businesses, reflecting the impact of new production introductions and recent acquisitions in the segment such as TUG Technologies, Dixie Chopper and HD Electric.

On the new product front, Textron’s specialized vehicle, we introduced the new Recoil iS Crew, an electric Bad Boy Buggies vehicle with the cargo bed and two forward-facing bench seats. At Jacobsen, we rolled out a completely refreshed TurfCat front rotary mower featuring all-hydraulic; traction drives with the lowest cost of ownership in this class.

In Textron Tools & Test in August, we made a small technology acquisition that resulted in the launch of a new product The DataScout 10G which further adds to our currently family of Ethernet/Transport network analyzers. At Caltex, revenue growth reflected ordinary strength in the North American market, which did overcome some softness in Europe.

Moving to Systems, revenues were down in part due to delay in TAPV vehicle program for which we had expected to begin delivers in the quarter.

During the reliability testing in August, we identified the need for a number of durability improvements in the vehicle steering system and in cooperation with the customer, we decided the best approach to suspend the testing to support an optimal redesign and retest process.

Our initial analysis indicates that we’ll be able to meet the vehicle durability requirements with relatively minor modification [to us] during system. We expect to redesign validation retest process, we’ll do initial deliveries by about one year. Elsewhere in systems, we’re making progress on a number of fronts.

Our TCDL program, the customers agreed to begin accepting production units which commenced during the fourth quarter. Our Unmanned Systems business which recently awarded a contract to provide an Unmanned Naval Mine Detection System for use in conjunction with the Navy’s Littoral Combat Ship.

This will validates investments we’ve been making to leverage our unmanned aircraft technologies in the marine-based applications.

Our [SIMTRU], Simulation and Training business we now have plans to open an East Coast Citation training facility in Tampa, Florida, which will complement our West Coast facility in Carlsbad California providing more convenient access for our customers.

And earlier this week we announced we’ll be opening a training center in Valencia, Spain in 2016 with the Bell 429 full flight simulator as our initial offering. On the air transport side of TRU, we delivered a Boeing 737 NG simulator that we used at Boeing Training Center in Singapore.

We also won a contract to provide China Express Airlines with the Bombardier CRJ 900 full flight simulator for pilot training and a contract to provide Airbus A320 full flight simulator at Ansett Aviation, one of the largest training operators in Southern Hemisphere.

In our Bell segment, we delivered 12 V-22s and 4 H-1s compared to 10 V-22s and 7 H-1s in last year’s third quarter. On the commercial side, we delivered 41 aircraft, down from 54 a year ago.

We continue to see slow order flow across the commercial helicopter market compared to last year and at this point with only a quarter ago, we expect 2014 commercial deliveries will be down from last year’s 213 units.

Despite this environment, Bell’s win rate remains favorable, especially with our model 429 where deliveries are up year-to-date over last year. In China, we received regulatory approval to conduct helicopter pilot and maintenance training for our growing business in the country.

During the quarter, we were also named the number one product support organization by Aviation International News for the 9th consecutive year. We continue to make great progress on development of our 525 Relentless program.

Our first two test vehicles are in final assembly and manufacturing process is going smoothly, thanks to large part use of new digital design and manufacturing process tools. We’ve also begun safety flight testing for most of the major components of the systems.

However, in order to accumulate the hours necessary to demonstrate safety margins on all components, we now anticipate first flight will occur during the first quarter of the year. Development of our 505 Jet Ranger X program is also proceeding well with first flight still expected by the end of this year.

We also broke ground for our new 505 assembly facility in Lafayette, Louisiana. We continue to sign new customer purchase agreements reflecting solid demand for the aircraft in the marketplace. Moving to Textron Aviation, in the quarter we delivered 33 jets and 30 King Air turboprops.

In last year’s third quarter we delivered 25 jets and Beechcraft delivered 26 King Air. We’re seeing a number of encouraging trends with Textron Aviation. First, integration of Beechcraft is going extremely well, which is evident in our cost productivity with a significant sequential improvement in margins.

Another example of integration benefit is the roll out of the new product support program for our King turboprop customers, based on Cessna’s ProAdvantage life cycle service program. On the market front we continue to see the availability of used aircraft come down and our only used trading activity has improved.

In the new aircraft market, we have seen a pickup in order activity since September. With improving market dynamics, we’re encouraged as we prepare to exhibit our full line of products in next week’s annual NBAA show including the debut of the first fully configured Citation Latitude.

I was in [with talks] several weeks ago I have the opportunity to see the NBAA Latitude first hand. It’s a great looking airplane and it makes an impressive statement about value, comfort, style and performance.

In fact with over 600 cumulative flight hours and development program, we recently announced that the aircraft’s range has been increased to 2,700 nautical miles. To wrap up, we believe we had a solid third quarter with overall revenue growth, improved manufacturing margins and solid cash flow performance.

Furthermore, our strategy of investing in new products is paying off and we’re seeing significant contributions from our M&A investments. With that, I’ll turn the call over to Frank..

Thank you, Scott. Good morning everyone. Segment profit in the quarter was $293 million up $85 million from the third quarter of 2013 on a $526 million increase in revenues. Let’s look at how each of the segments contributed, starting with Textron Aviation.

At Textron Aviation, revenues were up $487 million from this period last year, reflecting $398 million of acquired Beechcraft revenue and higher new jet volumes. The segment had a profit of $62 million compared to a loss of $23 million at the Cessna segment a year ago.

This reflected the impact of the Beechcraft acquisition, higher new jet volume and favorable pricing and inflation. Backlog in the segment ended the quarter at $1.4 billion, approximately flat with the end of second quarter.

Moving to Bell, revenues were up $20 million, reflecting higher V-22 program volume partially offset by lower H-1 and commercial deliveries. Segment profit increased $15 million from the third quarter in 2013, primarily reflecting favorable performance.

At Textron Systems, revenues were down $47 million, reflecting lower Marine and Land Systems volume partially offset by the impact of acquisitions. Segment profit was down $8 million, reflecting the lower volumes. Industrial revenues increased $74 million due to the impact of acquisitions and higher overall volumes.

Segment profit increased $1 million, reflecting the impact of higher volumes offset by an unfavorable mix of revenues in the quarter. Finance segment revenues decreased $8 million, primarily due to gains on finance receivable dispositions during the third quarter of 2013.

Segment profit decreased $8 million primarily due to prior year impacts of loan loss reversals and gains associated with the dispositions, partially offset by lower administrative expenses.

Non-accrual accounts ended the quarter at 101 million, up 13 million from the end of the second quarter while 60 day delinquencies were 70 million, down 26 million in the quarter. Moving below the segment profit line, corporate expenses were $22 million and our tax rate was 30.7%.

Interest expense was $37 million, up from $29 million a year ago, reflecting debt cost related to the Beechcraft acquisition financing. We recorded $3 million of restructuring cost in the quarter on the acquisition and restructuring line and we still expect full year cost of about $45 million.

During the quarter, we repurchased about 4.1 million shares at an overall cost of about a $152 million. We also repaid $200 million of our $500 million five year bank loan from the Beechcraft acquisition.

Finally, we are increasing our full year earnings per share from continuing operations guidance to a range of $2.05 to $2.15 a share and increasing our estimated manufacturing cash flow from continuing operations before pension contributions to $700 million to $800 million. That concludes our prepared remarks.

So Brad, we can open the line for questions..

Thank you. And our first question will come from Joe Nadol with JPMorgan..

Thanks. Good morning..

Good morning..

Scott, just first of all on the Systems side of things, given that there is some large lumpy programs here, if you could just maybe give us an update on what you expect revenue to be for the year relative to your earlier expectations.

And then I know you’re not going to give 2015 guidance yet, but as we think about the year delay on the vehicle program, what’s the profile sort of the quarterly run rate we should be thinking about until you start those deliveries?.

So, first of all Joe, the revenue at the Systems is probably going to be down about 300 from what we were originally forecasting and that’s principally driven by vehicle programs..

Okay.

And then, into next year?.

We are probably not going to go into 2015 guidance yet Joe. We have a lot of work to do here at the balance of the year and make sure that we know where we are on the TAPV program in particular, we’re well into the analysis phase; we feel pretty good about where it is. We’re just based on that starting to lay out what that recovery plan looks like.

So, I think we probably would prefer to wait and give you the guidance on that when we get into the January call for 2015..

Okay.

Over Aviation, good margin there, but when we think about the Beech cost saves that you laid out at the time of the acquisition, is there a way of thinking about how much of that is now embedded in on a run rate basis in the Q3 number?.

So, Joe absolutely, I mean clearly what’s happening here is that the number that we guided you guys, we’re getting there quicker is basically what’s happening. So I think the speed of the integration of the cost takeout, the integration of the organizations and whatnot has happened quicker than we laid out.

So, I think we still feel pretty good about the absolute numbers that we gave you but we’re going to get there sooner. So, obviously that’s going to drive some margin expansion in the year that’s part of what -- the largest part frankly what’s driving our increase to our guidance.

We had said originally that to help you guys think about ‘15 to think about a couple of hundred basis points improvement over where we would be this year, obviously that’s not going to be as bigger number, because we’re going to achieve more of that this year.

So, when you think about going forward, it’s not going to be a 200 basis points, because we’re sort of raising the bar this year only because we’re getting there quicker..

Okay.

And then just finally sticking with Aviation here, you mentioned, I think you mentioned that orders have ticked up since September, I wasn’t sure if you’re talking about the certain models or maybe if you could just give some context there and talk about the market environment and demand environment for Cessna jets in particular?.

Yes. I think we have seen an overall better demand environment, I mean July and August are always tough, people are out on holiday.

But there is no doubt that as we got in the sort of the September and the beginning of October timeframe, we’ve seen a pretty significant uptick in terms of the demand a lot of activity up here and it’s pretty much across the Board. We’re still doing very well.

And M2 this year it’s a new product and across the CJ line we’re a little bit wide on CJ3 this quarter, but that’s driven by the fact that was really the transition for the old CJ3 to the CJ3+, which is now certified. So we feel good about demand for that, all the way up. Sovereigns is still doing very well XLs are doing well.

So I think we feel probably have seen one of the strongest September, October levels of activity that we’ve seen in quite some time..

Okay. I’ll turn it over to someone else. Thanks..

And our next question comes from Carter Copeland with Barclays..

Hey, good morning. Thanks. I wondered if you guys will expand a little bit on the mix impact that you called out in industrial as unfavorable.

And then perhaps just tell us there was anything in the Bell margin that was one-time in nature perhaps related to the getting to the end of the V-22 multiyear contract ahead of the transition to the next one? Thanks..

Sure, Carter. So on the Bell front first of all; there was nothing unusual in there. I think if you look at the total company in terms of cumulative catch adjustments it was only $10 million across all of Textron. There certainly was some positive contribution there in Bell, but nothing that’s unusual for us in a typical quarter.

So it was really driven by strong performance in the business. As you know, we’re still playing our way through a little bit of trapped inventory costs from last year’s issues and efficiencies around some of the labor activities.

So we still face a bit of that headwind, but I think the guys did a nice job of performing and delivering a pretty good margin rate in spite of that. So no, there is nothing unusual in there. It’s just -- continue to try to drive the cost base down in the business.

With respect to the Industrial segment, the margin, this is the first time in a while we’ve not had a margin expansion on a quarter-by-quarter basis in that business. It’s a little disappointing, but I think we’ll call that back here as we did into the fourth quarter and still turn a year that has margin improvement in the business.

In terms of the mix, largely driven within our automotive business, we’re seeing some significant growth in our SCR business. And as we talked before, the SCRs do come with a lower return on sales because there is a large component of cost that’s largely a pass through on that. And so that does provide some dilution in terms of our overall ROS number.

And so that was probably the biggest moving part in there. It’s been a tough year frankly in the golf and in the turf business. We are I think you probably heard of that from everybody in the turf side, so Jake is having a little tougher year than usual.

But the CapEx piece and the mix around SCR versus our blow molding tank side is the primary driver..

Okay, great. And just perhaps one or two for Frank, just clarification; on the Beech inventory step up impact, I think you said last quarter you’ve been through 45 or 65 you called out, you said another 10 this quarter.

So are we still expecting a kind of 10 million in the fourth quarter? And then with respect to the corporate expense, it looks like given the pattern of the first three quarters it might be under running that full year expectations slightly. Is that the case and did that contributed all to the increase in the guidance as well? Thanks..

Yes. On the step-up, yes, we’re at 55 now as you point out and we expect about 10 for the fourth quarter and then we’ll carry over probably about 15 into next year as well in terms of additional step-up. So there is no change there.

On corporate expense, no, you know that we always have quarterly volatility; it revolves around kind of share price activity and just levels of spent. So we’re still looking at about a 150 million for the year..

Okay, great. Thanks gentlemen..

And our next question will come from Noah Poponak with Goldman Sachs..

Hi. Good morning, everyone..

Good morning, Noah..

Scott, I wanted to ask about Bell commercial and I guess what I’m wondering is, you had this big step-up the past two years in a pretty strong market to this kind of 180 to 215 aircraft call it per year.

Each of the next two years as you see it now, does this business stay up in that kind of annual delivery range or was there so much demand from a particular end market or a particular product cycle recently that this business needs to revert back to the 150 to 170 kind of range that it had in a lot of good years, but not quite as good as 2013 we’re in the past?.

I think we’ll stay in the range that you talked about at the beginning here. I mean predicting the end market obviously is a bit of a wild card and we are seeing some slowness right now. But I think what’s important is that our share has increased over the last couple of years as a result of a lot of what we’ve done on the product side.

So even in a market that would be like the market had been back when we were in those call 115 days to 150 days, I think our share has improved and would keep us in that kind of 180 plus range; last year, it was 213; I do think will be down somewhat from that as we look at the balance of this year just because of what’s happening here, softens.

But I don’t see us going back to the old days, primarily because our share is in a much better position. And clearly as we get into 2016 and beyond as you add in the 505 and 525, I think that really gives us that next step-up in terms of where we’ll be from a total number of deliveries of helicopters.

So, again try nicely, it’s a little bit from the market, because I can’t really predict that but I certainly have seen as we’ve talked about before, our share increase and I think the products investments are certainly paying off and 505, 525 will only help that going forward..

On the market, can you elaborate on where you’ve seen some incremental softness; is that in oil and gas, because of oil prices or elsewhere, any color you can give us there?.

Well, I think some of the oil and gas has been softer, we’re seeing some of the slowdowns in EMS certainly things around tourism. It’s really kind of across the board. And I think it’s just a lot of people concerned about what’s going on around the world economically.

So, I don’t know that we’ve seen; it’s probably too soon yet to see what the reaction of the oil and gas market is to the drops in the price of oil. But that’s a variable; I think it still needs to play out.

I think most of what we’ve seen this year versus where we expected was around things like EMS and certainly some oil and gas has been a little softer even before we’ve seen these changes in oil price..

Okay. And you called out favorable pricing in Aviation.

Any additional detail you can provide there on where and to what degree you saw that?.

In terms of the Aviation business?.

Yes..

It’s more or less firmed up across the Board on our products, I think part of that again is driven by new products having the M2 out there; having the Sovereign out there; the CJ3+ upgrade I think certainly helps us.

And importantly, on the used side, we’ve seen prices are not going up but they’re firming and not continuing to drop in that residual, in fact certainly has a knock on effect into new aircraft pricing as well..

And the inflation comment that’s separate from pricing, can you just explain what that is and why it’s different? You called out pricing and inflation separately in the press release I think..

Yes. We’ve seen some deflation in Aviation just kind of due in part to outdoor scale and kind of purchasing activity and things. So we’ve kind of benefited from some good cross productivity on the supply side in Aviation as well..

Yes. I think that’s just, Noah, general category of productivity, right? I mean we’re seeing some good productivity in terms of labor and the plants; we’re seeing good productivity in terms of supplier purchasing; it’s really across the board..

Okay. All right, thanks a lot..

And our next question will come from Robert Stallard with Royal Bank of Canada..

Thanks a lot. Good morning..

Hey Bob. .

Scott, I thought I should start on the Industrial division and whether you’ve seen any signs of weakening in some of these European markets over the last quarter and what your expectations might be for the final quarter here including foreign exchange?.

So foreign exchange hasn’t been a big issue for us, it’s kind of immaterial number for the company and even for -- within the automotive business. But I would say Robert that there is no doubt that we have seen weakness in the European auto market.

And so our European sales have been down, that’s largely been offset by the fact that North American market continues to be up and the Asian market has been up slightly. So the combination of those other markets, and again a lot of expansion in new products particularly driven by SCR is offsetting just volume demand of the European models of cars..

And then maybe switching over to Bell, you’ve talked in the past about some of the prospects for V-22 export. I was wondering if anything has progressed over the last quarter whether we summed up some of these prospects..

I would say no..

Okay..

Hey I mean it’s just -- look Robert I mean there is a great deal of frustration on our part. The deal with Israel which has been talked about a lot is still moving forward, but it’s moving forward at a slow pace. There has been progress. I mean the F&F cases are working our way to the process. So I think Japan has been talked about a lot.

It continues to progress, it just progresses very slowly. I wish I could tell you that in one quarter’s time I see a lot happened, but it takes time..

And then maybe just a final one for Frank.

Any comment on pension and what the changes in discount rate could mean for next year?.

Yes. I mean obviously there is tremendous volatility in rates and returns and everything else right now. I’d say kind of overall; we don’t believe it will be a headwind. We thought it would be a tailwind.

It will depend a lot obviously on what happens between now and year-end, but kind of as we look at the sensitivity around it right now we think that kind of it will be no worse than flattish type area..

And does the MAP-21 legislation have any change on your contribution?.

It pushes out some ‘16, ‘17 required contributions. It doesn’t have any impact on ‘15..

Thank you very much..

You’re welcome..

And our next call, question will come from John Godyn with Morgan Stanley. Please go ahead..

Hey guys. Thanks for taking my question. Scott, I was just hoping you go back to your comments on biz jet demand. I think on the last call, the view was legacy product continues on exciting and new product is sort of driving all the motor activity.

Now you broadened up that commentary which sounds exciting, I mean it sounds like legacy product is doing better. I’m just curious sort of taking a step back; we’ve seen a lot of [head bakes] in biz jet uptick. And you guys have done a good job kind of moderating expectations, but it can’t help, but interpret your commentaries very positive.

What’s different this time? Is this not just seasonality? Why is this -- why are these data points that you’re seeing now maybe stronger and maybe have more signal value than what we’ve seen in the past?.

We probably feel better about where we are right now again partly due to new product. So we got the M2 which has been very well received, we got the Sovereigns doing well, the TEN is doing fine, I mean it’s just not large volume product. Now with the CJ3+ in there that gives us one more product offering in sort of the middle of the product range.

But as we’ve said earlier, I think the demand has been -- we expect it to be fairly constant. And in the total marketplace most demand creation will be associated with new products. And that’s what we’ve been seeing happen through the year.

And the good news with that obviously as we’ve had a full year or some of those new products like the M2s and Sovereigns and TEN; is we’ve been a bit more level [loaded]. So we don’t have this huge fourth quarter run-off to get to where we were targeting in terms of the total year.

And the demand is there and so we feel pretty good about our ability as we look out over the quarter or so to feel good about what the demand looks like and what our production rate looks like and what our available for sale looks like. So, the total market has certainly improved.

The better linearity of being able to run the business for more linear function is helping and it’s helping to drive some of our cost and performance. And so I think that’s why we feel pretty good about where we are.

Obviously as we look into 2015 on the basic theory that the new products are what helps drive your growth with the Latitude performing, as well as it’s performing the way the aircraft looks, the way it flies, we’re feeling pretty good about the demand for that aircraft.

We have the first one out there now, it’s already doing a bunch of demo flights, it’s going to be out there at NBAA and I think it’s a beautiful aircraft and it will help us in the 2015 if that thing comes in the revenue generation..

That’s helpful. And when we think about aviation margins, you had some commentary about synergies and pricing.

But if I just sort of put it altogether, I mean as a simple point, can we use this quarter’s margin as a base for forecasting going forward? It’s very strong; there are things in the number that you would highlight as sort of being irregular for whatever reason for the purposes of forecasting going forward?.

No, I don’t think there is anything irregular in there. It’s just straight performance. And so that kind of margin rate with that kind of volume is certainly expected..

Great. And then just last one on capital allocation. About a year ago when the Beech situation I think was a bit harder, we were talking about buybacks, but obviously the Beech deal I think took that off the table for a bit, you’ve been very successful and in fact accelerating some of the synergies on Beech.

At what point and is it time now to have the conversation about buybacks again? Thanks..

We’ve -- our position especially on buybacks as you know has been that we’ll do enough to offset dilution of employee programs and that we look at sort of additional buybacks on an opportunistic basis. And so we did do in the quarter about $4 million of -- I am sorry 4 million shares of buyback in Q3..

I guess I mean more of a larger scale buyback with cash flow..

Well, I think at this point, we’re also still doing things like paying down our bank lines associated with the acquisition of Beechcraft. So, we have to sort of have a balance here in terms of what we’re allocating in the paying down the debt associated with Beech as well as trying to continue our buybacks.

So, I wouldn’t expect us to come out and announce some committed number. I think we’ll stay on the commitment of avoiding dilution and opportunistically executing buyback programs as we see fit. And the good news is our cash flow generation and strength of balance sheet I think allows us to be able to do both those things as we’ve been doing..

Great. Thanks a lot..

And our next question comes from [Johnny Wright] with Nomura..

Hi guys. Just couple of questions from me, firstly, probably for Frank, backing into your revised cash flow guidance, I think you’re looking for something like $650 million in operating cash flow in 4Q on net income of around $200 million. So you’ve got say $100 million in depreciation but there still out $350 million gap.

Can you just maybe talk through that is it a big working capital swing or is there anything else unusual in that 4Q cash flow?.

No, there is nothing unusual. And if you look at kind of our seasonality and quarterly progression, Q4 is always a very strong quarter, both from a profitability standpoint but also from a working capital performance just given the seasonality of the business. So, there is nothing unusual in there..

So for the full year, you expect to have a positive working capital movement, something like $100 million to $200 million, is that fair?.

I haven’t worked through what that means in terms of the overall working capital but if you look at the fourth quarter this year, I mean this year’s fourth quarter progression is based on that guidance, is actually down significantly from last year. So again, there is nothing unusual on the working capital..

Okay, great. And then you talked about China and helicopter market in your prepared remarks, those had a big order this quarters in China, obviously a lot of potential there.

Is there anything changing in that market? Do you see any prospects for actually some demand from China coming through?.

We’ve had good demand from China over the last couple of years. I think part of that is just the economy is generally doing well.

There has been a lot of liberalization of aerospace in the lower altitude which is where helicopters fly and so everything from corporate EMS to public inspection, utility, infrastructure, surveillance things like that which drives a lot of helicopter markets around the world.

We’re just seeing continuously that market grow in China and we’ve been doing very well over there.

Actually we’re pretty pleased with our position in China and being able to -- it’s getting a big enough market and a big enough demand which is what’s driving us to start to do more training as well as airport training over there to help support the deployment of aircraft..

Okay, great. And just one final on Latitude, you talked about increasing the range of that aircraft.

Is there any potential to get the existing Latitude amount to the 3,000 nautical mile range or would that need a bigger redesign or a new aircraft?.

That would be a bigger aircraft for sure..

Okay.

And I guess it’s pretty too early to talk about it but any plans to compete in that sort of coast to coast market with a flat body jet?.

Probably not going to make any new product announcements….

Okay, thanks guys..

I’d say if we did want to sign you up would that be a commitment of any kind?.

Sure..

And our next question comes from Pete Skibitski from Drexel Hamilton..

Hey, good morning guys..

Hey Pete..

I might have missed that, are you still expecting 4.8 billion at aviation this year including 1.5 at Beech?.

It’s a course there, Pete, it might be just a little bit lower not on jet deliveries, but a little bit less on used and couple of fewer [caravans], but in that range..

Got it, okay. Okay. And then I guess Scott, I just -- obviously just trying to figure out the cycle here on biz jet to some degree. How do you think about Beech being -- revenue being down sequentially? And then I thought Sovereign pluses you made some positive comments, but I think that used always Sovereigns were down sequentially also.

I’m just wondering how you think about that and maybe you can give us also kind of what book-to-bill was in the quarter for Citations?.

Let’s see Pete. Actually we don’t really keep very close track at year-over-year comps on the revenue number with Beech’s because Beech wasn’t part of us and we’re certainly reluctant to try to look too much at the financials. But sequentially -- sequential, I’m sorry, we’re down, but it’s only a couple of aircraft.

And so I think we’re pretty linear about the King Air product line and I think we continue to feel good about where we are and the demands about what we expected, so plus or minus a couple of aircrafts. It’s about what we expected and for the linear from quarter-to-quarter, which is good.

On the Sovereign+ side, an aircraft or two, demand is still very good. I think we’re going to be where we expect it to be on the total year. So the book-to-bill in these areas is pretty close to 1 to 1. We’re not really seeing a whole lot of change from what we expected.

So again on a sequential basis, we might be plus or minus a couple of aircraft, but it’s about where we would have expected it to be..

Okay.

So kind of still sort of a flattish market, but you just intuitively feel little bit better than you did the last quarter, is that a fair statement?.

Yes we do, Pete. I mean look the Q3 is usually pretty soft, I mean if you look at the amount of order activity in terms of what flows in July and August is generally pretty light. And as you know Q4 usually tends to be a little stronger.

People are back from holiday, they are looking at stuff and of course as always, hopes that they don’t capital at the end of the year and from a tax standpoint we’d just take delivery a Q4.

So, I think part of this -- again there are smaller numbers sequentially from Q2 to Q3, but I think usually within the normal cycle of how we see that market working..

Okay.

And then just last question on Latitude, can you remind us what quarter next year you’re expecting the first Latitude delivery and do you built any backlog yet? And how should we think about the slope of the production ramp on that program?.

So we have built some backlog, we’re still expecting to have certification in Q2. We’re as you know we don’t fully control that process, so if it’s early in Q2 we’ll get some sales in Q2. But certainly the vast majority of the Latitude sales I would expect to see in Q3 and Q4..

And is that going to be a fast ramp or…?.

Yes. It’s already being ramped. Look the beautiful thing about this aircraft is a lot of the aircraft in terms of wings and all the cockpit systems are common to what we just did on the Sovereign+. So obviously it’s a very new -- large, a much larger cross-section cabin.

But and also lot of the key components and technology we developed as part of the Sovereign+ program. So we actually run these things as sort of a mixed model line if you will. If you go into the factory, we can run things down the line and whether it’s a Latitude or Sovereign, it flows together quite nicely.

So from a production ramp perspective, it’s one that drops into our line very nicely..

Thank you..

And our next question comes from Cai von Rumohr with Cowen & Company..

Yes. Thanks so much. So, your guidance for the year as I recall you were at 2 billion on System, so if you’re down 300, it’s a 1.7 billion and so you’re basically saying volume will double in the fourth quarter from the third, how common? That seems like a huge jump..

Okay. It’s driven by the TCDL program. So as you know we’ve been working on this program for what seems like a very long time going through all development work. As I said in the prepared remarks, we now have received approval from the customer to accept the units in the fourth quarter.

Now those units have to go through their final acceptance test, there is quite test involved with the air vehicles and such. So that will happen here over the course of the fourth quarter, but we do now have their approval to go ahead and commence the production shipments.

And so that’s why the fourth quarter will be disproportionately higher in revenue than what we’ve seen, because we’ve built these units, Cai. They’re manufactured and they’re ready to go, now that we have approval we can go ahead and go through the formalities of the final production test, life test and acceptance.

And we expect obviously that product to be happen here in the fourth quarter..

Is there sort of a disproportionate delivery in the fourth quarter because if we annualize that rate you just get a humongous number next year respecting even you don’t have any vehicles in the fourth quarter?.

Right, correct. I mean we’ve had no sales associated with that program in any of the preceding quarters. So it’s going to be a big spike in deliveries here in Q4. And again, the only reason that’s possible is these things have been built. We’ve been building them for the better part of the last year or so.

And it’s just a matter now of having to go through the production test and acceptance as opposed to normal production flow. So without a doubt, Q4 is much heavier. And as you go through 2015, you’ll see a normal flow of deliveries of those units, not all of the contract units all in one quarter..

Got it. And so if we go to Bell, you did 12 V-22s. As I recall, you’re looking for 36 for the year. So it looks like you go down to 6 in the fourth quarter.

So, the mix which looks very favorable in the third would look pretty lean in the fourth; is that correct or has the full year number changed?.

No, I mean the full year number hasn’t really changed, Cai. I think all you’re seeing is that of course the fourth quarter is the beginning of the next contract year and so we’re now stepping down from the multi-year deliveries to the next multi-year.

So, the run rate of V-22s is now going to step down and stay down at that level as we go through the next few years..

Well given that you’re getting the step off and you have such a great mix in the third quarter, do you still feel comfortable as you look at next year that you’re going to hold Bell’s margins above 10%?.

Absolutely. Look Cai, we’re still targeting the 12% number. I think the reason you’re seeing the kind of margin numbers you’re seeing and certainly our expectations for margins for fourth quarter is because we’ve been taking a lot of cost actions to prepare the business for that lower run rate of V-22s.

And I feel pretty good about where we are on that; the team has done a nice job of getting us where we need to be. Obviously we’re not going to talk about a guide to 2015 yet at this point. The number we haven’t determined is what our expectation should be on the commercial side of the market.

We certainly know where we are in the military side of the market; we know what we’ve done in terms of cost. So, we’re still targeting the 12 and where we end up will have largely to do with what’s our perspective on volume in the commercial market in 2015..

Got it. And so if we go over to Cessna, so you’ve seen a pickup in demand in September and October; normally, you kind of set your production targets in the fourth quarter for next year.

What’s your strategy going to be in kind of establishing the production targets for Cessna?.

Cai, they’ve largely been set, because the lead time, the cycle time I should say on manufacturing in the jet world is depending on the model and I mean obviously we have some degrees of flexibility from model-to-model, but you’re anywhere from 6, 9, 12 months.

So, we’re already running the production lines with the volumes that we would expect to see in 2015 including new things like the Latitude. Now we can make and always have the ability to make adjustments to that and as we go quarter-to-quarter, we do that. But it’s for the next few couple of quarters, it’s pretty well set..

Well, if it is pretty well set, what kind of flexibility do you have to take it up and to what extent are you more inclined to leave it set and just basically get stronger pricing?.

Well, I think at this point we are -- our strategy is what we see in the marketplace, what we still believe is going to have in the marketplace is relative stability in terms of overall market demand and most growth or upside driven by new products.

So as we think about our production rates for next year, as we’ve been thinking about our production rates next year that’s kind of what we forecasted this year and what we’re thinking about for next year. So we’ll keep most of the volumes of products about where they have been.

And we would expect to see some upside from growth driven by the introduction of Latitude..

And then in terms of the cash deployment, I mean with this huge step up and deliveries on TCDL, your cash flow is going to be very strong in the fourth quarter kind of as you have indicated.

How come you don’t buy more stock, what’s the cash being saved for?.

Sure Cai. As you know and as Frank said, we’re a bit seasonal in terms of cash. And so we do generate a lot of cash typically in the fourth quarter that is mostly coming out of working capital in terms of usually inventories principally around the aviation and helicopter business. We’ll continue to deploy cash as we’ve talked about in the past.

And that is largely around to pay down on debt, I mean we did take on a fair a bit of debt associated with the Beechcraft deal, we’ve already paid down a couple of $100 million of that, we’ll continue to pay that down and we’ll continue to be opportunistic about stock buybacks.

So as I said, we took out 4 million shares here in Q3 and we’ll continue to look for opportunities to buyback additional as we think it make sense..

Thanks a lot and good job..

And our next question will come from Miles Walton with Deutsche Bank..

Thanks, good morning.

First I want a clarification on the margins guidance for Cessna, I imagine if that’s where most of the guidance uptick is coming from, you must be looking somewhere in the mid force of a little bit later on sales to Pete’s previous question, is that right?.

I think we’re -- we really don’t want to get into guiding on each individual segment, but you’re certainly correct. I mean the upside of what’s driving the raise is certainly better margins in the aviation segment largely offsetting lowering up in the Systems business as a result of some of the vehicle delays.

And again, we factor in some softness on the Bell commercial side which we’ve already factored into our numbers. So it is driven by the aviation, but I don’t think we’re going to revise any kind of guidance on a segment-by-segment..

All right, that’s right.

And then aftermarket commentary within Cessna and Bell if you can comment on the trends you’re seeing there I guess Doug alluded to maybe that was maybe a little bit on the top-line pressure for the full year, but just the overall trend in the quarter that you saw in the [C7s] would be great?.

We’re still seeing mid single-digit growth in our service franchises in both the Aviation and the Bell helicopter markets and that’s there is a little volatility from quarter-to-quarter, but it’s been pretty steady and about where we would expect kind of top-line mid single-digit sort of numbers.

We probably see it from a record basis, a lot higher than that because of the Beech integration for this year, but in terms of actual growth it’s probably mid single-digit..

And then one last one maybe for you Scott is, as you roll out the new products, obviously there is an international buzz, an initial pent-up demand and then often times there is a bit of honeymoon where it states, so on the CJ4 you see another programs.

How do you think about the kind of the timing of launching, obviously M2 has got a great reception and there has been the Sovereign likewise, is there one year kind of phenomenon than you kind of normalize to where the true demand is or how do you think about that?.

I think in this market it’s really -- certainly our expectations would be the deliveries on things like M2s and Sovereign will more or less stabilize where they are. I don’t think that there is certainly back in earlier phases just like where we had a huge uptick and then kind of went back to a normalized level.

We’re not expecting big changes going forward as we look at things like in M2 or Sovereign. So that’s why I say, I think our expectation is for those things which (inaudible) and transitioned into being a legacy product if you will is that they’ll just follow general market demand..

Okay, got it. Thanks..

And our next question comes from Julian Mitchell with Credit Suisse..

Hey hi. This is Charlie for Julian.

I know that you guys said you wouldn’t comment on the kind of segment margins, but just was curious if you could maybe just comment on systems just given the big kind of swing in revenue guidance for the year? Is that positive for the margins or negative or negligible?.

I don’t think we want to get into segment margin guidance. Sorry..

Okay. Thanks..

And our next question comes from Jason Gursky with Citi..

Hey, good morning.

I was wondering, I know you touched on this briefly before, but maybe just a little bit more color if you don’t mind on your activity that you’ve seen in September and October to the extent that that results in deliveries in the fourth quarter and whether we’re now beginning to take orders for further out and now actually starting to (inaudible) where we can build some backlog?.

Absolutely Jason, I think that’s where we are. This is probably the part of the positive feeling that we have right now is that we clearly see a fourth quarter where the amount of aircraft we have left to sell is not as many as that we probably could sell.

There is a market demand and so that would lead us to start moving deliveries into the first quarter of next year, which I think is a very healthy thing for the business.

Getting out or having sort of a negative or one-to-one book-to-bill, I don’t think, and we talked earlier, I think that the days of two years, I mean crazy numbers of backlog are not technical, but we’d sure be able to run a much more efficient operation and have a much healthier industry, if we had six months to nine months of visibility, so that we’re not having to sort of do forecasting around our production lines and customizations and things like that.

So there is no question, that if we can get to a point here where we’re at least three to six months out that’s a much healthier business.

And I think we’re looking at the fourth quarter as the first time we’ve seen in a while where we clearly see more demand out there in the market than what we think we have aircraft available to sell in the fourth quarter. And that will necessarily for some things in the fourth quarter which is -- into the first quarter, I’m sorry, which is good..

Right. Okay, that’s great.

And then as you look at the two businesses together, Beech and Cessna; and then the acquisitions which you brought in here of late, can you just help us and explain to us how you’re thinking about seasonality in that, in the aviation business going forward? Historically we’ve obviously seen some; is that becoming more muted, is it the way altogether or are we going to still continue to see seasonality into the second half of the year?.

Well, I think there is -- I believe there is always going to be a seasonality around the fourth quarter and that even by tax.

So you have a lot of customers out there that given their brothers, they’d rather take delivery of an asset or they can take a year depreciation in the current year rather than acquiring that aircraft in the first half of the following year.

Is that a huge number? I don’t think it’s a huge number, but I don’t think that some seasonality around fourth quarter will ever go away in the industry because of that.

The good news is again as we looked at both of our King Air business and the Citation jet business, it has been more level loaded of a lot of this year and that probably reflects some better demand coming back to the marketplace and obviously we prefer to see that. We would be much better running these operations on a more linear basis.

We see more linear behavior towards the customers this year, but I still think you are always going to see some fourth quarter demand driven around tax..

Okay. And then the last one from me is on the Industrial side.

Are there any new products or programs that you’ve been designed into and any of those businesses on the Industrial side that will lead to an acceleration of revenues over the next several quarters into 2015?.

Yes.

Look, I think if you look at our Caltex on the automotive side of things, we’ve had a lot of new vehicle, new platform wins in both the fuel tank side as well as a lot around our selective catalytic reduction business, there was demand for that vehicles; that family of vehicles grows in the marketplace that’s going to drive nice revenue growth for our business.

As I said earlier, the only challenge for us there is it does usually have a lower ROS, because part of the system is in acquired part which we pass-through at a lower ROS and would be typical of what we manufactured just because it’s a high dollar source component. But clearly revenue growth and overall not growth will be driven by that business.

And so it’s a lot of new platforms which we won and new product around the SCR system. We still see nice growth both organically and through acquisitions in the vehicle business, as well as our tool and test business. So I think generally speaking the industrial segment I think will provide nice growth next year..

Okay. That’s helpful. Thank you..

And our next question will come from George Shapiro with Shapiro Research..

Good morning.

Scott, given how strong you said September and October has been, is it fair to assume that the pricing might even be somewhat better in the September, October orders and what we saw in the strong margins in the current quarter?.

George I wouldn’t be too bullish on the pricing side. I think the good news is that it’s firmed up. So -- and again this is the market dynamic, as we’ve got more customers out there, it gives us the ability to hold the line on pricing.

So I don’t know that we see a step function by any means, here I don’t want to mislead anybody, but it’s not like the market is strong enough, the demand the kind of pricing that was in the last cycle, but certainly it has allowed us to firm up pricing and at least be stable maybe with some small gains because the market dynamics are stronger.

So it’s just supplying demand working a little more in our favor..

And the strength you talked about was that similar international, domestic or weaker international given what we all read about?.

George our order intake in Q3 I think was still slightly biased to the Americas, but it’s probably 60-40, some more an [eminent] balances around a little bit from quarter-to-quarter. But it’s not way out of line..

Okay.

And just some clarification, given the revenues you’re suggesting for Cessna in the fourth quarter it looks like we’ll probably get 70 plus deliveries in the fourth quarter?.

No, 70 would be -- I’d love to have 70, but that’s an awfully big number. I don’t know if we want to get into exact units, George, but again I think we’ve usually seen average aircraft revenues as I think kind of how we usually think about it being somewhere in the 8 to 9 range. So, 70 or something would be a pretty huge number..

Okay..

The revenue number will be higher than that number we talked about..

Okay.

And then one last one if you split it all, give any color on whether the book-to-bill of one for aggregation was similar with both Beech and Cessna?.

It was pretty close, George, pretty close on both Beech Cessna military versus commercial. It’s pretty close to one to one across every dimension that we would look at. .

And how about used plane sales in the quarter say versus last year’s quarter, much different?.

I’ll have to check the revenue number. I mean we usually have been looking at that one sequentially, George. So I’m sorry, I don’t have that number on my tongue here. Certainly on a sequential basis it was… but we’ll update you on....

It was about flat from a revenue standpoint..

On a year-to-year?.

On a year-to-year.

And up a little bit sequentially you just said Scott?.

What he was saying I think average selling price was up a little bit sequentially..

Okay. I can call you offline, Doug..

Yes now we can try to -- we can get those for you George, we just don’t have it..

Okay. Thanks a lot. Good numbers..

And our next question will come from Sheila Kahyaoglu with Jefferies..

Hi. Thanks for taking my question.

I guess how do you think about the underlying profitability for the Beechcraft business as it stands today and where you see the run rate, do you think you need additional investments in the King Air portfolio and what about the service business? Is there additional capital required to increase the level of service there?.

Sheila, we don’t track report separately, the Beech number and part of that because we’ve completely merged these entities. So I mean all the overhead pulls, all the engineering R&D what now results triggers one thing. So I wouldn’t have the ability to breakout overall profitability of say historical Beech versus historical Cessna.

But we’re at a point where feel pretty good about the productivity that’s been driven and that’s benefitting obviously across all the product lines.

In terms of R&D, we will now and we already are looking at the turboprop product line, the same way we look at the jet product line and laying out new product roadmap plans, upgrades, enhancements all the kind of things that people have expected us to do in the jet business.

So absolutely there will be investment on the R&D side into the King Air and other historical Beech products as we go forward. And we think just as we do on the jet side that we’ll have some good things coming out in the market as time goes on. In terms of capital, I don’t see any big capital outlays.

We’ve got I think a very strong service network now around the world. And I think we’re capitalizing on that in terms on taking some of the new service program offerings.

We’re trying to take most of our sites now and make it sort of capable of doing not just Beechcraft but also doing Citation jets or if there were Citation jets, now they can also do Beechcraft. There is some tooling involved in that, just to make sure that each of the sites have the capability to do both, but it’s not a material number.

Similarly on the overall aviation business side of things what CapEx is in there is really driven primarily by new product introductions. And so I don’t see any appreciable sort of change if you will over what we’ve seen in the last couple of years, because the flow of the new products will be pretty consistent with what we’ve seen in the past..

Okay. Thank you.

And so just is there any way you could provide a range of where the -- whether it’s King Air or the Cessna system portfolio; is that a mid single to double digit 10% margin business or is that at about a breakeven?.

I don’t think -- we’re not going to into margin levels, yes by individual product lines..

And then just last question in terms of Beechcraft synergies, you mentioned you are ahead; I’m guessing 2014 has largely been focused on headcount.

In terms of what’s left for 2015, is it supply chain; is it additional footprint consolidation; how could we think about?.

Mostly what’s out in the 2015 really is around some footprint consolidation, we have some warehousing and sites largely to do with our distribution of spare parts and services where we’re going to consolidate some of that. And then there are some opportunities to do some consolidations in some of the back shops if you will.

So, we don’t envision any significant changes to final assembly operations. Those are running pretty well and are pretty focused around the different model types. But there is an awful lot of stuff that we today where we have two separate composite operations, we have two separate machining and metal bonding and a lot of fabrication sort of stuff.

And we will continue as we go forward to see consolidation of those to again drive better cost efficiencies and better utilization of those facilities..

Got it. Thank you..

Sure..

I think we’ll take our last call now operator..

All right. And that will come from Ron Epstein with Merrill Lynch..

Yes. Hey, good morning..

Good morning..

So, just want to follow up on kind of one my favorite subjects with you guys is what’s going on with the Scorpion? Are we any closer to customer or if you could just give us an update there?.

Look Ron, I’d say we’re getting closer all the time. We have a bunch of customers frankly that we’re talking to. There is a lot of activity in the market. There is a number of countries that are going to be putting out RFPs for how they think about replacing some of their aircraft.

And part of that frankly is driven by the fact that there is something like that’s out there now that they see as a viable affordable product to meet their mission. So we continue in pretty serious discussions on a number of fronts and feel pretty good about where we are.

We did have the aircraft out at the Air Force Association meeting in Washington a few weeks back; we had a ton of customers coming through and looking at it; we continue to get very good feedback; we’ve had a lot of customers that have come out to see the aircraft and go through pretty detail briefings in Wichita as well.

So, I don’t want to -- I don’t have anything to announce to you, particularly today but I think we feel pretty good about where it’s going on. And we’re in pretty serious discussions with a number of folks..

Okay.

And on that one, do you guys see it as a potential or maybe some modification to it as a potential bid for the upcoming China program?.

Yes, absolutely Ron. We’ve been participating in the T-X program. There have been industry days; there is a lot of work going on in the Air Force right now as they kind of work their way through requirements definition. So, we are certainly inched in the program; we’re following it quite closely as our number of other competitors.

Look, I don’t think the Air Force is interested in the big development program, so I think clearly one of the things they’re going to have to do is look at what aircraft platforms are out there that are available that with some minor adaptations will fit what they need for TX. So we would love to participate in the program.

We’re working the program and how competitive we are or whether our aircraft is the right aircraft or not will depend on where the requirements document ends up.

And that’s something that I don’t think we’ll probably see till late this year or beginning the next year to know whether the Scorpion or a minor adaptation to the Scorpion is the right answer for them. We’re certainly very interested and we’re following it very closely..

Okay. And then maybe just one last one. So you guys delivered 33 Cessna aircrafts in the quarter. The mix was clearly skewed more towards M2s; M2s clearly has been well received. But relative to historic levels, it’s still pretty [anemic].

When we think about -- and again I know some sort of thinking about ‘15, ‘16 I mean is it okay to walk away from this call thinking we’re in a market recovery or is it more walking away from this call that it’s stabilized?.

You know Ron I still think that the way we think about it is that it has stabilized. And again upside to where we’ve been is largely driven by new products. That’s been true this year as we’ve seen mostly growth driven by M2 and Sovereign.

And I think that my plan right now would be that most of the growth next year would be driven by the Latitude introduction. So we feel good about where the market is, I mean it certainly appears to have stabilized. So as I said earlier, we like the level of demand that we’re seeing.

But I don’t want to say that we think there is some significant inflection in the market just stability on current aircraft programs and new programs driving growth is still how we see it..

Okay. And then maybe just one last one, that’s not a fairy topic in mind with Medtronic.

Have you picked up share you think by offering a training package with the Cessna product? Do you think you’ve picked up share from likes of CAE in flight safety in that market?.

I think, Ron, it’s still too early to say. I do think that -- and we’ve had great feedback from a lot of our customers, particularly our CJ customers. As we acquire ProFlight, which gave us that CJ training capability on the West Coast.

As I said, we’ve now announced that probably by the second quarter we’ll have that same training capability up and running in Tampa.

So we do have a lot of our CJ customers that are giving us great feedback unlike the idea of being able to not only acquire the aircraft, but take care of all their sourcing aircraft and the personal training in the aircraft. So I do think it will help us.

I don’t know in that case not so much a share shift of the equipment side of the business, but some share shift in terms of the training side of the equation..

Okay, great. Thank you so much..

Sure..

All right. Thank you ladies and gentlemen..

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