Douglas R. Wilburne - Vice President-Investor Relations Scott C. Donnelly - Chairman, President & Chief Executive Officer Frank T. Connor - Chief Financial Officer & Executive Vice President.

Robert Stallard - RBC Capital Markets LLC Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) George D. Shapiro - Shapiro Research LLC Sheila K. Kahyaoglu - Jefferies LLC Cai von Rumohr - Cowen & Co. LLC Seth M. Seifman - JPMorgan Securities LLC Noah Poponak - Goldman Sachs & Co. Samuel J.

Pearlstein - Wells Fargo Securities LLC Ronald Jay Epstein - Bank of America Merrill Lynch Jeffrey T. Sprague - Vertical Research Partners LLC Myles Alexander Walton - Deutsche Bank Securities, Inc. Peter John Skibitski - Drexel Hamilton LLC Jason M. Gursky - Citigroup Global Markets, Inc.

(Broker) Jonathan David Wright - Nomura Securities International, Inc. Justin Laurence Bergner - Gabelli & Company.

Ladies and gentlemen, thanks for standing by and welcome to the Textron Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session later. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. 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 $3.2 billion, down 7.3% from $3.4 billion in last year's third quarter.

However, income from continuing operations was $0.63 per share, up 10.5% from $0.57 per share in the third quarter of 2014. Manufacturing cash flow before pension contributions of $16 million was $116 million compared to $144 million in last year's third quarter. With that, I'll turn the call over to Scott..

Thanks, Doug, and good morning, everybody. Revenues were up at Textron Aviation, Systems and Industrial but down at Bell, which led to an overall decrease in revenue in the quarter. Segment profit was up 6.5%, reflecting improved margin results in each of our business segments.

At Bell, the decline in revenues was primarily due to lower deliveries in our V-22 program, as we delivered four V-22s, down from 12 a year ago. This decline was partially offset by an increase in H-1 deliveries, as we delivered five units this year compared to four in last year's third quarter.

On the commercial side, shipments were also up, with 45 aircraft delivered in the quarter compared to 41 a year ago. While commercial helicopter markets remain challenging, Bell continues to show a favorable win rate, so we still believe the commercial deliveries will be up modestly this year.

On the new product front, we've completed over 45 hours of ground testing and 35 hours of flight testing on our 525 Relentless program since the program's first flight on July 1.

During that time, we've successfully conducted numerous tests, including ground resonance testing, gross weight and envelope expansion, maximum continuous power climbs, minimum power descents and initial autorotation testing. We've also successfully engaged a full fly-by-wire system to a speed of 150 knots and an altitude of 13,000 feet.

Overall, the aircraft has performed very well, proving to be a very stable platform that is meeting or exceeding all of our initial performance expectations.

We've completed structural assembly of our second 525 test aircraft and expect it to enter the flight test program by the end of the year, with a third test aircraft expected to follow close behind. We are currently targeting certification and first delivery of the 525 during the first half of 2017.

Our 505 Jet Ranger X program is also making good progress, as we've now accumulated over 470 flight test hours. We are targeting certification and entry into service during the first half of next year. We also continue to have success on both the U.S. and foreign military front at Bell.

As discussed during our last earnings call, we received our first international order for V-22s in July with the signing of a contract with Japan to deliver the first five of 17 expected total units. On the H-1 front, we were awarded a DoD contract in August for an additional 35 H-1 units, consisting of 32 aircraft for the U.S.

Marine Corps and the first three of 12 planned deliveries for Pakistan. Based on the existing U.S. Marine and Pakistan requirements, we expect a gradual increase in H-1 deliveries from the mid-20 this year to the mid-30s in 2017 and 2018. Moving to Systems, both revenues and margins were up, reflecting higher weapons and unmanned systems deliveries.

At Marine & Land Systems last month, we were awarded a contract to supply 55 COMMANDO Select armored vehicles to the Afghan National Army. We expect to deliver most of those units during the fourth quarter, and we're pursuing a number of other promising foreign military opportunities for our COMMANDO line.

Elsewhere at TMLS, we continue to make good progress on the Ship-to-Shore development program, with the first two landing aircraft now in production. The initial craft remains on track for delivery in 2017.

Moving to Industrial, we achieved a 5.5% increase in revenue after a 7.5% negative impact from foreign exchange, reflecting strong organic growth in each of our businesses. Kautex had the highest increase in revenue with volumes up in Europe, North America and Asia.

Textron Specialized Vehicles also had solid growth across all business lines, reflecting our focus on new products and the success of recent acquisitions.

At Jacobsen, we launched our new Professional Series commercial grade lineup of mowers and utility vehicles aimed at the North American missile market at last week's GIE+EXPO industry show in Louisville, Kentucky.

Overall, our Industrial segment is performing well, both on the top line and in terms of cost productivity in what has otherwise been a difficult industrial environment. Wrapping up with Textron Aviation, we delivered 37 jets and 29 King Airs compared to 33 jets and 30 King Airs last year.

Margins in the Aviation segment improved significantly on the higher revenues and improved performance, which included lower amortization related to fair value step-up adjustments. Our strategy of investing in new products continues to pay off, as we delivered our first four Latitudes in the quarter.

We expect to see a ramp of Latitude deliveries, reflecting both retail demand and deliveries to NetJets. The Latitude opens the door to our new generation of larger cabin Citations, including the new Longitude, which will make its public debut next month at the annual NBAA show.

We believe the Longitude will be a significant game changer in the business jet world when we reveal its superior performance, design characteristics and best-in-class operating cost. We will have a broad array of Citation and King Air products on display, as well as product-related developments to share.

So we expect NBAA to be a positive catalyst for Textron Aviation as we look to 2016 and beyond. To sum up the third quarter, good margin results across our businesses contributed to a solid overall financial performance.

With only a quarter to go, we're adjusting our full-year guidance for earnings by bringing up the bottom of the range by $0.10 and maintaining our outlook for cash flow. With that, I'll turn the call over to Frank..

Thank you, Scott, and good morning, everyone. Segment profit in the quarter was $312 million, up $19 million from the third quarter of 2014 on a $250 million decrease in revenues. Let's review how each of the segments contributed starting with Textron Aviation.

Revenues were up $79 million from this period last year, reflecting higher jet and military deliveries. Aviation had a profit of $107 million compared to $62 million a year ago. This increase reflected the higher volumes, as well as improved performance, which included a lower amortization of $9 million related to fair value step-up adjustments.

Backlog in the segment ended the quarter at $1.4 billion, approximately flat with the end of the second quarter. Moving to Bell, revenues were down $426 million, reflecting lower V-22 deliveries and lower commercial revenues largely related to lower aftermarket volume and a change in the mix of commercial aircraft.

Segment profit decreased $47 million from the third quarter of 2014, reflecting the lower volumes partially offset by favorable performance largely related to our cost-reduction activities. At Textron Systems, revenues were up $62 million primarily due to higher weapons and sensors and unmanned systems volumes.

Segment profit was up $12 million, reflecting the impact of the higher volumes. Industrial revenues increased $43 million due to higher overall volumes partially offset by $59 million of unfavorable impact from foreign exchange. Segment profit increased $8 million, reflecting the impact of the higher volumes.

Finance segment revenues decreased $8 million and profit increased $1 million. Moving below the segment profit line, corporate expenses were $27 million, down sequentially from the second quarter, primarily from the impact of lower ending share price. Our tax rate in the quarter was 30.2%.

Interest expense was $33 million, down $4 million from last year. During the quarter, we repurchased approximately 3.1 million of our shares at an overall cost of about $124 million. Year-to-date, we've repurchased approximately 5 million of our shares at an overall cost of about $211 million.

To wrap up with guidance, we are estimating full-year EPS from continuing operations of $2.40 to $2.50 a share and cash flow from continuing operations of the Manufacturing Group before pension contributions of $550 million to $650 million. That concludes our prepared remarks. So, Brad, we can open the line for questions..

All right, thank you. And our first question comes from Robert Stallard with Royal Bank of Canada. Please go ahead..

Thanks so much. Good morning..

Good morning..

Good morning..

Scott, maybe we'll start off with Aviation. There's been some concern about emerging market weakness in business jet and FAA flight data still being fairly static. I was wondering if you can give us your perspective on what you're seeing out there in terms of customer demand and maybe pricing..

Well, I think, Robert, the market in North America, the U.S, has been reasonably strong. I think we're pretty happy with the market in the U.S. There's no question that the markets in Europe and Asia are challenged. I think part of that is just the economies are in a pretty difficult spot and, of course, the U.S.

dollar being quite strong puts some additional pressure on that in terms of all the product lines. So there's no question right now our recovery and the strength of the business is largely North American. In terms of pricing, it mixes by model but, overall, the impact of pricing has been not really material on a quarter-to-quarter basis..

Great. And then maybe secondly, on Bell, a very good margin performance in the quarter.

You think this is sustainable going forward?.

Well, Robert, we've been trying to target the business in that 11% to 12% range. Obviously, we took a lot of cost actions earlier this year when we realized the commercial market would be lighter than we expected, so I think we're comfortable with our guidance this year on that 11% to 12% range based on those actions.

I think there's always risk on the volume line, I think, but I think we're in a spot right now where we feel pretty good about that 11%, 12% guidance..

And just a quick follow-up on that.

The V-22 -- it seems to be a bit volatile from quarter to quarter, is it?.

Well, I mean, it's obviously been stepping down through the year, Robert, on the new contract but, frankly, this quarter was probably a little lighter than it normally would be just in terms of some of the timing of completions of aircraft and acceptances. So it's probably more volatile this quarter than it would normally be.

We would have actually planned probably six aircraft sell, there were a couple aircraft that sold right at the very beginning of the next quarter so they just missed the revenue in this quarter..

Thanks so much..

Sure..

And the next question will come from the line of Julian Mitchell with Credit Suisse. Please go ahead..

Hi. Thank you.

I just wondered on the Latitude, when we're thinking about the effect of that on Aviation margins from here, as you see deliveries ramp up, do you think there'll be a big negative margin hit, or you can kind of manage it across the fixed cost base?.

I think we'll manage it within the context of the overall business. So the margin rates, the costs have come in about where we expected on the product.

We will as we go into next year in particular because we'll have a number of deliveries into NetJets which typically are a level below our typical retail sales since they are effectively a reseller of those aircraft in a fractional sense.

We'll have some lower margin deals in there, but I think it's something we'll be able to manage in the context of the overall business..

Thanks. And then on Bell, you talked about commercial deliveries still be up potentially. Maybe just home in on 412s. I think you've delivered nine to-date after 26 in the whole of last year.

How are the orders trending there and how do you think about those deliveries looking out?.

Well, there's a fair bit of activity in both late this year and through next year. I think certainly we'll be down in terms of the total number of 412s for the year, but that's kind of what we've been expecting as we've been going through all of our restructuring and production planning..

Thanks. And lastly, buyback, a step up to a degree in Q3 as you'd mentioned.

Is that just kind of opportunistic around the share price, or is there anything more fundamental there?.

No, I think it's consistent with what we've been saying, so we'll continue to retire the – to make sure we're not diluting, and opportunistically we do some additional share buyback and we certainly had some of that activity in the quarter..

Very helpful. Thank you..

Sure..

And our next question comes from George Shapiro with Shapiro Research. Please go ahead..

Yes. What I wanted to ask on the guidance for the year, and this is probably more for Frank. If you look at the high end, Frank, it implies $0.81 in the first quarter.

You did $0.76 last year but you had $13 million in special charges, $8 million of beat step-up, interest expense probably $7 million lower, so I net that out as a benefit to this year of $0.07 a share. So if I put it together, you're actually forecasting a couple cents below last year.

I figured Bell's going to be down, but Aviation ought to be up by more than what Bell's down and the other sectors probably not much to split.

So I just wondering what's wrong with the arithmetic, or are you just kind of being on the conservative side for the guidance?.

Well, look, I think obviously we've talked a lot about we've got a difficult environment for Bell. We've got kind of we've done a lot on the cost side. But kind of as volumes have come down there, that puts kind of pressure on just the cost structure and cost base at Bell.

So, no, I don't – I think we're being appropriate given the market environment that we're seeing out there and, obviously, we're working hard to achieve those results..

Okay. And one for Scott. Latitude deliveries, four in the quarter, Scott, I mean, I would have thought maybe there's a little bit more.

I mean, is this just timing and could you give us a kind of a ballpark as to what we might see in the fourth quarter?.

Well, I think it is largely timing, George. We've got the first four aircraft, we've got the certification done obviously and got the first four aircraft out there into the market. We certainly expect to see that ramp as we go through the fourth quarter. Aircraft is still doing great with customers. I think it's showing very well.

We'll have it obviously at NBAA. It's been doing a lot of flying in both the U.S. and Europe. We expect to get the OSIS certification here in the quarter as well, probably late in the quarter going through that process which could have some effect on where we land in terms of total deliveries, but we still feel great about the aircraft.

It's flying great. The customers seem to love it, and as I said, we expect to see that ramp as we go through the fourth quarter and obviously into 2016..

You don't want to put a number on it, though?.

I probably wouldn't put a number on a particular model, number of deliveries in a quarter, no..

Okay. Thanks very much. Good execution..

Okay. Thanks, George..

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

Hey, good morning, guys..

Good morning, Sheila..

It looks like we'll see the Longitude at NBAA.

Could you maybe just give us an idea how you're thinking about the magnitude of the investment in Cessna overall and further refining the portfolio?.

Oh, the investment kind of continues obviously at Cessna. I don't know if the fixed wing aviation has ever had more programs going on at the same time than we have right now but, obviously, the Longitude has been a significant investment and one that we'll continue to make. We're holding our late 2017 entry into service on the aircraft.

I think it's going to show beautifully at NBAA. And we'll have some additional announcements, frankly, beyond that in terms of what we're doing with the product portfolio. So the pace of the investment I certainly expect will continue.

We tend not to give a specific number for each of the aircraft or anything, but the R&D is continuing as we've committed and I think that's paying off for us. You've seen what's happened over the last couple years with a lot of the upgrades, the Latitude, obviously, we're very happy with.

Longitude, we talk in terms of our single engine turboprop as well as what we're doing to continue to expand our jet portfolio..

Okay, thank you. And then just a follow-up on Bell margins.

As we look out on the commercial side, how do we think about the impact of the 505 and the 525?.

Sheila, the 505, given where that part of the market is, is usually dilutive to margin rates. Those aircraft tend to be at a pretty low price point, so there's not a whole lot of margin dollars in them. It tends to make up for that as you look long term in the service business.

We still have a huge portion of our service business today at Bell that's driven by jet rangers and 206s, 407, the light single end of the market. But it won't have a material impact in the margin rate.

And, of course, the 525 we expect will certainly be a profitable product, as those tend to be in the larger end, are more profitable in the initial sale. But again, that's something we're talking about entering the service in the latter half of 2017, so it wouldn't affect anything that we would talk about when we get into 2016..

Okay. So overall, the commercial business is net neutral to profitability next year.

There's no significant impact from the 505 or certification on the 525s?.

No, there shouldn't be. I mean, the number of 505s in the year next year I don't think will create a material impact in terms of the margin rate..

Perfect. Thank you..

Sure..

And the next question comes from Cai von Rumohr with Cowen & Company. Please go ahead..

Yes, thank you very much. So it looks like both the 412 and the 429 kind of are running light and the smaller helicopters are doing well.

What does that imply for Bell revenues for the year? Can you still get – can you get to $3.5 billion and kind of a flattish fourth quarter in terms of revenues?.

Well, Cai, I mean – it's a good question. If there's any risk to where we're going, it's in that volume and then particularly on the commercial side of the business. But you're right, the volumes have been stronger in the lights than they have been in the light twins or the heavier twins in the 412 side.

But I think we're going to be close to the revenue guidance numbers that we've given you guys. There's probably $100 million of risk in it or something like that, but that's – for the total year, that's probably where we're going to head in terms of the Bell revenue..

Okay. And then, given kind of the ambitious new product kind of plan you've got, as I recall, last year you did about $565 million in R&D and I think you were kind of talking about $600 million for this year.

What can you get – can you update us where is the R&D for this year and how should we think about it going forward?.

Well, I think we're going to continue to see increases. And so, in the third quarter, we were up slightly in terms of overall R&D spending for the total company.

And I think that's a trend that will continue, Cai, and that's largely driven by the investments that we've made in the Latitude, what we're doing in the Longitude and other stuff we'll talk at NBAA in terms of our fixed wing aviation business.

And obviously, we're getting close on certification here of the 505, but we have the 525 now in full certification testing, we have a huge investment in the V-280 program and, obviously, a lot of investments across our Industrial and Systems businesses as well. So I think the level of R&D is tracking with kind of what we told you guys to expect..

Well, I think everyone expects the R&D will go up and the revenues generally also are going up.

Should we think of the R&D to sales holding approximately flat or is it likely to be up with this ambitious Longitude program?.

No, I think it's probably flattish, Cai. Obviously, this year we've had some additional headwind in total, but that's largely driven by the fact that we've been seeing this contraction at Bell, principally on the military side, to some degree on the commercial side.

But I think our expectations going forward is that it will hold about flattish in terms of percent of sales..

Thank you very much..

Sure..

And our next question will come from Seth Seifman with JPMorgan..

Thanks very much and good morning. I was wondering if I could ask a quick question about Kautex and the exposure to Volkswagen that you have there and whether you expect to see any impact from what's going on there..

Well, that's very hard to say at this point. VW's obviously an important customer for us, but we're a supplier to the industry in total. At this point, I think it's hard to predict exactly how that's all going to play out.

Clearly here in the near term, we've seen a movement from a lot of the small diesel to the petro-based models just because of the situation with sales in that product line.

But I'd say at this point, it's too early to know what's going to happen, how customers are going to react and do they choose other VW models, do they choose models from other manufacturers. I think it's very much still to be determined. And so for us, it becomes a model mix question, both within VW or outside of VW.

And at this point, we just don't have a whole lot of data as an industry on what that shift is going to look like. But I, frankly, don't expect it to be a material impact to us one way or the other. The automotive markets have been fairly strong, and I would expect to see them kind of continue on the trajectory.

This is really just a question of model mix..

Would you be able to size your – the percentage of Kautex revenue that comes from VW?.

No, we wouldn't – I don't think we would ever publish those numbers. As I say, they're a significant customer, but across a very, very broad range of VW product. And that's why the question in terms of what the mix does, I think a lot of the mix shift, frankly, will be within VW, so it's....

Great. Okay, thank you..

And the next question will come from Noah Poponak with Goldman Sachs. Please go ahead..

Hi. Good morning, everyone..

Good morning..

Good morning..

Scott, if I'm thinking about scenarios for Cessna production in 2016, is a production decline in the scenario analysis or is that off the table, and could you answer that both including and excluding the Latitude?.

I won't do it including or excluding certain model types. I would say, Noah, and we want to – we're not probably ready to get into 2016 guidance just yet, but, clearly, as we have production running today, no, I would not expect to see a decline in volume across any of our product lines..

Okay..

Jet turboprop single-engine, I think where we're tracking right now in the market, I think we're still running production with expectations that we'll not see declines next year..

Okay. And on the margins at Aviation, the incremental both sequentially and year-over-year, stripping out the inventory step-up looks quite nicely ahead of how you guys talk about how that should trend over the long run.

Can you parse out what drove the upside in the quarter and how that should trend over the next few quarters?.

Well, Noah, it's always – when we talk about incrementals, it's sort of how to think long term. We kind of talk about this 20% or so kind of number. Obviously, that's a little bit lumpy. We're going to have quarters where we do quite a bit higher than that. This is a good example of such a quarter.

But we're going to have quarters where it's going to trend below that. And it largely has to do with how R&D costs are coming in, SG&A shows – I mean, there's always noise in that number.

So I think the guys did a great job of converting on the volume that came through this quarter and it's a very solid performance, so I still think that kind of 20% numbers on an incremental basis are good numbers to use, but there is going to be lumpiness to that..

Okay. And then just one last one.

In Bell commercial, has the oil and gas customer at least stopped getting worse, or is it hard to tell? And where will you exit the year with that customer as a percentage of Bell revenue versus where it started the year?.

Noah, I honestly don't have that number. I think we've talked before about the oil and gas segment historically being sort of around that 10%-15% kind of a percent of our sales directly into that oil and gas market. I think our visibility, obviously, that's down this year, so you're not seeing a whole lot of new equipment sales.

Utilization is clearly down in those markets, so that's impacting our aftermarket, obviously. I can't tell you that I see the data on enough of a daily basis to say, hey, has it flattened? Is it moving around? I don't really know. I think the trend of utilization being down continues.

And in terms of what that means, I don't have the exact number this year to compare it to tell you last year and what that stabilized..

Okay..

I know that's not much of an answer. Unfortunately, that's one bit of data I don't have, so....

It sounds like, I mean, without – so you don't have the data, but it also sounds like it is not clear that it has actually stopped getting worse, necessarily..

Yeah, I don't – I certainly have not anecdotally had any feedback or input from the guys saying, hey, good news as the oil and gas guys are starting to fly more or back looking for new aircraft..

Yeah. Okay. Thank you..

Sure..

And our next question will come from Sam Pearlstein with Wells Fargo. Please go ahead..

Good morning..

Sam..

Can you talk a little bit about – I know you're going to show more on the Longitude, but there were discussions last week about delays on the whole Silvercrest engine line, and can you just talk about how that's impacting the timeline for that plane?.

Sure. I mean, I want to sort of stop short of doing product announcements at this point, but I would say that we're certainly aware of what's going on with the Silvercrest. That does not have an impact in terms of the Longitude and its launch date in late 2017.

There's a lot of work that's been going on in terms of our portfolio in the jets business, particularly the higher end of our jet business, and I think it will all start to make more sense once you see what happens at NBAA.

So we'll talk about our whole product line and portfolio and what's going on there in the large cabin segment for us, and I think it will all make sense in the fact that we have a clear line of sight to Longitude in 2017 and the product portfolio beyond that..

Okay. And then just to go back, can you talk a little bit about some of the demand in the non-jet programs? Just because we saw both Collins and Garmin talk about some weakness, it seems like that would imply King Airs and some of the Beech products might be having some pressure.

Can you just talk about some of the demand in that area?.

So if you look at the King Air, the numbers we give you guys, we had 29 in the quarter versus 30 a year ago. We've been a few aircraft lighter in each of the previous quarters as well, so the volume would be down, but only a couple, two, three aircraft on a year-over-year basis. So the King Air, I think, is continuing to do fine.

Caravan deliveries will be, in my view, roughly, probably flat on a year-over-year basis. We've had a little bit of softness in China. We've had some good-sized orders in China as well, so Caravans will be kind of flattish on a year-over-year basis.

And, frankly, I think we'll be up and we're already up on a year-over-year basis in our piston product line, which are all Garmin as well. So I think if you looked at our year-to-date performance in aircraft at our Garmin base relative to their comments (31:27) marketplace, we're actually up and expect to be up for the total year..

Okay, great. And one last question is can you just talk a little bit about the Canadian TAPV program? I know it's somewhat unrelated, but the election seems like it might have some impact on what Canada does in the aircraft programs.

Has there been anything that would affect the demand or the timing or schedule for TAPV at this point?.

Nothing political, certainly. I mean, we've had no indications that there's any change in their strategy with respect to this program. We are in the test phase of the program. And as we talked, this is kind of a race to the end of the fourth quarter, whether we get deliveries this year or we get them in the next year. So the test program continues.

Guys are working it. But in terms of any jeopardy or risk from the change politically, we're certainly not aware of any..

But now sitting at the end of October, you haven't really started the delivery ramp yet in the fourth quarter?.

No. No, that's correct..

Okay, thank you..

Sure..

And our next question will come from the line of Ron Epstein with Bank of America..

Hey, good morning, guys..

Good morning..

Good morning..

So quick question, I guess, for Frank. What's going on with the balance sheet? Inventories are up $600 million in the quarter, and it just seems like the balance sheet's getting a little bloated.

And just curious what's going on?.

Yeah, so we've had – we've seen a little bit of inventory build. Obviously, we're very seasonal in terms of kind of what happens with inventories.

We had planned the year a little stronger at Bell commercial and we've seen kind of less volume there, as we've indicated, than we would have thought, and the year has been a little bit more backend-loaded than we would have thought. So kind of nothing that is troubling in any perspective, but it is kind of something that we continue to watch.

We, obviously, also have been building inventory as we've ramped the Latitude program, and so kind of just in terms of how those kind of the Latitude program will grow from a volume standpoint, we need to begin to flow that inventory through the system. So that has a bit of an impact as well..

Yeah.

Do you have any white tail helicopters sitting in inventory?.

We don't talk about kind of white tails in any of this, right? We have production plans. We have delivery forecasts and we try and match those up as best we can. And on the helicopter side, kind of unlike the jet side, you also have long completion activity at times.

So kind of how long it takes from kind of beginning to fabricate to actually delivering a helicopter can vary dramatically, depending on the configuration of that helicopter. So there's a fair amount of volatility to that..

Keep in mind we took our production cut in the second quarter of this year. It's now just the third quarter, so it takes some time to catch up with that flow through the....

Yeah. I think what Doug said, Ron, is when we start these things down the line, we're not going to stop them, so we did cut production schedules. But for the stuff that was in the pipeline, obviously, we can continue that stuff and build it out.

In terms of the white tail, remember, there's nobody – you have to flow production, right? So there are certainly orders for all those models of aircraft that go out into 2016.

The question's going to be whether – how many of those you do get completed and finished and able to deliver in 2015, but any that are not are already spoken for in orders that you look at in 2016. So there's not aircraft that we don't know what's ever going to happen to that aircraft.

But we were running production lines at a higher pace, we cut that back in the second quarter. We are going to finish – go through the final assembly up to the green stage of an aircraft.

And then in the helicopter market, the level of customization usually is pretty significant, so those things will then go into the completion process prior to delivery. They're not sitting on a ramp, typically, in a deliverable form..

Got you..

I ought to mention, we had a couple V-22s that delivered a week later. So had we measured the balance sheet a week later, it would have had a significant improvement. So it's mostly timing, Ron..

Okay, okay. Fair enough. And then just completely changing gears, what's going on in the golf cart market? How are you guys doing with share and are you seeing any pickup there? Your primary competitor in that market said they've seen some growth in that market. Just curious about what's going on. Nobody ever talks about golf carts..

We talk about golf carts all the time, you guys just never ask about them. No, our golf business is doing great. I'm really happy with it. Our product lineup is in good shape. We've had some nice additions to the family this year in terms of some of the – more on the utility side of the product line in addition to just the basic golf cart.

And the business is doing really well..

So are you seeing growth, do you think?.

We certainly see some growth, sure..

Okay, great. Cool. Thanks, guys..

Sure..

And our next question will come from Jeffrey Sprague with Vertical Research. Please go ahead..

Thank you. Good morning, gents. Just a couple of follow-ups, I guess, covered a lot of ground here. Just back to Cessna margins, I mean, to one of the earlier questions, sequentially, they were actually quite strong and, Scott, you kind of just suggested that's kind of the normal lumpiness and everything going on in the business.

But given that lumpiness and our inability to kind of forecast that sort of thing, can you triangulate us a little bit on actually what you're expecting for Cessna margins in the fourth quarter as part of this guidance construct?.

Probably not, Jeff.

I mean, look, this is why we do the annual guidance because we do get lumps through the quarters in all of our businesses, right? So I think the margin performance – look, we're not going to be able to sustain 40%-plus incrementals on volume, obviously, so I think we will expect to see a considerably lower margin conversion on what growth there is in the fourth quarter.

But we'll be probably – look, I think we'll end up a little bit north of our yearly guidance range that we gave you back in the beginning of the year.

The performance in the business has been quite good in items of its conversion, so I think the – frankly, compared to the annual guidance number we gave you, we're likely to be light on the revenue side. We've been sort of struggling through that all year. I mean, I think we're doing okay. As I said, I think the U.S.

market, the North American market is good. The international markets have been tougher probably than we expected, which means we're, probably from an overall annual guidance, going to be lower on revenue but probably up a little bit in terms of the margin rate from the full year range..

Thank you.

And then just on Latitude, has there been any meaningful change in order intake on that aircraft now that it's flying and available? Can you provide any color there and any impact that it may have had on other products in the product line?.

I mean, we're selling them which is good, right? So I think it's been well-received in the marketplace. So we are booking orders. And we've always – look, there could be some cannibalization within the family, obviously, as you add more products, but we're also up a little bit on Sovereign sales in the quarter as well.

So the Sovereign Plus continues to sell as well. Really, those two aircraft are similar, but it's a question whether you want a larger cabin and give up a little bit of range, and single club plus two or you want to go with the big double club and a little bit more range on the Sovereign side. So both aircraft right now are doing well in the market..

All right. And then just one last one for Frank. It's the time of the year to be thinking about pensions again.

Can you give us any color, Frank, on kind of snap the line today on the various metrics, what we might expect in the next year on headwinds or cash funding?.

Yeah. Jeff, as I always say, there's still a lot of moving pieces. But I think from a cash funding standpoint, we don't expect kind of a need to make any contributions into the defined benefit plan, sort of our defined contribution plan sort of be similar to this year's levels.

And from an expense standpoint, a lot of moving parts will not be a headwind unless something were to change dramatically and should be a little bit of a tailwind and, again, it depends on where things come out in terms of returns and discount rates and stuff like that..

Great, thank you..

And our next question comes from Myles Walton with Deutsche Bank. Please go ahead..

Thanks. Good morning. I think last quarter at Cessna, the aftermarket was a shade lower year-on-year.

I'm just curious, can you give us some spot on the Aviation aftermarket trends as well as the Bell aftermarket trends?.

Sure. Look, I think the fixed wing aviation market this year on the aftermarket is going to be pretty flattish. And I think that just reflects sort of utilization, what utilization numbers that we see in the U.S. around takeoff cycles and such is up a little bit.

I think the data is not as good internationally, but it feels like it's probably down a little bit. So kind of netting out the two, I think ex-the incrementals obviously that we're going to see from the first quarter numbers of the additional Beech and (41:25) aftermarket, I think the overall organic number is going to be pretty flattish.

On the Bell side, it's going to be down and that's just, I think, not to be unexpected given what's going on in utilization in the helicopter business..

In the Bell side, is that a deceleration or is that kind of consistent quarter-on-quarter?.

Quarter-on-quarter..

I'm just curious if you're seeing aftermarket deterioration..

It was a little stronger in the beginning of the year..

Yeah..

Okay. And the only other follow-up for me was on cash flow.

So just for the year, and I guess following up on Ron's question, it looks like you'd be probably at the lower end of the range for this year, maybe given kind of performance year-to-date, but maybe in 2016 given the inventory build, you might have a cleaner trajectory to have a little bit better cash conversions.

Is that the right way to think about it?.

Well, I think it's all dependent on how volume plays out here in the balance of the year, right? I mean, you get down to the end of the year, every dollar of revenue translates into a dollar of cash.

But I think the way you've categorized it, obviously, we think if things go the way we'd like to see them go, we'll be in fine shape in terms of the cash guidance number that we've given you. Obviously, I think this rolls over into 2016, but our current plans would have us solidly in the guidance that we've given you..

Okay, great. Thanks..

And the next question comes from Pete Skibitski with Drexel Hamilton. Please go ahead..

Yeah, good morning, guys. I just had a question about the TRU simulator business, just because you guys have called out the 737 MAX opportunity as being fairly sizeable, and I'm just wondering when the first simulator delivery would be and kind of how fast the ramp is..

So, the initial – the contract that we talked about before is with Boeing to provide their 737 MAX for their flight test programs and their training centers. They've already exercised the first few incremental units to go into their training centers, and there's a number of options left to be exercised on that.

I think beyond that the ramp is really going to be driven by individual airlines, as they get closer to taking deliveries of their 737 MAXes, so that's probably still a ways downstream just given the schedule of the 737 MAX coming into the market.

But the development program, which is what it is at this stage of the game working with Boeing to bring that to the market, is going very well. I think we're happy with how the product's coming along and have a lot of engagement with them and are in the process of assembling and building that first unit for their use..

Scott, (44:11) thank you..

Sure..

And our next question comes from Jason Gursky with Citi. Please go ahead..

Yeah, good morning, everyone.

Frank, can you talk a little bit about Systems backlog and what you expect seasonally as we move into the fourth quarter and how quickly you'd expect the backlog that you have there to convert into revenues?.

Oh, there's so many pieces to a Systems backlog and it's lumpy. So, no, I don't know that I can give you great guidance in terms of kind of how that backlog rolls out. I think we feel good about our kind of sold position, if you will, for Systems for kind of near-term revenue realization, so Systems is a lot more about execution.

Obviously, we need to continue to take orders and execute on foreign military sales and all the things that we've talked about on the Systems side, but that backlog does provide a path towards near-term revenue performance as long as we execute on those programs..

Okay; great. And then you talked a little bit about the H-1 ramp.

Can you talk about the impact on margins in the out years as the H-1 ramps?.

Well, I think it's only goodness for us, right? I mean, it's a very solid program, the incremental volume which we've just received that order which includes the next lots of the Marine Corps, as well as starting now the Pakistan deal.

So those incrementals, as we – they'll probably have a little bit of benefit in 2016 as we start – stuff goes into the production cycle, obviously, but the revenue recognition and margin deliveries will be 2017 and 2018, but certainly any additional volume is good for us incrementally.

So probably not a material impact in 2016 but beneficial to us in 2017, 2018 as we see that increased number of deliveries. You add six to 10 H-1s a year, that's good business..

Right. Okay, great.

And then, Scott, what do you think the earliest timeframe is for volume increase in the V-22s, given the international demand that's come in?.

Well, it's probably pretty similar actually. We now have the options that have been exercised to support the first five for Japan, and it's a similar kind of story, right? We'll start -- the long lead activity in production will start to ramp a little bit in 2016, but those deliveries technically are slated to 2018.

I think there's possibility that we can try to get a couple of those pulled back to 2017, but we'll have to work on the customer as we go forward but – so not a lot of impact in 2016; beneficial certainly in 2017 and 2018..

Okay. And then last one.

Frank, what are you assuming for corporate expenses end of (47:19) year, end of the fourth quarter that's baked into your guidance?.

Yeah, we had been in the $175 million from a guidance standpoint. It should be lighter than that. Some of that is share price performance year-to-date. But we've got pretty good cost control going on, so we'll be less than that $175 million number..

Okay, great. Thanks, everyone..

And the next question will come from Johnny Wright with Nomura. Please go ahead..

Good morning, guys.

So just sticking on the V-22 and the H-1 kind of the international side, how do you kind of size the opportunity there from an order perspective in terms of where are you looking at, where's the best opportunities on the H-1 and the V-22 and how should we expect that to play out over the next few years?.

Well, look, we always struggle with predicting foreign military sales. And there's a number of customers that are, I would say, in active discussions on both V-22 and H-1. The difficulty on these things is just the timing of how long does it take to come to closure on.

And I think it took a lot longer, frankly, than we would have expected on V-22 for the first deal to come in, but it did come in which is good, so I think that generates some momentum for us. We are in discussions. We collectively, ourselves and the U.S. government, with several other V-22 potential customers and several H-1 customers as well.

And so I've only been wrong 100% of the time when it comes to trying to predict the timing from those deals transitioning from discussions to under contract. So I would say I have a high degree of confidence that they will come to contract. The timing is hard to predict..

Okay, well, appropriate. I have another question for you --.

That's probably not a very fulfilling answer but, look, it's the reality. FMS deals are just difficult to come all the way to closure..

Well, this is going to be appropriate then.

So, Scorpion -- where are we at from an FMS standpoint? How do you kind of see the demand playing out there and, timing-wise, where do you think it's most likely to fall now in terms of first order?.

Well, the criticality for us on Scorpion right now is really around certification. The aircraft has been seen and flown by a lot of prospective customers. They're very excited about the aircraft. They love the performance. They love the price point. We need to get a certification program going. I think we're very close to doing that.

Obviously from our internal perspective, the production of the conforming aircraft to go into flight test cert is coming along very well. We expect that conforming aircraft to be flying in probably the first into the second quarter next year.

And I think that as a result of a lot of work over the past year, we are getting pretty close to having a clean path to an airworthiness certification, which is critical to be able to close deals with customers. I think there's a lot of interest.

But the certification box is one we need to be able to check, so we're doing everything we need to do to take care of all the design and manufacturing side of it, and I think here pretty shortly we'll have a clear path to be able to talk to customers about the certification process, which is going to be good and critical to closing on first orders..

So is it fair to assume something like second half 2016 first order, so shipment in 2017 maybe, is that a best-case assumption?.

Something along those timelines, that's....

Yeah. Okay, great. Thanks, guys..

Sure..

And our next question is going to come from Justin Bergner with Gabelli & Company. Please go ahead, sir..

Good morning, Scott. Good morning, Frank..

Good morning, Justin..

Most of my questions have been answered.

I was going to ask in regards to Textron Aviation margins, is there anything in the 2015 margin performance that will stand out as a positive that creates headwinds as we look into sort of the potential for 2016 Aviation margins?.

No, I don't think so. There's no unusual or no onetime kind of stuff in there. I mean, that's – as reported, it's pretty clean..

Okay, great.

And second question, as you sort of move on from – or I guess as the Sikorsky deal moves toward completion and as you hopefully work down your inventory and have a lighter balance sheet, have free cash flow priorities changed at all in the organization or perhaps just give us an update as to where they stand today?.

It's exactly the same which is, obviously, we're continuing to invest heavily back into organic growth of the business, but kind of that's not a – necessarily flows through the cash flow statement item, but it's to focus on some of our free cash flow and acquisitions to the extent available and we continue to do that.

And then otherwise to the extent there's excess cash, to return that through opportunistic share repurchase activities. So it all remains the same level of priorities..

Great. Thanks so much..

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

Yeah, just a couple of follow-ups.

Could you give us, Scott, what percent of the orders in the quarter were from North America in Aviation?.

Aviation, it's roughly around 80%/20% right now, George..

Okay.

And the percentage of commercial helicopters that you see to the oil and service business?.

Quite low..

That's what we were saying earlier, George, we don't really have good data on that. It's kind of hard, for one thing, sometimes you sell a helicopter to a utility operator and what the end use of that is sometimes a little difficult to discern..

Yeah, we have – I mean, we have a number of – there's a number of big helicopter operators out there, George, and they put those helicopters into use for – remember, they're – we don't usually sell directly to an oil and gas guy.

We sell to these helicopter operators who are then under contract, but they have contracts with oil and gas operators, they have contracts with emergency medical services operators, they have contracts with utility operators. So, we have to be careful. I can't just say, hey, I sold a helicopter to that firm.

What's their end use? And, frankly, they could repurpose the flight, and you see that, right? So there's guys out there right now that probably have fewer contract hours with oil and gas guys but they've repurposed that aircraft to go execute either utility or emergency medical services or things like that.

So it's kind of not really a number I have specifically that we can track exactly directly through it.

Obviously, there's some guys out there that almost all they do is oil and gas and we know that, but I think that the number – and the reason I say it's quite low I really think most of these guys right now are repurposing aircraft into other markets other than oil and gas, and the aircraft that they are taking from us are primarily going into service in emergency medical and applications like that..

Yeah, okay.

So you're kind of making a guesstimate and figuring it's a pretty low number?.

Yeah, I mean, we work with these customers, we know them, but it's not something that – there's no system tracking this. It's really just our knowledge of what are their flight hours, what are they repurposing. And, again, it's more anecdotal, right? It's not, okay, I can tell you it's 17 helicopters this year got switched over from oil and gas.

We don't have that kind of a hard number for you, so it's more of a color discussion..

Okay. And then just a last quick one. Aftermarket growth in the Aviation business, I assume it was kind of flat to down a little bit consistent with what you've been saying for the year..

Correct. It was pretty flat..

Okay. Thanks very much again..

And no further questions in queue at this time..

Okay. Thank you, ladies and gentlemen..

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