達信公司 (TXT) 2002 Q2 法說會逐字稿

Good morning and welcome to Textron's second quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and at that time if you would like to ask a question, press the one on your touchtone phone. You will hear a tone indicating that you have been placed in queue and you may also remove yourself from that queue by pressing the pound key. If you should require any assistance during today's call, please press the zero followed by the star key and as a reminder, today's conference is being recorded. I would now like to turn the conference over to Doug Wilburne, Vice President, Communications and Investor relations. Please go ahead sir.

Thank you and good morning and welcome to our second quarter conference call. Joining me here today are Lewis Campbell, Textron CEO and Theodore French, our CFO. Before we begin, let me add that over the course of our discussion 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 earning's release. Now for the summary of our second quarter results.

Revenues were 2.8 billion dollars down from 3.3 billion last year primarily due to divestitures including Automotive Trim and turban edging components and software sales across several war businesses, partially offset by higher aircraft sales. Free cash flow before restructuring was 143 million dollars, 34 million better than the second quarter of last year. Our reported GAAP earnings in the quarter were 74 cents per share. Now, our reported earnings per share includes 29 million dollars in pre-tax, special charges and cost related to restructuring and a 25 million dollar pre-tax gain from transactions related to the divested Automotive Trim business.

Excluding these amounts, our adjusted earnings per share then were 82 cents. I would like to remind everyone that Textron adopted statement of Financial Accounting Standards number 142, which required companies to stop amortizing goodwill and certain intangible assets with indefinite use for lives. Under this new standard, companies were also required to test all existing goodwill under books for impairment as of the beginning of the year, on a reporting unit basis, using a new, more stringent testing methodology.

Based on the results of the revised impairment test, we have recorded as a cumulative effect of change in accounting an after tax, non-cash transitional goodwill impairment charge of 488 million. This change is effective as of the beginning of the fiscal year and is reflected as a retroactive charge in first quarter results.

The charge relates to the segments as follows. $274 million in Industrial Products; $111 million in Industrial Components; $88 million in Fastening Systems; and $15 million in Finance. Correspondingly, the segment profits that we will discuss today reflect to remove our goodwill amortization from last year segment results. The segment profits for this year and last year will also be before special charges and restructuring costs. Now let me turn the discussion over to Lewis.

Thank you Doug and good morning everyone. Well, as a note from the press release, we exceeded our earnings target of 77 cents for the quarter by a 4 or 5 cents and we produced good cash flow. This in my view was largely due to our continued ability to generate substantial cost savings from our restructuring and other re-engineering initiatives and I think that is important to understand. It is somewhat validated in my mind, our transformation efforts and everything that is going on in Textron these days.

Operationally, we did see stronger than expected sales in our aircraft, defense, and fuel systems businesses and technically that offset weaker than expected volume in our telecommunications and commercial finance businesses and then rounding it out, our industrial market has pretty much performed as we thought they would, which was soft to say, the least. We have also dealt with a numbers of issues during the quarter, that typically occur late in an economic business cycle, things like receivables and inventory adjustments and French will outline quite a few of those for you.

However, restating that statement I made a moment ago, the fact that the second quarter results exceeded our plan in my view provides tangible evidence of the importance and significance of our ongoing efforts to transform our company. Let me give you a few highlights inside the businesses. First, we are encouraged about our jet order activity for the quarter, it is Cessna. We are now right on track with our jet orders to support our current production plans. In fact, we remain over 90 percent sold up for 2002 production, which is targeted for about 300 jets and we are now over 60 percent sold out for 2003 production, which is targeted for 250 jets.

I am also pleased at the outset, on June 27th we completed the first flight of the first production Sovereign business jet. It was right on schedule and I am told that we far exceeded our expectations for that first flight. It was a tremendous success and we are on schedule to begin the commercial delivery of new Sovereigns in 2004 and we had previously told you that is not a new number. Moving on to Bell, the V-22 has returned to flight during the quarter. It was an extremely important step forward in this program. The V-22 returned to flight-testing in May and I am sure if you have read the press clippings, it performed well above everyone's expectations.

Well,18 months. We produced them at Bell. We are now able to resume deliveries to the US government and may start that this year. I would also like to share some additional positive news with Bell's H-1program all five developmental aircraft were delivered to Patuxent River and they are now in the final instrumentation and modification process to begin the next phase of testing there.

We are very pleased with the results of the flight test to date and we expect to deliver the first eight production aircrafts in 2006 four Super Cargos and four Hueys. And finally both the V-22 and the H-1 were recently approved for full affirming by both appropriations committees. Another one of our businesses that had good success during the quarter was the Textron Systems. Textron Systems produces air launch weapons, intelligent battlefield, mobility, and surveillance systems for the US and foreign militaries. Recent world events have resulted in increased demand for many of Systems' products. In fact revenues were up 16 percent in the quarter and now we expect full year revenues to exceed 500 million dollars. Let me mention one more, I want to talk about Kautex for just a brief minute.

Adjusting for the foreign exchange, Kautex revenues were up 12 percent. Kautex continues to win new contracts to manufacture fuel systems for our major customers. We are the fuel system supplier of choice. In addition on June 13th, we received the necessary approvals to establish a 100 percent owned subsidiary on China. Taking together and going forward Kautex is well positioned for continued growth as the world continues to migrate from steel to plastic fuel systems. Now let us talk about transformations.

I want to update you on the some of our progress. You remember, we referred to our transformation in kind of short hand fashion referring to the four Rs. Restructuring, reconfiguring, reengineering, and return on invested capital. Our restructuring initiatives have permanently taken out significant costs throughout the entire operational base and more is to come. To date we reduced our headcount by about 5900 employees. We have closed 60 facilities, 28 of those facilities were actually full operating plans. We have achieved year-to-date savings of 111 million dollars from our restructuring program and therefore we are right on track to deliver at least 225 million this year. The second R is reconfiguring and we have and we will continue to reconfigure our portfolio. Since we began this program we have divested 12 businesses including a small fastening business we divested last week and progress will continue.

As opportunities present themselves we will take advantage of those opportunities to again create an even stronger portfolio going forward. We are also very pleased to have been able to monetize the significant portion of the preferred securities we received as a part of the sale of Trim to Collins & Aikman and Ted is going to go through the components of that transaction in just a minute. Okay, the third R is reengineering. We continued to make excellent progress in transforming Textron across the entire network enterprise. We are advancing enterprise live supply chain initiatives establishing a common Information Technology infrastructure and rolling out a common medical plan just to name a few.

We have also continued to make great progress with Textron's Six Sigma which is beginning to play an important role in making each of our businesses stronger and really creating a more unifying culture of enterprise excellence. Well, the final R return on invested capital. Everything I just mentioned is focused on that. In the short term we will stay focused on the execution of our plans to reduce cost and improve the productivity of our existing investments and transform our company.

Well, here is my summary, we made good progress during the quarter and we are on track to deliver the EPS and free cash flow results that we targeted for the year. In the aggregate our markets are performing pretty much as we planned. We have not seen and we do not expect to see a rapid improvement in the economy. In my view, this quarter begins to validate the effectiveness of our broad-reaching transformation efforts.

We are beginning to make meaningful and permanent improvements in each of our businesses and across the entire enterprise and those improvements translate directly into improved shareholder value. And I think more importantly as we look to the future, our transformation efforts will continue to reward our customers, our employees, and our investors especially when our markets recover. Ted.

Thank you Lewis. Good morning everyone. Thanks for being here with us. Let me start with an overview of key operating results for the quarter. Segment profit in the quarter was 235 million, down on a year-over-year basis by 122. About 38 million of that reduction was the result of lower volumes and sales mix, 31 million came from the impacts of inflation. Divested businesses contributed a negative 39 million to the change in segment profits and keep in mind that, that amount does not reflect interest savings or the impact of repurchasing shares with divestiture proceeds.

Profits declined 28 million dollars as a result of inventory adjustments and higher reserves for doubtful accounts that happened in our industrial products businesses. Last year's segment profit included 13 million dollars in one time gains from the sales of non-core product lines. Primarily the electromechanical business at Kautex and the carbon materials business at Textron Systems. So obviously those are not repeating again this year. And we had a 14 million dollar reduction in segment profit at Textron Financial and I would address that a little bit later.

And pricing during the quarter, which contributed, 14 million and we had 37 million dollars in year-over-year savings that show up in segment profit for our restructuring and other cost initiatives. I want to do those for you one more time. The total reduction 122 million, 38 from volume and mix, 41 inflation, 39 from the divestitures, 28 million in inventory and receivables adjustments, 13 million of one-time gains on the assets sold last year and 14 million at TFC, those offset by 14 million positive for pricing and 37 million for restructuring and other savings. Now I will briefly go through the segment results for the quarter.

Aircraft revenues increased 65 million and profits were up 19 million. Bell's revenues increased 4 million due to higher sales to the U.S. government on both the V-22 and H-1 upgrade contracts, partially offset by lower foreign military sales and lower commercial sales. Those profits decreased primarily as a result of lower commercial profit due to reduced pricing for one commercial helicopter model, which was partially offset, by higher profit in its U.S. government business primarily due to the higher revenues on the V-22. Bell ended up the second quarter with a backlog at 1.1 billion.

At Cessna revenues were up 61 million primarily due to higher citation volume, higher pricing, higher used aircraft sales and higher spare parts and service revenue which were partially offset by lower sales of our single engine piston aircraft which has seen the affect of the weak economy. Profit increased as a result of the higher citation volume, pricing, a favorable sales mix, and lower engineering expenses partially offset by lower sales of single engine piston aircraft and lower resale prices for trade in aircraft. Cessna ended the quarter with a backlog of 4.5 billion.

Next is Fastening Systems. Revenues and profit for the second quarter were down 20 million and 15 million respectively. Revenue decrease was primarily due to the divestiture of non-core product lines, customer price reductions, and depressed market demand partially offset by some favorable foreign exchange. Profits were down primarily due to the customer price reductions, lower sales and manufacturing inefficiencies.

The unfavorable profit impacted Fastener's was partially offset by the benefit of their restructuring activities. In industrial products revenues and profits declined 36 million and 53 million respectively. Revenues decreased in most of the segments businesses primarily due to depressed markets, the divestiture of non-core product lines partially offset by higher revenues Lewis mentioned in our Aerospace and defense business. Profit decreased primarily due to the reduction of volumes, unfavorable sales mix of the product sold and an increase in reserves for receivables and inventory and the impact of the gain on the sale of the product line in 2001 again partially offset by the benefit of restructuring. In industrial components revenues are down 457 million and profit decreased by 59 million you take Trim and the other divestitures in that segment, they contributed 484 million and 31 million to the decline in revenues and profits respectively.

Revenues increased to Kautex with higher volume from new product launches were partially offset by customer price reductions and the sale of a non-core product line last year. The increase in revenue in Kautex was also partially offset by lower sales of power transmission and fluid handling as a result of a soft industrial market. Profit decreased primarily due to lower volumes and manufacturing inefficiencies in power transmission and fluid handling. Customer price reductions and the gain on the sale from the prior year partially offset by the higher sales at Kautex and favorable restructuring. Finance segment revenues decreased 16 million and profit was down 14.

Revenues decreased primarily due to the lower

of freight environment partially offset by higher fee income, higher syndications or securitization income and higher operating lease revenue. Profit decreased primarily due to a higher provision for loan losses and higher credit and collection related expenses partially offset by higher interest margins. Credit quality indicated that TFC reflects the current economic environment but remained within historical norms for this stage of the business cycle. 60 days delinquencies were 2.58 percent in the quarter, up from 2.04 at the end of the first quarter. Charge offs were 1.52 percent down from 1.98 in the first quarter. The non-performing asset ratio was 3.06, just up slightly from 2.97 in the first quarter. While we are certainly not pleased with our results of TFC our performance compares favorably with the ratios that we are seeing at a number of our peers.

Miscellaneous items. The first issue which we received a number of phone calls on, is our expected level of pension plan income going forward. Let me start by saying that we are extremely fortunate to have a well-funded pension plan, that is the result of strong performance of our pension assets over a long period of time. What has happened was that the gains experienced by our plan in the 90s have resulted in higher levels of income than would be normal. And those were being smoothed into their earnings by the FAS 87 methodology.

We have fully anticipated that as asset performance softens there would be a decline in the level of earnings contribution over our planning horizon. I want to share with you the assumptions that we have built into our multiyear financial plan. We are using a 9.25 percent long-term rate of return, which is well supported by broad range of external and internal historic benchmarks. Our discount rate has been 7.25 percent through 02 going forward and 03 and all the other years that is being lowered to 7 percent. Our compensation growth rate is at 4.5 percent. Based on all those assumptions the EPS impact for pension income that is in our plan right now would be as follows. We have 40 cents this year, we will have 26 cents next year, and 13 cents in 2004. Now I want to update you on our progress with restructuring.

We are very pleased with the execution of this program, it is going very well. As Lewis said we are right on track to achieve our targets, at least 225 million in savings this year and at least 250 next year. By the end of this year we expect to have incurred charges of about 270 million out of the 325 total that we have planned. The balance of those will be incurred in 03, as the final programs are initiated, most of which now are related to specific and future events such as the product outsourcing. As a reminder, we have estimated that the total after-tax cash cost to this program will be between a 155 and 175 million, of which about 80 to 90 million is expected to occur this year.

Now I want to give you a little color on the gain that resulted from the Collins & Aikman transactions that occurred during the quarter. We received 110 million in cash from C & A , first to settle various transaction issues including a working capital true up and second to retire 126 million of face value of C&A preferred shares, which we are recurring on our books at 57 million. Also C&A issued additional common shares to finance the payments, resulting in a broader float of their stock.

Accordingly, we have reduced our estimate recurring value of the C&A common shares that was on our books. These three items taken together resulted in a 25 million dollar pre-tax gain relative to the estimates that we originally booked when the transaction closed. Incidentally, we booked taxes of about 16 million, which included a number other kinds of tax true ups, so the net after-tax gain was 9 million dollars or about 7 cents a share. We also received 5 million dollars for accumulated cash interest on those preferred shares that C&A repurchased.

You might remember that we are not booking the pick interest until we actually receive cash, so we did receive 5 million and that was booked in the quarter as a credit to interest expense. While we are on the subject to the proceeds from our sale or Trim, let me talk a just little bit about where we are with our stock repurchase program. Since we announced the sale of Trim, we have now repurchased 3.8 million of our shares for approximately 171 million dollars. Frankly, we might have done more than that, but we have taken a pretty conservative approach to our balance sheet and our liquidity positions in the cold war and economic environment and we are very pleased with where our balance sheet stands today.

During this last quarter, we were able to place 300 million of 10-year notes to Textron Corporate and 600 million of 5-year notes to TFC; we had excellent results and were significantly over subscribed in these placements. At the end of the quarter we had 595 million dollars of cash on hand, zero commercial paper at Textron, and less than 1 billion of CP at Textron Financial. So we feel very, very good about our current liquidity and financing situation. Now let us move to outlook. We knew that the first half would be tough from a comparison standpoint. But we achieved all of our objectives in both the first and the second quarters. We are targeting to deliver earnings per share of about 68 cents in the third quarter and we continue to be on track to achieve our full year EPS targets of about 3 dollars. And we are also still on track to deliver free cash flow of about 325 million dollars before restructuring. Now I will turn the call back over to Doug and we would love to take your questions.

That concludes our prepared remarks, we are now ready to take your questions, before we do, I would like to remind members of the media that they are in a listen-only mode. If any of the media have questions, please feel free to call my associate Sukor

or me after the teleconference. Operator we are now ready for questions.

To ask a question please press the 1. Our first question comes from the line of Jeff Sprague with Salomon Smith Barney. Please go ahead.

Hi good morning everyone.

Good morning.

Could you give us a little more color on what you are expecting for Q3, I mean, you know the margins in all your businesses, I think were above my expectations and looking into Q3, looks like I'd have to knock things down a fair amount in a few places to actually get 68 cents. Is there some timing dynamic in Aircraft for example or something else that's leading you to a temporary outlook in the third quarter?

Yeah we are temporary in our outlook, this is still our right on our plan for the year. But, yeah what will happen in the third quarter without getting too specific here, aircraft margins will be low. Aircraft margins came in about in the 11 percent in the second quarter, which was a very strong performance. Aircraft deliveries are lower in the third quarter. So we will see aircraft margins come down in the third quarter to still better than what it was in the first quarter but not as strong as the second and then virtually every one of our other businesses is expecting to see some improvement margin in the third quarter over the second.

Great and Lewis on the reconfiguring the portfolio dynamic, most of what you have done has taken the place of divesting non-core and you have been, you know, quite on the acquisition part which probably makes sense in terms of just kind of getting things quite away internally, but are your sights turning to the acquisition front? Is there anything you are thinking about there? What we should expect going forward?

Well, I am not much different than I was on the first quarter call. Actually here is how I see it. We are feeling.

You can't feel it over the call. We are really feeling good about the results of the other Rs, especially the re-engineering, you know you are just seeing the tip of the power that will be unleashed as we roll through consolidating our IT infrastructure as we really, really got 150 Black Bells on the field now, I'd launch every class. We've got another 75 to go and then we will put more in the field next year.

Feel if we are getting into some real traction now, so I have got to say that we don't have to buy anything and we don't have to sell anything and we feel even better this quarter than we did last quarter about this year and next. But you know the economy really would have easily come back and we have a very aggressive effort with some inside and outside folks really combing through the opportunities out there to see, you know, is there an opportunity that we might be missing. I'd have to tell you right now, I don't see anything coming that way this year of any significance whatsoever.

Would we you know buy a 10 million dollar product line to enhance one of our industrial businesses, yeah we might, but I don't expect much Jeff year. I really don't. I think there is a lot of uncertainty out there and we've got plenty to do internally. I wouldn't pass up a strategic opportunity but I don't see any of those out there.

Right, just a quick follow up and I'll pass it. Ted can you give us what the restructuring cash flow was in the quarter?

Hold on just a minute. I don't have that page, yes. Yeah, I got it right here. No, no that's the full year. We'll dig it up and give to you in just a minute.

Right thanks a lot.

11?

Yeah.

11 million.

Thank you.

Our next question comes from the line of Stephen Volkmann with Morgan Stanley. Please go ahead.

Hi, good morning. Can you give us a little bit more color on what happened in finance and I guess in industrial in terms of the write down of the receivables and so forth?

The finance is pretty straight forward there, we are seeing, even though we had a pretty good quarter and then an improvement in write offs during the quarter, you know one quarter doesn't make a trend, and we were really monitoring our nonperforming assets and delinquency levels and concluded that we needed to show results more strongly there. We had a couple of specific aircraft receivables that we took specific reserves against in the quarter so that one's pretty straightforward.

In industrial products, I guess we had a couple of things. We had both some receivable write offs that were primarily OmniQuip and a little bit at E-Z-GO, they just reflect the continuing difficulty that some of the customers and some of the distribution channel in particular is having at this stage in the business cycle and then we had some one-time write downs for inventory evaluations primarily related to our telecom businesses which were also inside our industrial products and all those together added, they also I think took a small write down on used golf carts in the quarter. So, all of those together added up to a 28 million dollars which obviously had a very significant impact on the industrial products business.

It has also increased, looks like a little bit. Can you quantify that?

I can get that, just one second. We have got it. It's just deep in the book. I've got it. He is fast. Securitization gains were 11.6 in the quarter, versus 8.4 a year ago, and syndication was about flat. So up about 3.

Thanks a lot.

Our next question is from the line of Harriet Baldwin with Deutsche Bank. Please go ahead.

Good morning. I'm wondering if you could give us an update on the fasteners organization, that looks like you are on the right track this quarter. I know you had some decisions to make about branding strategy, any progress there or direction you could account for?

Yeah, I can do that, I have to say, I really have been pleasantly surprised at how well that team has come together. You know, on retrospect I wish I had done it sooner, but we did, you know, you can't change the past, but by God you can affect the future and Jake

and his team have really got on that organization focus, we have added up the top 120, 40 new teams, we have got an aggressive guy in sales and marketing, by name of

, that is really helping us focus on global customers with our specific markets. One angle that we are little cumbersome at, was we probably have the best fastening systems business in the world or down close to it.

But the trouble is, it was too fragmented in the way we were going to market. You know, the old Textron, both companies, but we did not integrate as quickly as we should have. And that is not the way we are doing things currently. So, we have now focused down, we have a single sales and marketing team, we have single operational team, and so we are aggressively targeting customers and taking our entire portfolio of products into those customers. If you take a look at performance, I will say they are performing a lot better, but I'm still disappointed that we are not seeing more improvement, and Jake and his team are very focused on that, so the restructuring efforts are well underway there, we have seen consolidation or elimination of management positions, plans. I think the future looks pretty good over there, but there is a lot of hard work to go.

There are still significant and employ real cost reduction opportunities in the fasteners business and these guys are getting at trying to bring them home.

And in speaking as cost added, sounds like you guys are, well, if not ahead of track, let me on track for cost savings for 02. What are the chances with the additional restructuring actions on the, judging by the cash outflow into 03. Do you need to raise those numbers?

Well, we are working that all the time and, you know, we have said that we will have at least 225 million when we are done here, so, we are not going to change the numbers right now, but we feel pretty good about the program.

And do you think at this point a specific action is getting you higher cost savings than you expected or have you been able to execute faster or what is driving the strong executions?

The honest answer to that is we have been able to do more for the same amount of money than we originally thought we would do. We have been bringing in these programs, you know, maybe we were just a little too conservative in estimating what the cost was going to be, so we are going deeper and getting more done and that is allowing us to realize larger savings for the same amount of cost.

And, then finally on the industrial products side with the right turns you took this quarter, is that something that is an ongoing process or do you feel that is pretty much down in you. You have got those levels down where they need to be going forward?

Oh, I hope it's not at all going forward

, but, you know, this is pretty typical, unfortunately, when you get there, nobody ever goes broke at the beginning of our session, you get towards a number of quarters into a downturn in the market and you start to run into some issues around inventory valuations and credit worthiness to some of your customers. We certainly tried to get, you know, all of that as properly reflected as we could at the end of the second quarter. Cannot promise that we won't have other customers have problems if this economy continues to stay down, as it seems to be for a long period of time. I don't know, but I certainly don't expect to see anything of that magnitude again.

Great. Thanks.

Our next question is from the line of Jack Kelly with Goldman Sachs. Please go ahead.

Good Morning. In the past, Ted or Lewis, would you over to Cessna. Can you give us a little bit of a view of 03, and the question is this. Based on the backlogs that you currently have for 02 and 03 assessed as 300 against 250. In the past you were indicating your shipments would be down next year. The positive swing that you had discussed in the past, the potential positive swing, may be to bring earnings and you are being flat despite the down deliveries where lower losses on used aircraft sales. Now it sounded like in the quarter that was a pleasant surprise in terms of sales, I don't know how the profits or losses there were. Could you give us a sense of what the swing might be on the profitability and your losses of used aircrafts at Cessna, what say, you know, this year, versus what it might be next year? Secondly, if you could just give us an updated number, if there is one, on you know, capital spending for the year?

Okay. On Cessna, total hits that we took last year on used aircraft valuations were about 34 million and right now our best guess this year is it would be exactly the same. That is just an estimate of course. And all I can tell you at this point is, we are hopeful that, you know, we have a lot of that coming because we agreed to trade in values of aircraft obviously many, many, many, months ago that are coming into the system now, that values that are not supported by the current economic conditions. So we are certainly hopeful that we won't see that kind of level repeat in 03. But I don't have a perfect crystal ball to tell you what that is right now.

Right now capital expenditures are looking to be around 350 or 360 for the year.

Hey Jack, I would add a couple of more things on the assessment piece because I think it helps get, you know, a little more confident. We close the shops, so as to speak, the used shops so to speak last year, which means that when we began, as we continued to place orders, we were flying back and as Ted mentioned, you know, we still got some of that overflow before we the closed the shop, has still to come out of that. That is number one. The number two, we are seeing a little bright light in the percent of used planes on the market in total.

That is down to 16 percent now. It should be 10 or 11 versus 18 or 19 and when there is an excess of used aircraft on the market, well, that puts pressure on prices. So, you know it is a relief that to say that it is moving in the right direction. Also we have talked about this, but one of the things that continues to help us with our outlook next year in addition to really aggressive, I mean, if you want to see some good, lean, and Six Sigma work, go up to Wichita they are having some really good stuff out there. But in addition to that our sales and marketing of replacement parts and also our service centers are getting a lot of attention now and you know we are up those 24 seven, so, that income is up year-over-year too so. I feel pretty good about Cessna right now.

Good. It is a good talk. Just summing it up on Cessna assuming losses were reduced some significantly from 34 million, you know, we have these other cost saving etc., and you delivered 300 aircrafts this year 250 those have to be the numbers. Do you think, you guys have a fair shot at having a flight year earnings wise?

Oh yes. You bet.

Okay.

You bet.

Thank you.

Bet on a fair shot, I would say.

Our next question is from the line of David Bleustein with UBS Warburg.

Hi. Good morning. You walked through the core revenue growth rates for each of the major businesses in the quarter?

Yeah. Hold on just a minute. I think I have that somewhere. The aircraft was 5.2 percent organic, fastener's organic growth was minus 1.7 with an FX impact of 1.6 percent. Industrial products was minus 5.5 percent organic with an FX impact of 0.3, industrial components was a positive 6.7 with an FX impact of 0.6.

The first number you gave us included or excluded the FX component?

No, the first one included the FX impact. So, for example, Fastening System was organic 1.7 as reported as adjusted minus 3.3.

Yeah. Okay. And you mentioned a new facility in China. What percentage of your revenues is derived from Asia and what trends have you seen in business conditions in that region?

We are going to have to scramble to get those percentage of sales, not tremendously high today. Got to be less than 5 percent, but here is how we see, we do see emerging opportunities in Asia. We have a Shanghai office that is, in fact, we just had 4 or 5 of our operating guys come back from over there. We are beginning to develop some pretty interesting plans for organic growth there, which means our Greenlee products for construction and if you have ever been to Shanghai they have more cranes up in the air than any probable location in the world. So, we happen to have some products that we can aggressively market in the Asia area and I am thinking China is one of the primary focus area, it is not the only. Well, in the Kautex, Kautex when we brought them had a smaller facility North of Beijing that sold plastic fuel tanks to one of the transplant customers there. I think it was also Volkswagen, but I am not exactly sure. This new deal expands us even further and Kautex is really skilled at setting up a remote plant and then producing their products there.

So, I expect, we are going to see Asian revenues grow at a modest pace until we tell you more, but I, you know, we got to try to get that 10 percent in the next 2 or 3 years, but we don't really have a firm target in side yet.

Kautex did, in the last year form a joint venture in Japan to capture the master business and used that as a base for growth and that is the one market that hasn't converted to plastic systems at the same rate as the other market. So there are some real growth potentials there, but it is not a big piece today.

All right. Thanks and congrats on the quarter.

Thank you.

Please press the one at this time and we will move on to our next question from the line of

from Lehman Brothers. Please go ahead.

Good morning guys it's Don.

Hi Don!

Just a follow up on the numbers you gave to Securitization in company, your 11.6 million is that a pre-tax number?

Yes.

And do you think the next couple of quarters will be in that line, in that range?

I don't have that here in front of me but I think that's, it is probably pretty close.

Okay, all my other questions were answered. Thanks a lot guys.

Okay Don.

Our next question is from the line of Richard

with Dupont Capital

. Please go ahead.

Good morning.

Good morning Richard.

Okay, could you quantify as against the hits or against

securitization. What the hit was from credit loss and increased expenses?

Do you have the total?

We hope so; just give us a second...

All right. The higher provision for loan losses was 13 million. Higher operating expenses were 9 million. The offset for higher interest margin was 6 million.

Okay.

And the provision for losses by the way reflected net charge of 10 million, an increase in the allowance for the losses of 3, Richard.

Okay. All right and then on Bell. You know, you, Bell and Cessna, you talked to some extent about Cessna being helped by the product and service business. Can you quantify that as a percentage of Cessna's revenue. Could you do the same thing to helicopters and talk about how that is doing now and whether the situation offset the economic situation?

Custom service as a percent of total revenues. Yeah. Custom service at Cessna is about 12 percent and at Bell it's in that neighborhood as well. I am not sure of what it was in the quarter.

I don't know, but it generally runs a little higher 13 or 14 percent.

That is both of those companies are known for their availability of parts and service in the world actually and so the health of that business or those components of Bell and that component of Bell and that component of Cessna is very healthy and it continues to be, I don't have the number but we will get that on the next call and they will strike that out. We continue to have year-over-year, I'll call it organic growth and just the basic servicing in terms of parts and labor for the products we put out in the field. Bell was in a 140 countries, Cessna is in primarily 3 but their service centers are renowned and we service only Bell products, I am sorry Cessna services only Cessna products for the most part and Bell actually, they service a variety of different customers but primarily Bell.

We are making both a start this year and over the next couple of years significant investments to expand Cessna's service center capability as a big slug of our capital going into expanding those businesses because you know we have really had great opportunity there because the parts of jets. There weren't any business jets around 20 or some odd years ago and it would be part has grown and grown and grown and we really are seeing the tail of that being strong growth in the parts and service business and it ought to continue growing at a pretty good pace.

One of the reasons why I like this business, both of them is because if you look at the profitability of let us take the jet. When you first start to producing it the profit is usually lower than as you get into a mature cycle and so forth. But if you can grow your parts and service business it is like an annuity and that parts and service business has grown well for the 10 years I have been at Textron and because Cessna has maintained the reputation as a kind of service organization of choice and we also have some unique programs that allow you to sign up for a fixed service payment when you have to have your normal overall etc., done.

It is good. It is a very, very good area.

Hey Richard, just to calibrate the spares part of the commercial side of Bell's business during the quarter was about 45 percent of our business and I do not have the corresponding figure.

45 percent of what?

Of about little less than 200 million on the commercial side of Bell.

Okay. All right, then the last thing I you know but we are used to always think of kind of margins on this business when we are looking at United Technologies as being somewhere at 25 to 30 percent. Is that a fair approximation?

You mean from service, or parts and service.

For parts, service will be close to 10-15.

That wouldn't be far off.

Okay, thank you very much. Thanks.

Our next question comes from the line of John Mcdouggal with JP Morgan. Please go ahead.

First question would be in the finance segment and in light of recent used Aircraft pricing trends. Are you comfortable with where your residual value assumptions are on any receivables you have in that area?

We look at those regularly and as I said we did take about a 7 million dollar charge in the second quarter specifically related to Aircraft receivables. So we are looking at it regularly and we made disclosure we possibly can.

Okay and then on the Cessna side, Lewis I am not sure, there were a lot of numbers here, did you actually give us what the orders were in the quarter and then for may be the first half of the year?

We didn't. I will make a deal. You can have a misquote but we are getting a lot of pressure not to put those up, because it has given our competitors some advantage on us.

None of them do it.

Nobody else does it and that I didn't know this. We have been really free with it. I am not sure so much on how much we call tell you guys everything we can think of here. We are really right on track we said we had to do 120 and we are exactly on track at the middle of the year, right where we want to be.

Okay.

Cancellations have slowed which is really good. So we are feeling better and better about.

Eh, we are not out of jet. This is such an uncertain account. But still we have contingency plans in place in case we miss an order or two but I feel it pretty good as we sit here now.

Just for the amplifying what Lewis said about going forward here, what we would like to do is rely on our percentage sold out statistic as the definitive guidance to you in terms of assessing whether we are on track with respect to orders for future deliveries.

Okay and that's 60 percent sold out or 60 percent sold out of the 250?

Over 60 percent sold out of the 250.

Of the production plan for next year.

We take that this if you work through that, that will give you guys the guidance you need without being so specific in helping our competitors.

And can I give you a little bit of local color on that too. I first came to Textron in September 1992. In the 92, 93, 94 time frame we kind of hoped to get 80 percent sold out by year end and we had to sell the remaining 20 percent and deliver it for the next year. So, you know although in the last 3 or 4 years, at this point we have been higher than that 60 percent. On historical basis this is a number, that's why we are not too afraid of, this is a number we have managed for many of our years as a jet manufacturer.

Okay.

In pretty good shape. Yeah.

One other thing I think I heard in your comments was that you did get some pricing benefits in Cessna in the quarter?

Yes we did.

Is that, I mean, I guess given the state of the industry I guess it's a little surprising to see pricing power. Is that something you expect to continue or as capacity opens up do you see the possibility for maybe a more challenging pricing environment into next year?

You know we have in the products list prices up on a regular basis and continue to do that. You know we do give some of it back but we tend to do giving it back and things like, you know lower rate financing or better trade values and the likes of this. The idea upon putting the less price up has continued in Cessna. We expect to see continued favorable pricing. It may not be a strong; it has been strong here recently as it has been in the past.

Okay and then just a final question Ted, I want to first to clarify you are setting your 2003 pension assumptions as of now?

There is not much difference from what we have set for a while but yes we are formalizing them in the planning process right now but those are not different numbers from what we looked at. I share the pension asset committee and we sit down and go through these things every quarter, so it's not a big change. We had anticipated that this would peak out last year and pretty common this year and will start to trail off.

Just a philosophical question. I think you had said 9.25 return assumption on the assets, and as you know it's an issue that many investors are focused on and sensitive to, there is a belief certainly in the popular media, I believe myself that return assumptions that high are probably, they are not as conservative as they should be. So why not just bring it down to a level where may be wouldn't be subject to any of that sort of criticism?

Well first of all because we try to be fact based. We meet as a pension committee, we look at this thing every quarter we have a lot of data sources that we utilize to try to set that rate including looking at 80 years of history on the historic long-term returns on everyone of our asset classes and by the way US common stocks only represent 36 percent of our pension plan with another 11 percent in international equity. So our pension assets are not all stock-market related assets.

Yeah.

We look at 80 years of history by each of those asset classes. We look at things like

risk premium on equities which by the way for 75 years the risk premium is 7.4 percent and for the last 10 years 9 percent. We had a risk-free weight back to that. We look at the actual performance of all pension plans over 1 billion in size comparable to us and we look at both their actual performance and their assumed rates, and probably most important we look at our own performance history which has been for the last 25 years ended last March, our asset mix is generated at 12 percent compound annual rate of return. And that has been also by the way consistently a little bit better than our peer groups. So we will look at it all the time. These are long-term rates.

We are going to pay off liabilities to pension recipients that have started working for our company for decades to come and so the fact that the stock market is down for a couple of years, it does impact our pension earnings calculation because we have to start with the beginning asset base in that calculation, so short-term earnings changes do matter but the long-term rate also plays an important part in this thing and if you look at all the objective data out there, worked out sitting right in the middle of what all of the objective benchmarks that we look at, say we ought to be. We look at it all the time. If we come to the conclusion that one of those bench markers whatever everyone else is doing frankly, we come to the conclusion that we ought to move that we will but frankly we think we have a pretty good discipline and fact based process in place to do that and you know we are going to stick with it.

We look at 80 years of history by each of those asset classes. We look at things like

risk premium on equities which by the way for 75 years the risk premium is 7.4 percent and for the last 10 years 9 percent. We had a risk free wait back to that. We look at the actual performance of all pension plans over 1 billion in size comparable loss we look at both their actual performance and their assume rates, and probably most important we look at our own performance history which has been for the last 25 years ended last month our assets makes this generated at 12 percent, compound annually rate of return. And that has been also about a very consistently a little bit better than our peer groups. So we will get it all the time. These are long-term rates. We are going to pay off liabilities to pension recipients that have started working for our company for decades to come and so the fact that the stock market is down for a couple of years, it does impact our pension earnings calculation because we have to start with the beginning asset base in that calculation, so short-term earnings changes do matter but the long term rate also plays an important part in this thing and if you look at all the objective data out there, work out sitting right in the middle of what all of the objective benchmarks that we look at say we ought to be. We look at it all the time. If we come to the conclusion that one of those benchmarkings, whatever everyone else is doing frankly, we come to the conclusion that we ought to move that we will but frankly we think we have a pretty good discipline and fact based process in place to do that and you know we are going to stick with it.

Our next question come from the line of

. Please go ahead.

Actually this is Jack Murphy . Sorry.

Hi Jack.

The three-dollar earnings guidance you provided for 02, what does that assumed finance business do?

Well, I am not sure to give specifics out on each of the businesses, but we certainly assume that the finance business is going to be down on a year-over-year basis.

Whether you are kind of running down 40 or something like that through the first half. Is that reasonable? 40 percent?

No. Probably a little better than that, Jack, do you want to just have a conversation with me offline. I'll talk you through it a little.

Just as a part of that, I was curious, you know, for some reason I thought securitization and syndications were supposed to start trending lower and it looks like they are up in the quarter and is that or am I wrong in that assumption?

There are so many variables depending on what rates look like and what different asset classes, which used to securitize, I am not sure you are going to have a look at this is like a regular steady machine that we are going to be able to predict quarter-to-quarter, but there is no strategic direction to take that number up or down from kind of the same percent of our overall assets originated, but it has been running for the last couple of years. It may bounce all over the place from one quarter to another.

Okay and then just on the aircraft business, you know specifically, 6 million I guess, but, there seems to a sort of consolidation opportunity in there with UN and at least a couple of other manufacturers and I was wondering if you have any thoughts along those lines, if you'd rather be a consolidatee or consolidator or you know, is that something that's just not on the table and you know, you are not even looking in that direction?

Well, here is our answer to that. I do not know of any and I am not particularly interested in any. I do not think that is going to happen. I think what our focus is, here it is exactly, you're talking about fixed wing, right.

Yeah.

Okay. Our focus is so clear on what we need to do and that is, here it is. In the last 10 years, Cessna has delivered a tremendous amount of value to us. I mean it is unbelievable if you look at the numbers over the 10-year period whether you want cash, operating profit or revenue growth. We have a very strong, which we can't talk about much right now, but a very strong forward program on our own production model upgrades. New models and existing models. And we have the wherewithal to fund it, and we have an equally strong effort in making our good business even better and I mentioned

and Six Sigma. I really wish that the more you can get out and take a look at what these guys are doing. They are really setting a nice pace on that topic too, so, Jack, on the one hand, I see a very strong future for Cessna without having to combine with anybody and secondly I don't think any of those are needing out there. Now, if you know some, you however have to make of that. I do not know of anything. I am not particularly looking to do anything.

Don't you share a tarmac with someone in Wichita?

We share with everyone.

. Yeah, we do.

Okay, just checking. Anyway, would you concede Lewis that this is probably your lowest multiple business from a stock market valuation standpoint?

Say it one more time.

Do you think this is your lowest multiple business?

Cessna? You mean it is inherently a low multiple business?

Right.

I wouldn't concede that. Why do you say it?

If you look at it, the aerospace and defense multiples against diversified industrial multiples are pretty much sitting on top of each other right now.

Okay. I appreciate it.

Yeah.

Our next question is from the line of Steve

please go ahead.

Cessna is not for sale

.

Hi Steve.

Well, hi. That was the question I was going to ask about Cessna. No, I am just kidding. Anyway, my question is already answered. Thanks.

Thank you.

Well, operator do we have anymore questions in queue?

We have one additional question at this point.

All right, let us take that question.

We have the next question from the line of Bob Decker with Harris Investments. Please go ahead.

Yeah, so a quick follow up on the Cessna stories. A couple of questions. What is the pace of, you know, Citation shares, business north of, looks like a proportion of backlog is growing a bit especially over the last year and then can you follow up on your comment about your product upgrades, I mean, are you targeting products markets to compete against a potentially stressful eclipse?

Okay I can do all those

ownership business, you know, we call Citation shares, we started sometime, a couple of, my guess is, a little bit over a year ago. We have pretty much shipped right on track, that is what we wanted to do. We put 10 of our planes under Citation shares in 2001. We are going to put 12 in 2002 and the latest we have a feeling about that number is that we are still right on track to put approximately a 100 jets into service with Citation shares in 2006.

That will be a cumulative number, so by the end of 2006, we will have produced at Cessna and then sold into fractional ownership Citation shares specifically a 100 aircrafts. Right now we have 12 Citation Bravos', 7 CJ-1, those are smaller aircrafts and then we have 4 XLs. So, that business is doing about what we really wanted to do and I tell you, I know some customers that are just acquaintances of mine that are using that business and I have to say one of their shining capabilities is unusually high customer service rate. They are really knocking the cover off the ball there, so I see that is on track.

The Eclipse isn't in production yet obviously it is a plane that supposedly is going to sell for about I think about a million dollars. It may or may not be successful and one of our big strengths at Cessna when we talk about service centers and just the capability of the company. You know a single aircraft entering in a market place that we are very strong in, is not something that we, you know feel so much. Actually in kind of a strange way if they are successful, they won't, I don't think robbing sales from us they will get more people huddled over into jets and once you get them in to jets that is right and our `neck of the woods`. There isn't anybody better in light and medium jets than us, so the Eclipse is not something that we are free of a loss.

Yeah. It is not the first time that has ever tried to make it in and that is all about I could say about that and nice to see all that develops. It does not look like competing with our products sale.

Okay ladies and gentleman thank you very much for joining us. If you have any further questions please feel free to give us a call dialing investor relations office, today. Thank you. Follow up.

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