達信公司 (TXT) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by during our loss. Welcome to the Textron first quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. If you have a question please press one on you touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. If you are using a speaker phone please pick up your handset before pressing the numbers. If you should require assistance during the call please press zero, then star. As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Mr.

, Vice President Corporate Communications and Industrial Relations. Please go ahead.

Good morning, and welcome to our first quarter conference call. Joining me here today are Lewis Campbell, Textron's CEO, and Ted French, our Chief Financial Officer.

Before we begin let me add that over the course of our discussions this morning we may be making forward looking statements. Any such forward looking statements are subject to various risk factors which are detailed in our SEC filings, annual report and today's earnings release. The profit's margins we will discuss today for both 2002 and the prior year reflect amounts before special charges and costs related to restructuring. The amount of special charges and costs incurred during the first quarter was $14 million dollars before taxes. Year over year pretax savings from restructuring were $42 million dollars. Also Textron has adopted statement of financial accounting standards number 142 which provides new accounting standards for goodwill and other intangible assets. The new standard eliminates amortization of good will. Accordingly, this year's results do not contain any goodwill amortization. If we compare ability, the company has also recast its prior segment results by reclassifying goodwill amortization and treating this expense as a

segment profit item.

Now, for a summary of our first quarter results. Earnings in the quarter were in line with our plan at $47 cents per share. Revenues were $2.4 billion down from $3 billion last year, primarily due to divestiture including Textron automotive trim and turbine engine components, and soft sales across most of our businesses partially offset by higher aircraft sales. Free cash flow before restructuring was a use of $207 million, a $170 million improvement over last year.

Now, let me turn the discussion over to Lewis. campbell: Thank you, Doug, and good morning, everyone. Our first quarter results tell an encouraging story of ongoing progress in several areas. We met our earnings target achieving results in line with our plan. We significantly improved our cash flow compared to last year through some very strong cash management and despite lower revenues. And third, we continue to generate substantial cost savings from our restructuring and supply chain programs. And perhaps more important and speaking to the future of Textron, I'm very pleased that we continue to make progress on every area of transformation throughout the company. That being said, we did continue to experience weakness in most of our markets from an economic standpoint. While some macro economic indicators have improved the first quarter, others that more directly affect our markets really haven't. For example, nonresidential construction is down 4.5 percent, corporate profits are estimated to be down about 15 percent and that in turn drives capital spending which continues to be extremely depressed in a number of our end-use markets.

In the aggregate however our markets are performing pretty much as we thought they would so therefore we're on target to deliver the results we expected for the year. Ted will talk a lot more about that later.

Now, let's turn to some business highlights. While we experienced another quarter of economic weakness we did make meaningful progress in a number of areas. I'm going to highlight just a few. I'm going to start with fastening systems and the reorganization that we undertook early in January of this year. This reorganization is just another example of streamlining and taking out costs, an area that we've been focusing vigorously on across the entire company. However, this is also important because of its strategic implications for fastening systems. This reorganization represents the final step in the TFS consolidation strategy that we've been executing over the past two years. With this step we've created a single global marketing and sales organization squarely focused on our customers with a single point of contact. This actually contrasts with our former structure of somewhat uncoordinated product focus sales groups. Now, with a single global sales force we can offer each of our customers the full suite of TFS capabilities and products consistent with our strategy to be a value added engineered solutions provider.

This restructuring differentiates us from our competitors, most of whom are smaller and are unable to offer this full solution to each of our customers. TFS manufacturing has also been reorganized to take advantage of our global scale. While we've been making good progress on costs as evidenced by our return to profitability in the first quarter, let me tell you with this new organization I'm looking to improve costs even further each quarter of the year.

In addition to progress at TFS, let's turn now to look at Bell. We've made some good positive steps there as well. First, the new management team has shown great leadership in improving results. Costs reduction and project management are both getting back on track. Actually we've reduced head count by almost 600 since the end of September.

We're also very pleased that we have just now renegotiated a revised H-1 development contract with our customer. This new contract refines the requirements for the remainder of the development program and establishes a new, higher budget baseline. The new budget baseline mitigates the need for Bell to absorb further losses as long as we're able to perform consistent with the new budget and we're very confident we can do that.

I would have to say however there's one key requirement that still needs to be completed before this program gets back fully on track. We're currently engaged in what's called the

review process in Washington for the H-1 program. I've got to tell you we've got a lot company. There are many other military programs going through the same review. This is not an uncommon occurrence in the industry. What it really is, is a process used by the government to recertify programs that have exceeded their original cost estimate by 25 percent.

We're encouraged by the Marine Corps continued support and believe that the H-1 is still a cost competitive and very important component in building the company's future military readiness. We expect the Defense Department to make its certification decision in a positive way in the next few weeks and we'll be sure to let everyone know once that happens.

Now, let's take a look at the V-22. I continue to be pleased with the progress we've made with the V-22. As many of you may have seen just last week the Department of Defense declared that the Osprey is ready to return to flight testing which we expect to occur next month. We believe that the V-22 is now back on track and we'll proceed methodically to full rate production. Full rate production probably will occur sometime in 2005, 2006 time frame. In the near term, we expect to complete contract details for lot 5 and 6 which go into production later this year. Incidentally, once completed this will add about $700 million to Bell's backlog in the second quarter.

While we're on the topic of tiltrotor let me mention, and you've probably seen this in the press too, that we're also planning the first flight of the BA609 late this year. You know, that's the commercial tiltrotor. You should know we've made a decision to slow the BA609 program down based on a very strong feeling that we have that the commercial introduction of the BA609 must follow a period of demonstrated performance of tiltrotor technology by the V-22. Now, what this implies is that you'll see lower IR and D expense for the next several years which in turn we'll defer first sales of the 609 out towards the end of the decade.

Now, I want to also talk about the business outlook at Cessna. based on our current assessment for business jets in the near term, we're confident we'll be able to meet our target to ship at least 300 business jets this year. That's not new news, that's just reconfirmation of what we talked about earlier. However, we are currently planning to adjust our production schedules downward for next year to produce about 250 jets. Now, although we saw a nice rebound in orders during the first quarter we don't think that the level of demand in the current market is sufficient to support a 300 plus level of production in 2003. The good news here is however that in spite of lower production schedules in 2003 we believe that we'll be able to deliver stable profits at Cessna through a richer mix of jets, normal price increases, less used aircraft adjustments and a plan to continue to improve cost performance.

Ted will go through some of the numbers in more detail, but as I've always said, we're very fortunate that Cessna entered into this economic environment with an excellent backlog. The backlog was created because Cessna has some of the most desired products in their segment. And as a matter of fact you may recall we launched three brand new models in just 2002 alone -- 2000 alone -- excuse me.

Now while markets remain slow, Cessna will continue to benefit from the strong backlog as well as the shift towards higher margin ships and their continued ability to reduce costs. We believe the recent softness in order demand is a short-term issue and will strengthen again with improvements in corporate profits. And I believe the fundamentals of the business jet market continue to look as attractive as ever and we expect growth to continue when the economy and corporate profits improve.

Now, let me talk about transformation. The progress I've been describing at TFS, Bell and Cessna illustrates what we're really driving across the whole company. Textron's systematic transformation into a network enterprise of globally strong businesses and powerful brands in attractive industries is moving full speed ahead. As you know, this transformation, as we call it is changing the very DNA of Textron. The old Textron in the late nineties was managed on a model of operations planning where each business unit had common financial goals but could use its choice of tools to accomplish these goals. This worked fine for many years as the economy boomed but was not nearly robust enough to maximize resources and productivity especially in a recessionary environment. We're now managing the new Textron on a model of enterprise excellence. This means leveraging our size and resources and creating a world class process for improving the performance of each business unit and by extension the corporation.

You know, you've heard me talk about the four R's. I have to tell you I get pretty charged up about this subject. Restructuring, reconfiguring, re-engineering and a return on invested capital are our four R's. And we're focused on executing each one. Our restructuring initiatives have taken significant costs out of our operations permanently and will continue to do so. Today we've reduced out head count by about 5,400 employees while closing 53 facilities, including 24 plants. We're solidly on track to deliver total savings for this year of $225 million.

The second R is reconfiguring. We have and we will continue to reconfigure our portfolio. In Q1 we divested two rather small businesses I'd say, our gear tool business and our joint venture interest in a wire processing business. But progress continues. In fact, since we announced our new portfolio strategy late in 2000 we've divested eleven businesses. And as we go forward we will continue to refine our portfolio as opportunities present themselves.

Re-engineering. That's our next focus area. Re-engineering encompasses a host of individual projects most of which are just now starting to take off. You've heard me speak about our integrated supply chain program and our new information technology shared services organization, both of which are making visible and meaningful contributions to the company. In the first quarter this year we also launched a very powerful Textron Six Sigma initiative. In my view it will last forever. We're in the very early development stages of this program but we expect Textron Six Sigma to play a crucial role in making each of our businesses stronger while creating a unifying culture of enterprise excellence.

And our finial initiative, in fact the first three are focused on the fourth, return on invested capital. We're working to steadily improve ROIC and in the short-term you can be sure we plan to stay focused on the execution of our plans to reduce costs and improve the productivity of our existing investments while continuing to transform our company.

My summary. Well, despite the challenges of the market environment we made good progress during the quarter. We remain confident in our ability to meet our performance objectives for the year and our continued focus and execution of the four R's is not only making a difference this year but we are positioning Textron for a much stronger future. I'll turn the call over to Ted. Ted.

Thank you, Lewis. Good morning, everyone. Thank you for being with us today. Let me start with an overview of the key operating results for the quarter. As Doug indicated earlier my analysis reflects the removal of goodwill amortization from last year's segment results. So on an apples to apples basis, segment profit of $165 million was down year over year by $175. About $117 million of the reduction was the result of lower volumes and sales

. $51 million came from the impact of inflation or rising costs, lost profits from divested businesses were $35 million. But keep in mind that $35 million only reflects the impact on segment profit. As such it does not incorporate the accreted impact of the reduction in debt, the impact of goodwill, share repurchases or taxes. Profits declined $30 million as a result of several miscellaneous cost issues primarily in our aircraft sector, including an $11 million dollar mark to market charge for used aircraft at Cessna, a $10 million reserve at Bell for international receivables and a $5 million charge at Lycoming related to an engine recall for a crankshaft issue. And we had a $27 million reduction in segment profit at Textron Financial, and I'll come back and talk about that in a little more detail later.

Those negatives were partially offset by positive cost performance of $63 million dollars related to restructuring and our other various re-engineering efforts and pricing during the quarter contributed a net positive $22 million with increases in aircraft offset by decreases in some of our industrial businesses. Let me run through those once again for you quickly. $117 million, these are the negatives, volume in mixed, $51 million inflation, $35 million divestiture, $30 million for those other cost issues such as used aircraft pricing and $27 million for TFC. And then offset on the positive side by $63 million in cost performance and $22 million of favorable pricing.

Now, let me make a comment about our cash flow during the quarter. Textron has historically used a lot of cash in the first quarter but we were really pleased that we were able to moderate that use this year by $170 million less than we used in the first quarter last year. Our commitment to reduce capex to focus on working capital reductions were the major contributors to performance in the quarter. I also want to remind you that we estimated about $80 million dollars of the fourth quarter's positive cash flow was related to payables that were arguably an '02 item. You'll remember that our year last year ended on December the 27th and we made significant supplier payments on the 31st, so in this year's first quarter.

Overall though that improvement year over end year cash flow is a great indication that we're making significant progress here and we continue to feel very comfortable that we'll be able to hit our free cash flow target for the full year of $325 million before restructuring.

Now, let me briefly go through the segment results for the first quarter. Aircraft revenues increased by $25 million and profits decreased $28 million. Sales revenue decreased $21 million primarily due to lower foreign military sales, lower commercial aircraft volumes, and lower sales of Huey-2 retrofit jets. Partially offset by higher revenues received on the V-22 program and higher sales of spares and services. Though profit was down due to the following factors, lower volume, lower margins on the V-22 program, increased reserves for international receivables and lower income from our joint venture partner related to the 609 program. These decreases were partially offset by lowered overhead costs, lower product development expenses associated with the 609 and higher spares and service revenue.

At Cessna revenues were up $56 million primarily due to higher pricing on Citation business jets, higher used aircraft sales and increased spare parts and service sales. That was partially offset by lower sales of single engine piston aircraft which have been adversely affected by the weak economy. Cessna's profit also increased and reflecting the higher pricing. The profit increase at Cessna was partially offset by the write down of used aircraft inventory.

Lycoming revenues decreased $10 million, primarily due to lower OEM volumes. Profit decreased due to these lower volumes and a higher warranty reserve.

Now let me review the numbers related to business jet orders that Lewis said I'd cover. First, we're over 90 percent sold out for 2002. So barring any major event we feel very comfortable that we'll meet our target to deliver at least 300 jets this year. During the first quarter we booked 33 net orders. As of today we now have a backlog of about 140 confirmed jets for 2003. We believe that a full year net order rate of about 120 jets in '02 will create a sufficient backlog to support sales of at least 250 jets in '03. Therefore at 33 net orders for the first quarter we are right on track to make that happen. While we could see order rates accelerate later this year we decided that the most prudent course was to reset our production plans for '03 at this time for two reasons. First, as Lewis explained at this level of production we believe that we will be able to deliver stable profits in '03 at Cessna, due to the stronger product mix, normal pricing, lower adjustments for used aircraft and our plan for continuing to improve cost performance.

Second, making this call right now allows a very manageable transition of manning at the lowest possible expense and allows us to methodically readjust our line rates for maximum cost effectiveness.

Now, I'm going to turn to fasteners. Revenues and profits for the first quarter decreased $70 million and $32 million respectively. Revenues were down primarily due to weak market conditions in most industries, lower pricing and the unfavorable impact of foreign exchange. Profits were down due to the lower volumes and pricing, as well as operating inefficiencies related to smaller production lots. The unfavorable profit impact at fastening systems is partially offset by the benefit of restructuring and other cost reduction activities.

In industrial products revenues and profits declined $81 million and $31 million respectively. Revenues decreased in most of the segment's businesses due to soft demand from the depressed economy and the divestiture of non-core product lines during 2001, partially offset by higher revenues in our aerospace and defense businesses. Profit decreased primarily due to lower volumes and an increase in reserves for receivables partially offset by the benefit of restructuring.

In industrial components revenues decreased $470 million and profit decreased $57 million. Automotive trim and the other divestitures contributed $439 million and $38 million through the decreases in revenue and profit respectively. So take out $439 and $38 of profit for the divestitures. If you take those out excluding them revenues decreased $31 million and profits were down $19 million. The revenue decrease was primarily due to depressed market demand and the unfavorable impact of foreign exchange and some lower pricing. Profit decreased primarily due to the volume and pricing and was partially offset by restructuring improvements in that business. The finance segment saw revenues decrease $26 million and profits fall $27 million. Revenues decreased due to a lower average yield reflecting the lower interest rate environment partially offset by higher pricing or somewhat better spreads on our products. Profit decreased primarily due to a higher provision for

and higher operating expenses primarily related to growth and managed receivables and higher expenses in service related operations. Those are partially offset by that higher interest margin.

Credit quality indicators at TFS reflected the tougher economic environment but remained solidly within historic norms for this stage of the business cycle. Sixty day delinquencies actually improved in the quarter to 2.04 percent versus 2.24 percent at the end of '01. Charge-offs were up at 1.98 percent from 1.27 in the fourth quarter. This is as we expected and reflects the soft economic conditions. And our non-performing asset ratio came in at 2.97 percent which was also up from 2.13 at the end of the forth quarter. There were primarily two items that contributed to the increase in non-performing at TFC and we believe that we are adequately reserved for each of those.

We've been strengthening our reserves as we entered this tougher environment. Our overall loan loss reserve to finance receivable ratio now stands at 2.6 percent which is up from 2.1 percent a year ago and we believe that's an appropriate level relative to our assessments of the risks in the portfolio. We expect that the credit environment is likely to remain challenging throughout the rest of this year. However, we have no intention of growing receivables by relaxing our underwriting standards.

Now, while we're on the subject of the credit environment we were very pleased during the quarter that we were able to fortify Textron's liquidity position. We secured a new $1.5 billion dollar credit facility with our bank group to replace the previous $1 billion facility that was coming due next year. The new facility consists of a billion dollar line with a five year term and a half billion dollar line on a 364 day term. And we secured a very similar $1.5 billion facility for TFC just last year. So we're in excellent shape with our lines of credit which are in place to support our commercial paper programs. On a consolidated basis we currently have $1.3 billion of outstanding CP supported by $3 billion in backup lines.

Now I want turn and discuss the impact of the new goodwill accounting standard on Textron. First, on a pro forma basis the elimination of goodwill amortization results in an earning impact of about 62 cents a share versus '01. That includes about 7 cents which was associated with trim and that we netted against the dilution projections that we gave you when we sold trim and about 55 cents of impact on an ongoing operations basis.

We are also evaluating the impact of the new standard relative to goodwill impairment. Our preliminary review indicates that application of the new standard will probably result in impairment in our telecommunications and certain other industrial businesses. The total goodwill related to these particular businesses is about $400 million and $250 million respectively. However, the exact amount of any adjustment that we would make will be dependent upon the measurement of the extent of any impairment and the tax deductibility of the impaired amounts. Any goodwill impairment will recorded as a cumulative effect of a change in accounting principle.

Now let's move to our outlook. While some positive macroeconomic measures have been reported, we've not yet seen any meaningful signs that our markets have improved. I would say that the markets are on balance right in line with our operating plans. They're no better or no worse. As a result we are still very comfortable with our earnings per share target of about $3 dollars for the year, and we are on track to deliver earnings per share of about 77 cents in the second quarter.

And with that I'm going to turn the call back over to Doug and then we'd be happy to take your questions.

That concludes out prepared remarks and we're now ready to take your questions, but before we do that I would like to remember members of the media that they are in a listen-only mode, that if any of the media do have questions please feel free to call my associate Sue Bishop or me after the teleconference.

Operator, we're now ready for questions.

Thank you. The first question will come from the line of Jeff

with Solomon, Smith, Barney. Please go ahead.

Hi. Good morning, everyone. wilburn: Hi, Jeff.

Hello, Jeff.

Just a few things. First, I was interested in Cessna, the ability or willingness to raise prices and what you're seeing is a little bit of a slowing environment if you could address that first.

Yeah, I'll do that, Jeff. You know, I know it's a little counterintuitive but each year those manufacturers that are making you know, what would be considered to be the best jets in their state are able to raise prices and we've been able to do that time and time again, and we plan to continue. You know, you're looking at some number that's, you know, 3 to 5 percent possibly on some models, 1 to 3 on others, so it's not a big number, but that continues and I see it going well into the future.

Jeff, there's been some modest discounting off the list price increases on a year over year basis, but you know, net, net we've been able to get somewhere north of 80 percent of the list price change to stick.

And keep in mind, Jeff, we also have a little bit of a kick from the new tax stimulus bill that gives our customers some additional tax depreciation on these purchases.

Are you benefiting more though from higher prices on units that are in backlog? Are you seeing similar price increases on units you're selling today that will be delivered at some later date?

Like I said, you know, we pushed through a list price increase for any new orders that we're booking, and you know, we may be on a deal by deal basis, you know, giving back 10 or 15 percent of that increase but nothing more than that.

Okay. I see. And just two other questions, one on Bell and then one on the cash flow.

On Bell can you just give us a little color I guess first on H-1 what you're booking in revenues and I guess are you booking revenues and no profit now? Is that kind of the message and what we should expect for revenues booked out of V-22 this year?

Doug, do you want to do the revenue piece.

For the revenue piece it's between $35 and $40 million a quarter this year, and you're right, it's --

And relative to the V-22 too, so give him both.

And as we said before on the V-22 we'd expect to book about $490 million this year. The V-22 is at lower profit margins than last year but still positive and the H-1 is, with some adjustments, it's a slight negative.

Okay. And then finally Ted or Doug, whoever has it, could you just give us kind of the cash walk in the quarter from, you know, net income to the free cash flow you reported and also tell us what the restructuring cash out actually was.

Restructuring cash out in the quarter was $11 million, not a huge cash quarter from restructuring standpoint. Let me just hit a few of the highlights in the quarter. Net income was $66 million, depreciation versus capex, depreciation was $77 against capex of $63, so a little positive there. Total working capital in the quarter went up about $250 million which was the other, the primary driver there. The key point because obviously you know in our seasonality we use a tremendous amount of cash up in the first quarter and as you know generate it back through the balance of the year. The interesting statistics to me are the change in working capital at the end of March this year versus the end of last year, March of last year. Receivables are down $108 million dollars. This is March to March. Inventories are down $187 million. And this is all excluding divestitures in the prior year, so this is clean numbers. PP and E is down $97 million and we managed to hold payables about flat on a year over year basis. So really a tremendous performance in the quarter versus performance in the prior year.

Just one quick follow up then I'll get off. The restructuring cash outflow for the year is expected to be what?

$80 --

$90 --

Between $80 and $90 after tax.

All right, thanks a lot.

Thank you. Our next question will come from the line of

J.P. Morgan. Please go ahead.

Good morning. A question on the business jet. You had mentioned that mix was going to be a benefit that would offset some of the lower volumes. Could you go into that in a little more detail?

Yeah, we had a really strong year here in the last, particularly this year at the small end of the business jet market with the recent introduction of CJ-1 and the CJ-2. So I'm going to try to get these numbers right and Doug will correct me if I miss it a little bit. You look at 250 kind of a jet sales level next year versus 300 this year. Out of that 50 decline I think 30 plus of those jets are CJ-1 and CJ-2, maybe about 35 of them. And then the balance is also skewed towards the lower end of the range. It's a few units less in each of the categories and then not much of a decline at all by the time you get up to a Citation-10 type size. So we do have, we'll have in '02 versus '01 and then again in '03 versus '02 a naturally richer mix of jets so that you know we don't expect -- you know, we could be down in units, you know, if it's 250 up in the high teens, we would not expect revenues to be down more than high single digits at Cessna, and obviously profitability we would hope to hold pretty stable, you know, anywhere from up a tick to down a couple of percentage points based on that richer mix, on the fact that you know, we're still taking pretty significant hits this year on the write down of used inventory of jets at Cessna and then the continuing strong cost performance, we're seeing there some of out enterprise initiatives are taking hold at Cessna. So you know, we feel pretty good about next year with those three factors helping us out on a little bit lower volume.

Don, I want to add something here. You know, if I were to say of the factors we named what's the driving, what's' the main factor, the most important factor in that cost performance next year at lower volume, that's really Cessna's work on cost reduction. And you know, we announced Textron's Six Sigma program. We've got 125 Black Belts that have already entered training. I just kicked a class off in Germany last week. But Cessna got started on Six Sigma early, got started on lean manufacturing early. We were just out there and they were showing us where they had taken lines, you know, eliminating a whole line space that gets the inventory piece for example. So there's a lot going on in the cost area that we haven't talked a lot about that I think and I'm sure is going to really pay off as we go forward year after year.

Yeah, I think there's just one last thing to add there. You know, as we have geared up to sell --

That's a pretty good point.

Sell 313 business jets last year and approximately 300 business jets this year we strained a little bit in getting that kind of volume through the shop. So I think we also have some meaningful cost opportunities as we re-balance line speeds at Cessna, as we reorganize the workforce. You know, we've brought a lot of new people in and done a lot of things on overtime in order to get those units out and obviously that will not be the case next year. And I think it's very positive that we're making this call early enough in the process that we can make this adjustment very methodically, very systematically for maximum efficiency.

Okay, thank you. That's good color. And on fasteners I'm wondering, would you expect to see maybe a little more strength on the top line with the automotive production rates actually so far this year coming in ahead of where I think most people thought they would be, I guess I would have thought maybe fasteners' revenues could have been a little bit stronger. You may have some other offsets, so if we could get some end-market color on that segment.

Yeah, it's kind of a mixed bag. We are seeing on the North American auto side some positives there, at least some signs that there could be some positive volume. Europe on the other hand is going in the other direction. It seems to be in a number of our businesses Europe is doing the typical three to six month lag on the North American market so we're seeing some weakness there. So fasteners is a very mixed picture. They go into a lot of end-markets. There are a couple of them auto in North America being one that's a plus, but there are others that still remain pretty weak.

Okay. Turning to finance, Ted, you know, is this kind of profit run rate something that we would expect to see through the year or do you get, you know, maybe better or lower provision, loss provision?

No, I think this was a bad quarter. It was a bad quarter for a couple of reasons. You know, loss provisions increased on a year over year basis by about $19 million in the quarter. We don't expect -- we do expect higher loss provisions during the course of the year but we don't' expect them to continue at quite that pace over the course of the year. We had a big jump up in non-performing assets during the quarter. A lot of it for some fairly discrete things. About $40 million dollars of the increase in NPA was a handful of aircraft that based on our historic experience, you know, we'll get those jets back and we'll get those through the system probably without incurring any significant loss.

You know, we have $22 million of repossessed aircraft at the end of the quarter that we already have $15 million of them sold at no loss. But they are showing up in the NPA statistics and we made the call that in the current market environment we wanted to make sure we were adequately reserved no matter how anybody wanted to look at it so when the NPA numbers went up, you know, we took pretty aggressive steps to take the reserve balances up as well.

You know, we've been through NPA item by item by item. We've got a pretty good plan for working that down over the course of the year so we expect that the run rate will not be at the same level as the first quarter but it's going to be a tough year for finance. I think we just ought to say that, you know, margins are tight out there in the marketplace cost of funds is tight, and volumes are off. And frankly, we have made the very conscious decision that we're not going to chase volumes in the finance business in the current economic environment by relaxing our underwriting standards. In fact, if anything we've tightened up in this market environment. So we're going to have a tougher year but we do expect to have a better run rate than the first quarter.

Okay. And one final question on the corporate expense you did a little bit better than I was expecting. What would a reasonable run rate on a quarterly basis be there? Should we just extrapolate this forward?

No, that number is a little low. I think corporate expenses on a full year basis are going to come in about $140ish so we had a little stronger quarter than normal.

What was responsible for the better performance this quarter?

We got a lot of improvement initiatives. A lot of our transformation activities that are still kind of gearing up so we have not -- some of the money we intend to spend during the course of the year on Six Sigma and the like are just not in the numbers at the run rate yet.

Okay. Thank you.

Thank you. And the next question will come from the line of Harriet Baldwin with Deutsche Bank. Please go ahead.

Good morning.

Good morning.

There seemed to be a theme in many of the segments of increased reserves, receivables. Is that something that you just think reflects the economy or have you actually changed either the process or your standards of when you want to put in a bad debt reserve?

Well, I think, in general, Harriet, that reflects caution about the economy. You know, it varies business by business. I think in TFC it's, you know, as I just said it was just a reflection of trying to keep our reserve ratios relative to non-performing assets looking right. In other businesses it's unique things that are going on, but just generally reflects the economy.

Okay. And then in terms of the jet outlook in saying you're going to assume now it's going to be 250 for next year and thinking that that's going to get you the best cost position possible to go through that transition. If by the second half of '02 we do see corporate profits stronger and it ends up being a higher number either for most of the year, or particularly the second half of '03, is there an expected ramp-up cost that would come from flexing back up again?

Well, let me say a couple of things. No, there wouldn't be a big ramp-up cost. In taking it down we have an advantage and by doing it this early we can kind of plan the attrition rate to pretty much coincide with the retirement rate with not as much layoffs as you'd normally see. On the pick back up side it would be fairly easy to put the workforce back in place. It takes about six months to turn it up again, so we're being kind of conservative in our planning but we think that's prudent. So we can turn it back up, Harriet, it wouldn't be a big situation for us.

I don't think you're going to see a change in capex spending by the rest of the industry this year because I think pretty much everybody's pretty much frozen their capital spending for the year. So that doesn't help the rest of our businesses but for Cessna we wouldn't have to put a dollar in the ground, we'd just turn it back up again.

In fasteners with the shift that you've made in distribution, obviously any shift of distributions has positives but near-term there's usually a fair amount of disruption. How long do you think that process is going to take or is it pretty much done at this point?

Well, it's not quite done but we -- let's see now, actually at the end of last month, March, I just had to think about my time frame here, at the end of last March we will have transitioned from three distinct units inside fastening systems to one and that eliminated in the top management ranks about 30 positions, so from 120 down to 90. And we've now flowed all those people, you know, we've been able to pick the best and put them in the 90 spots. I'd say we were practically speaking you know, kind of pretty much behind us. We've been planning this for sometime so we knew the steps we had to make. And I'm serious, I really expect the fastening systems -- and by the way, they are really aggressive on Six Sigma, really aggressive on lean, really aggressive on supply chain. We've got a very strong management team now wall-to-wall. I expect them to turn in improved profits every quarter, and I think they'll do it.

Harriet, we've got a new person out there in the marketing sales position at the executive level and I'd have to say that the early signs anecdotally are very positive. There are a number of examples where we secured business that we previously didn't have or had a sale that was across the manufacturing units that wouldn't have happened before. So I think the disruptive effect that you would normally encounter is overcome by the immediate sales synergy that we're enduring.

I think it's fair to say that this change in org structure has also crated a change in fasteners to a balance of cost and growth. And I would not have said that was true during the course of last year. We were really trying to put all of our efforts on getting the cost down as the economy was getting weaker and I think we've already seen signs that we've entered this year with a much more balanced approach and that we're going after new business.

And then Ted, maybe you can highlight within components and products what some of the individual business trends were. Yeah, obviously most of them are down but was anybody doing worse than other folks.

Let's see here. On the revenue side let's do industrial products. Everyone was down with the exception of Textron systems which is our defense and aerospace business. They were up about 10 percent. The Golf and Turf business, Greenlee, OmniQuip were all down, you know, a good strong double digit kind of numbers and all the telecom related businesses, Tempo and

were off strong double digits also. On the industrial components side it pretty much across the board. The power transmission business which as you know, particularly the European side of the power transmission business was down a little more than the rest of the businesses. I guess I read a wrong number. I should have told you the telecom related businesses were down more like 40 percent. Sorry.

Okay. And then one last question. I really will let somebody else ask one eventually. For the fastener side and some of your other telecom businesses we've heard scattered reports that although end-markets are still extremely depressed there's increased new product activity starting to shift from development to early stages of production. Are you seeing any signs of that?

I'm sorry. You said fasteners for telecom? Sorry, I didn't quite catch that.

Well, you've got some telecom exposure I think in fasteners products and components and I was just wondering, particularly on the handset side, if you'd seen any signs of new development activity shifting to early stage production?

Not much. I would say no. No. There is a shift to the Chinese, China market actually and a lot of that's moving that way and of course we can serve that market, but I wouldn't say in balance globally we've seen much change.

Yeah, I think in the handset, when you get into the cell phone market the big shift right now is that the United States is no longer the largest buyer. In fact, China is now moving to become both the low cost source as well as the big demand area so you are seeing the cell phone manufacturers making big moves both into Mexico and to China, and, you know, we're going to have to follow our customers in that regard. And there'll be some new products as a result of that but not a lot of life in those businesses right now.

Harriet, I can tell you one thing relative to the China market which is an area for us to explore and exploit is our Greenlee

business which has been really good here in the states, you know, there's a lot of construction

and we've established I think about 20 different locations throughout China to begin to sell and market our Greenlee and

products. So there are some areas where we're already seeing some upside you know in 2003 and beyond on the revenue side from that market expansion, but we haven to been able to see it much overall from the cell phone standpoint.

Yeah, and the rest of the telecom, the large customers of Tempo are basically just still shutdown. They had indicated to us when they shutdown in the fourth quarter that they thought they'd start buying again in Q1 but they have not.

Thanks.

Thank you. And next we'll go to the line of

Lehman Brothers. Please go ahead.

Good morning, everyone,

here. Just going back to Cessna does the resetting of the production plans for '03 involve any potential layoffs?

Don, yeah, there'll be some but not very many. You know, there is a balance there. We basically, it's the advantage of the backlog and the order flow of the prior years. We basically have been running a lot of overtime because, you know, we knew that this wasn't going to continue forever. And secondly, it was a pretty tight marketplace so we were running pretty tight to be able to fill all of our open positions. Now that that switches around we can use a more orderly outflow of folks as they retire and matriculate out of the workforce. But there will be some. I wouldn't say it's going to be a big number but there'll be some. I don't have a handle on the number. We're off to Cessna next month and we'll be finalizing all of those plans and numbers.

Okay. Have you quantified the remaining restructuring charges for '02 on a cash basis?

I think the total after tax cash will be between $80 and $90 million dollars, Don.

And we had $11 in the first quarter so $70 to $80 to go.

And then lastly, did you buy back stock in the first quarter?

Yes, we did.

About how much? french: About, let me see if I can get this right. Since the announcement of the trim sale and the announcement of the new program we bought about 1.7 million shares at $41 and something and change. I think the end of quarter was about 1.4 something.

Yeah, 1.4, 2.5, something like that.

Yeah, 1.4, we bought a little bit in December right after the trim deal closed but 1.7 program to date.

Great. Thank you. That's it.

Thank you. Next we'll go to the line of Larry Baker with Legg Mason. Please go ahead.

Good morning. Just to go back to the tiltrotor for a second. You talked about '05 possibility for full production. When is the actual decision date or is there one set yet?

It's not set yet. Let's do this kind of step by step. You know in a military program V-22 is very typical of a military launch. You have LRIP low rate initial production and then FRP, full rate production. And the full rate production decision would be made sometime in the 2004, 2005 time frame. Now what is actually happening is with the beginning of resuming of flight testing we'll see flight testing now resume, we'll get the authorization not only to continue building but to begin shipping. And our production in numbers because of the lots that have already been released, you know, we talk about lot 5 and lot 6, that's ten or twelve ships per lot that have an agreed upon price and agreed upon delivery schedule.

So I'm looking at a matrix and if you understand this matrix you know you just see a flow of eight to ten to twelve to fourteen ships every year until you get out to you know 2005, 2006 and then it begins to ramp up and eventually late in the decade the Armed Services would like to see about 35 or 36 ships a year produced and shipped. And so that's kind of how the numbers flow and you know I think what you're going to see is a pretty steady set of revenue numbers for us until we get into full rate production. And you know we had that in our plans. It pretty much is unfolding the way that we thought so we feel pretty good about the V-22 right now.

Just to add one more thing and clarify with the program it's really not a date driven program now it's an event driven program.

That's a good point.

You know, obviously we want to avoid doing this thing at an accelerated pace that would get ahead of the accomplishments so between ourselves and Boeing and our customer we're pretty much pacing this relative to accomplishments. So when we talk to you about time frames those are nominal time frames depending on a nominal assessment of when we hit milestones. We're not making one step forward without going past the milestone first.

Do you have another question, Larry?

Yes, just a follow on. I think you mentioned earlier that margins on the V-22 are down this year. Should they recover in next year or the following year?

Yeah, we're doing a lot of improvement program work right now under this way forward contract it's got much lower margins. So as that goes away the margins will start to improve and as we ultimately get to full rate production obviously they'll improve. Once we go -- just to kind of scope this thing for you, we're at, you know, a little under half a billion of sales now. It's been picking up a little bit this year. It's going to pick up a little bit next year, but kind of stay in that half a billion dollar range until we switch over to full rate production and there will be a phenomena when we switch over to full rate production when we go to fixed price contracting versus the development program where we'll actually see a little dip in revenue and earnings in the year that we make that switch over to full rate production. And then we'll start building back up and you know when this thing hits the 36 ship range should be kind of in the $1.7 billion, $1.8 billion, $1.9 billion kind of range out near the end of the decade, if that helps.

Okay. And just a final question, Lewis, in your conversations about Six Sigma you have not provided an expectation of benefit at a particular time. Can you -- are you far enough along to quantify some benefit for that?

Well, here's what I could say about it. You know, I'm going to be really disappointed if everything we spend to launch Six Sigma this year isn't at least offset by savings programs, so net, net we shouldn't see a penny of degradation based on the launching of the program. That's number one. Keeping in mind that we're launching 25 Black Belts a wave. We've done five waves, we're going to do four more. So we're going to have 225 men and women that are some of the best and brightest we can find in the corporation from all over the world with two projects under their belt that have been signed by the finance guy and the operating guy in each unit. And these projects, you know have the potential of saving a couple hundred thousand dollars a project, so. But we have start-up expenses and training expenses and we're taking these people off the job. So this year I can't really give you a number other than that. I would expect that as we get into the balance of this year you'll see us and hear me talk more about savings in 2003, so there's a lot of upside I think coming for the future for us.

And we're going to be at this a long time. Also don't forget the Textron Six Sigma is not only variation reduction, it's not only waste elimination but it's also focused on design for Six Sigma which is a real strong organic growth component. And so that's another area of our program which is unique. I don't think anybody's ever combined all three. That bodes extremely well for organic growth in the future.

The way to look at this, this is a tool that's going to allow us to hit our margin targets overall and more important our ROIC spread targets that we're working towards and you know if you get into what is supply chain versus what is Six Sigma versus some of our other cost reduction activities they all kind of overlap to some extent but they're incredibly important tools to help us get the overall margin targets that we're trying to achieve.

All right, thank you very much.

Operator, I believe we have time for one more question.

Thank you. Next we'll go to the line of Jack Kelly with Goldman, Sachs. Please go ahead.

Good morning. Just a couple questions. Ted, maybe you can just give us a little color on this. If you look at the detrimental margins in, let's say, industrial components at about 60 percent and in fastening systems, you know, 45 percent, you've given some idea of why that occurred but is there anyway to kind of give us the detail that maybe you gave us on the overall impact of lower volume, the $117 in rising cost, how it might apply to those two segments because they seem to have been particularly hard hit.

Let me try and see if I can.

And on the industrial components you know, you're getting rid of the divestiture so it would really be $31 million dollar sales decline and a $19 million dollar profit decline.

Yeah, I think really in both cases in fasteners and in industrial components you have, you know, some pricing degradation as well which is probably the principal contributor to why those conversion rates look the way that they do. And fasteners. You also have some operating inefficiency issues. You know the volumes have fallen off in fasteners. Until we get all of our restructuring activities done we're running appreciably lower lot sizes than we have historically. But fasteners, the volumes are driving about $18 million of the profit decline but pricing is about $8. And industrial components, let me see here, $7 of that is pricing. So pricing is really the primary driver for why those margins look a little worse on the detrimental side than they might otherwise.

And just two other questions. In terms of the V-22 I thought margins were going to recover this year after being you know hit by the restatement last year. And then just last, in terms of you know possible estimate of loss on aircraft sales this year, on used aircraft, versus the $11 million in the first quarter, how do you think that might scope out for the full year? french: I'll do the last one and I'll let Doug do the first one. Last year we had right now of unused aircraft of about $34 million dollars. This year we expect that number to be somewhere in the high twenties, a little better than last year but still a fairly significant amount. And then hopefully a heck of a lot less than that next year.

Jack, on the margin issue with V-22 that's just a timing issues through the quarters when we had the big hit in the third quarter last year. So your expectation relative to improvement in margins on a year over year basis will hold by the time we get through the fourth quarter.

Thanks.

Thank you very much ladies and gentlemen.

Ladies and gentlemen this conference will be available for replay after 1:30 p.m. today through Thursday April 25th midnight. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code of 614532.

END