達信公司 (TXT) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Textron 3rd quarter teleconference.

At this time, all participants are in a listen only mode.

Later, we will conduct a question and answer session.

If you wish to ask a question at that time, you will need to press 1 on your touch tone phone, and you will hear a tone indicating you have been placed in queue and you may remove yourself from queue at any time by pressing the pound key.

If you are using a speaker phone, please pick up your hand set before pressing the number.

If you should require operator assistance during the call, please 0 then star and an operator will assist you.

As a reminder, this teleconference is being recorded.

I would now like to turn the conference over to the Vice President of Investor Relations, Doug Wilburne.

Please go ahead sir.

Thank you and good morning.

Welcome to our third 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 that are subject to various risk factors which are detailed in our SEC filings and today's earnings release.

Now for a summary of our third quarter results.

Revenues were $2.6 million down from 2.8 billion last year, primarily due to divestitures including automotive trim [INAUDIBLE] engine components, and lower revenue in the finance segment partially offset by higher sales in most of our other segments.

Free cash flow before restructuring was $6 million, compared to a use of $67 million in the third quarter last year.

Our reported gap earnings in the quarter were 51 cents per share.

Our reported earnings per share includes 34 million in pretax special charges and costs related to restructuring.

Excluding this amount, our adjusted earnings per share were 68 cents.

I would like to remind everyone that Textron adopted statement financial accounting standard number 142, which required companies to stop advertising good will and certain intangible assets with indefinite use for lives.

Correspondingly, the segment profits that we will discuss today reflect the removal of good will amortization from last year's segment results.

The segment profits for this year and last year will be before special change and restructuring costs.

Now let me turn the discussion over to Lewis.

Thank you, Doug and good morning.

Coming into this year we were very deliberate about setting reasonable and achievable targets given given our view back then of a continuing softened economic environment.

We talked to you a lot about that.

Also in setting those targets, we knew the natural seasonality of the businesses would make the 3rd quarter our most challenging.

It usually has been over the past 10 years I've been here.

As it turned out, in addition to the ongoing economic challenges and the normal summer seasonality for which we had planned, we had to deal with a number of other significant issues during the quarter and we still achieved our earnings per share target of 68 cents.

Now, foremost amongst these issues was the customer care program we in connection with a product we call [INAUDIBLE].

In addition, in our commercial finance business we wrote off various nonperforming loans in the telecommunications industry and to a lesser extent in franchise and aircraft finance.

As you know from an earlier press release, we offset a portion of the financial impact of these issues from the settlement of a prior year tax dispute.

I also want to emphasize, however, that we had much stronger than expected performance success in the Bell and Textron systems and CalTex.

And importantly, across the enterprise, we are continuing to accelerate cost savings and improve operating efficiencies through our restructuring program and other cost reduction initiatives.

Based on the success of our restructuring program to date, we also decided to expand the program to take advantage of strategic opportunities to further improve operating efficiencies, primarily in our industrial businesses.

It is permanently taking out costs across the entire company and Ted will provide additional information about restructuring activities later in the call.

Next I want to discuss a couple of specific highlights from the quarter that bode well for the future that I think are important for you to understand.

Turning to our outlook of business in demand at Cessna, I have two messages.

First, we do have two lean years ahead of us, but we are on track to maintain relatively stable profits in the aircraft sector through this entire period and second, the long-term outlook for Cessna business jets is very good.

Now with respect to 2002 production as most of you know by now, we are practically sold out; in fact, we are completely sold out. 2002 will happen as we think it will.

Looking to 2003, we currently have about 70% of planned production of 250 jets already sold.

While the current business jet market is in a down turn, I believe our broad array of products combined with a strong backlog, together are helping us manage through this environment quite well.

As I said, the longer term outlook for Cessna is very strong.

For example, customer excitement about Cessna's products was evident at the NBAA convention in Orlando last month when we announced two new aircraft, the CJ-3 and the Mustang.

Market reaction to these reactions has been strong.

We received 156 orders for the CJ-3 of which about 100 entered backlog in the 3rd quarter.

And to date we attracted over 250 orders for the new entry level jet, the Mustang.

In our view the Mustang is a game-changing innovation for Cessna.

As a new entry level jet, the Mustang is well positioned in a way that addresses a previously untapped market.

Let me explain.

Priced at $2.3 million, a full $1.5 million less than the least expensive jet in today's market, we are solidly in position of a price range of many current high end turboprops.

The mustang is a jet.

It attracts a new set of potential customers as people aspire to get into their first business jet.

In fact, it creates a new address for market and demand for citation jets that quite frankly, just didn't exist before.

The long-term strategy with the new Mustang customers, obviously, is the step up strategy that Cessna is so famous for.

And that is to move up the Mustang customers to a higher priced, higher performance products over time as they develop the desire for the benefits of a larger, faster, longer range jet.

The key assessment is differentiation in this market, I believe.

It has been the strategy of continued investment in new models, coupled with the ability to successfully bring out the new models on time and on budget to the market place.

Cessna is unique in the business jet industry with the broadest and most modern array of jets strategically spanning the small and mid-sized jet market.

In fact, three of our jets are new since 2000.

The Mustang, CJ-3, and Sovereign will join the lineup over the next several years.

Our strategy of continuously introducing new and improved products in Cessna is working and drives future growth, especially when corporate profits improve.

Moving on to Bell, we are making excellent progress on the V-22.

Three ospreys are actively in flight-tests right now.

The redesigned ships are flying test missions with excellent performance results.

One of them just flew from Amarillo, Texas to Pituxit River, Maryland, for delivery to the Marines 10 days ahead of schedule.

We expect to have five in flight by the end of the year and during the quarter we received approval to begin the Block A modifications to retro fit existing aircraft and signed contracts for lots 5 and 6 which added over 500 million to Bell's backlog.

So a good story on the V-22.

Bell's H-1 upgrade is also making meaningful progress.

Last quarter we finalized a new contract to continue forward with product development.

Program and cost management are on track and recent reviews by the Navy and DOD have been very positive.

As of today, all five H-1 developmental aircraft are actively flying.

The flight and static results have been positive and development will continue over the next several years with the first 18 production aircraft scheduled for deliver in 2006 and 2007.

With a total contract value approaching $5 billion.

In addition to meeting the needs of the military, we believe H-1 program also has significant foreign military sales opportunity and we are obviously pursuing these as well.

Finally, I want to give you a brief update on progress with transformation.

We are only in our second year in this important effort, and yet the benefits are beginning to materialize and make a difference across the entire continent.

We established a common IT organization and we began building a common infrastructure.

We are creating core competencies and full supply chain management and brand management.

We are driving all of our financial decisions to maximize return on capital.

Through Textron's Sicsigma [PHONETIC] we are creating an enterprise-like culture focused on continuous business improvement.

Our deployment has gone like clock work.

During the 3rd quarter, I kicked off our last two black belt training classes for 2002.

In my view, the black belt candidates in the last two classes are particularly important to the future of Textron.

Here's why: they will graduate with a specialty in the tools and concepts of design for Sicsigma, or DFSS as we call it.

DFSS provides a disciplined process to understand and translate customer requirements into exciting, profitable products and services.

The DFSS frameworks allows us to accelerate future organic growth.

Including these last two classes, we have over 230 of our best men and women from around the world trained or in training as back belts.

As we said earlier, we are beginning to see the benefits from the first wave of projects, and the momentum is building.

We fully expect that Textron's Sicsigma will contribute to our earnings performance in 2003 and grow significantly in years following.

As I see it, we managed through a number of issues through the quarter and still delivered financial targets.

We are making progress on the transformation initiatives and in spite of light industrial volumes, we are continuing to see improvements in all our businesses.

Looking forward, we still don't see any significant near term improvement in the general industrial manufacturing environment, however we are encouraged by our ability to continue to significantly take out cost and are also building a platform for future growth.

Ted?

Thank you, Lewis and good morning everyone and thanks for being here with us.

I will start with an overview of the key drivers of our results of the quarter.

Because we had a number of significant changes below segment profit, I will do this quarter's analysis on the basis of EPS.

Earnings of 68 cents per share this quarter were 93 cents better than last year and the key drivers are as follows. 10 cents came from volume and sales mix. 13 cents related to pricing. 39 cents was due to net cost improvement, and that includes 12 cents that came in the quarter year over year from restructuring program. 39 cents was a result of the Bell profit adjustments that we had in the 3rd quarter of 2001. 16 cents came from elimination of good will amortization and 9 cent from benefit of settling federal tax issues from prior periods, which we talked about earlier.

These positive changes were offset by the following three negative items. 17 cents for inflation, reflecting in part exposure to rising steel prices. 13 cents for performance at Textron Financial and 13 cents for the engine recall and customer care program at Ricomie [PHONETIC].

I will go through that one more time, starting with the positives. 10 cents volume and mix. 13 cents pricing, 39 cents cost improvement, 49 cents the overall Bell profit adjustment, and 16 cents for good will and 9 for the tax settlements offset by negatives of 17 cents for inflation and 13 cents at Textron Financial and 13 cents for the Ricomie issues.

Now we will briefly review the segment results in the quarter.

Aircraft revenues increased $60 million and profits were up 117 million.

Bell's revenues increased 17 million due to higher revenues from the U.S.

Government primarily on the V-22, and higher foreign military sales, partially offset by lower sales in commercial helicopters.

Bell's profit increased, primarily due to the unfavorable adjustment last year obviously, although as well higher profits in both the commercial and U.S.

Government businesses.

The V-22 program continues to be a strong contributor to Bell.

During this quarter, we finalized a contract for lots five and six and as a result of the progress we are making, we expect to book 575 million in revenue in '02 and a little over 600 million in '03.

The V-22's backlog stands at about 800 million and about 550 of that amount was added in the 3rd quarter.

Bell's total backlog at the end of the quarter was at about 1.4 billion.

At Cessna revenues were up 43 million, primarily due to pricing and higher sales of caravans, used aircraft and spare parts and services.

Cessna's revenue increase was partially offset by lower sales volume of single engine piston aircraft and aircraft engines affected by the weak economy.

Profit decreased as the benefit of higher sales and mix were more than offset by the $31 million in cost related to a recall and customer care program at Ricomie, and a write down for used aircraft and start up cost related to the Sovereign.

Backlog at Cessna was 4.6 billion, and that includes about 600 million for 102 new CJ-3 orders.

It does not include orders for approximately 50 CJ-3's expected to enter the backlogs during the fourth quarter as contracts are finalized.

It also does not include any of the new Mustang orders.

Those will enter backlog next year after engine and of avianic specifications are completed.

Let's talk about fasting systems.

Revenue and profits for the 3rd quarter increased 22 million and 13 million respectively.

Revenues increased primarily due to higher sales volume and the favorable impact from foreign exchange partially offset by customer price reduction and divestiture of noncore product lines in 2001.

Profit increase primarily due to improved performance and savings from restructuring and higher sales and the loss on the sale of the noncore product that we took in the 3rd quarter of '01.

Those were partially offset by customer price reductions.

In Industrial products, revenues were down 2 million and profits up 33 million.

Revenues decreased in most of the segment's businesses primarily due to lower sales volume and the divestiture of noncore products in '01 offset by higher pricing and higher sales volume in the golf and turf businesses.

Profit increase primarily due to cost performance and higher price, partially offset by an unfavorable sales mix.

Industrial components, revenues decrease 314 million and profits were up 2 million.

Revenues and profits were down 364 million and 8 million respectively, due to divesture of trim, TECT, and several other products lines in our run.

If you take those divestitures out, the revenues of the remaining businesses were up 50 million and profits were up 10 million.

The revenue increase was primarily due to higher volume at CalTex, as a result of new product launches, and a stronger automotive market and favorable impact of exchange and partially offset by lower volume in other industrial businesses as a result of soft markets and price reductions.

Excluding divestitures, profit increase was primarily due to higher sale and improved performance at CalTex and benefits of restructuring activities, partially off set by price.

Finance segment revenues down 22 million and profit down 32 million.

Revenues decreased primarily due to a lower average yield, reflecting the current interest rate environment..

Profits decreased primarily due to a 24 million dollar higher division for losses and lower interest margin.

Credit quality indicators of TSC were mixed and reflect the current economic environment. 60-day delinquencies came in at 2.78% versus 2.58 at the end of the prior quarter.

Charge offs 2.13, up from 1.73 in the second quarter.

Our nonperforming asset ratio was 2.98%, an improvement from 3.06 in the second quarter.

We expect to have continued stress in the commercial finance markets over the next several quarters.

I want to spend a few minutes on several other issues and let's start with reconstruct .

We are having great success with the execution of our restructuring program.

We now believe we will reach $250 million in savings this year.

We reduced our head count by about 6400 and closed 65 facilities, including 29 manufacturing plants.

Based on our success to date and ongoing strategic evaluation of our businesses, we decided to expand the program, as Lewis mentioned, by about $150 million.

To date, we have incurred about 225 million of charges on the program.

The additional charges are expected to be substantially completed by the end of 2004.

We expect that after tax cash cost for the total program will now be approximately 250 and with the expanded program, we are now estimating annual ongoing savings to be approximately 250 million in '02 and 325 million in '03 and at least 400 million in '04.

Also during the quarter, we continued to invest in our stock, purchasing about a million shares and bringing the total number of shares repurchased since we sold automotive trim to 4.8 million.

Let's move on to the outlook.

As Lewis mentioned, we still did not see any real near term improvement in industrial markets, but believe we are on track to deliver earnngs per share of about $3 for the full year.

We are reducing the year's estimate for free cash flow to about 300 million, primarily due to the timing of certain customer payments, and reflecting the cost of Ricomie's customer care program.

With that I will turn it back over to Doug and we will be happy to answer all your questions.

We are prepared to take remarks, but before we do that, I would like to remind members of the media they are in a listen-only mode.

If any of you media do have questions, please feel free to call my associate Sue Bishop, or me, after the teleconference.

Let's go to questions please.

Thank you.

Once again if you have a question or comment, please press the one on your touch tone phone and you will hear a tone indicating you are in queue.

You may remove yourself at any time by pressing pound.

If you are using a speaker phone, pick up your hand set before pressing the number.

Once again, if you have a question or a comment, please press 1 at this time.

The first line is the line of Steve Mulpin at Morgan Stanley.

Hello, Steve.

I wonder if you could talk a little bit about a couple of things.

One, currency over all sounded like it was fairly helpful in the quarter.

Can you kind of quantify that a little bit, and then I guess going the other way, you mentioned customer price reductions a couple of times in a couple sectors.

You can expand on that a little?

Yeah.

Currency was a plus on the revenue side.

Fairly small numbers.

I guess only about a tenth of a percent and virtually no impact on the bottom line.

We are pretty well exchange neutral on that, but we got a little plus up here and there on the revenue side, but fairly small numbers.

Price in a lot of our industrial businesses are under price pressure as they typically are with customers.

We had positive pricing coming out of the aircraft business and we did have reduction in pricing at fasteners as well as CalTex.

It will be a decrease in the power transmission business.

We offset strong positive pricing in the golf and turf business.

Great.

Then I guess finance, you talked about the outlook being weak going toward.

Should we look at these kind of margins going forward or how can we quantify that?

We hope that the 3rd quarter write offs were abnormally high.

We took a couple of charges in the telecom portfolio in the 3rd quarter that amounted to almost half the charges.

We took total charge offs in the quarter were $44 million for the finance business and $18 million was for two transactions.

Hopefully we won't see that repeat on a go forward basis so that margin should improve in future quarters.

I think it's better to say as the economy stays in the condition it's in, we have a few more bumpy quarters ahead of us to get through all of this in finance.

When you look at the portfolio in finance and then I will get off, we probably agree that coming into the year here, we would have said telecom is potentially at risk.

As you look at the portfolio now, is there anything else in there you are worried about or are we kind of done with that now?

I tell you, if you step back and look at the business, the core businesses, and we talked about how we are working to refocus TSC around a set of core businesses.

The core business performance has held up amazingly well.

Where we tended to get all the incremental hits and charge offs during the year have been Telecom, which is the single biggest piece, followed by the nonTextron aircraft financing piece.

Followed by charge offs in some of the businesses that we are exiting right now.

That we are running down portfolios on.

Absent those three, things would have been a lot better for us for us.

We are working through those and hopefully we will continue to see solid performance on the core piece of business.

Okay, thanks.

Your next question is from the line of David Lucing at UBS Warberg.

Please go ahead.

Good morning.

Can you walk through the impact of acquire and divested revenues, just basically what they were by segment?

Yeah, hold on a minute.

Not much.

Do I have that here easily, Doug?

While you are looking for that, why was the tax rate so low in the quarter?

Am I looking at the right spot?

Sure, as we had announced previously, when we announced the Ricomie program, we were able to settle a old tax dispute that dated book to the 87 to 91 tax audit for a favorable impact of one-time of 9 cents a share that's reflected in the tax rate during the 3rd quarter.

You included that in the adjusted column as well?

It is in that column as well, yes.

Go ahead, Doug.

Why don't I give you organic growth for the segments that strips out the impact of acquisitions and then I will give the numbers with fx out as well.

Aircraft organic growth was 5.4 and new fx impact and fasteners organic growth was 6.8, and without fx it's 5.3.

Industrial product and organic growth was basically flat with a negative .2 stripping out fx.

Industrial component 14.6 and organic fx stripped out 11.5.

Finance is minus 12.1 on both sides.

Ted, you can walk through restructuring program again.

How big was the old program and the initial cash estimate and how much cash was spent on that one and the new cash cost of the expanded 150 million dollar piece.

I will give you a number and adding the whole thing.

The old program was $325 million of charges.

The cash cost was somewhere we estimated in the $155-170 range.

The new program was an additional approximately 150.

Put them together and roughly 475.

The after-tax cost for the entire program will be about 250.

So the new one is --250, of which how much is remaining?

We have charges-wise, let's see if I can add these up quickly.

We took charges of 17 in 2000 and 131 in '01 and we are expecting to take 122 roughly this year.

I don't know what the year to date number is.

Program to date is 225.

225 total to date.

How much cash is remaining of the 250?

For the total program.

We have about 50 more to go this year.

We are looking at somewhere between 80 and 90 next year and the balance would be out in '04. 30ish.

Okay.

So roughly 90 million is spent?

A little over 100, I believe after tax.

Thank you very much.

Thank you.

The next line is the line of Jeff Sprague at Solomon Smith Barney.

Go ahead.

Thanks.

I actually wanted to clarify one thing on the cash flow.

The free cash flow target for this year excluding restructuring is $300 million.

Then you have basically 150 million of cash restructuring this year?

Is that what we just pieced together with David? 50 to go and 100 already done?

No, no.

After tax cash cost for 2002 is going to be around 60-70 of which we spent 36 pretax.

That's after tax.

We spent 36.

Okay.

Also I was wondering on the organic question, you can roll that up for the entire company.

Organic fx divestitures to foot us to the grand total?

Yeah.

The total organic for the company is 4.7.

Without fx it's 4.

The impact of fx was .7.

Divestiture impact?

The total divestitures then would be 5.1.

All right.

A negative .4.

I was also wondering if you can update us on the pension that has been going on with changing assumptions.

I think the funded status is eroding, but you are far from making that.

Any color there is appreciated.

We have quite a bit of color.

Let me try to start.

First of all, we remain fully funded.

Even at the moment of the end of September where we were close, it bounced back.

Since that point in time it's correct that we are not anticipating cash contributions in the near future beyond right now.

We are in the foreign plans been making about $25 million a year of cash contributions for several years and will continue in some of those foreign plans to make that same level.

The the big domestic plans, we are not making contributions of cash and don't anticipate that we will have to do that in the foreseeable future.

On the earnings side, it's really a moving target with everything going on in the market place.

I give you more color.

Let's start with the same caveat.

There a lot of assumptions playing around in these numbers.

We talked to you last time and said we thought pension income this year would be a little lower at the 40 cents a share.

That still looks good and may be closer to the mid-40s.

We had positive impact on this year's results due to some of our restructuring activity and terminations of individuals in the plan.

We said we expected next year's number to be about 26 cents of income.

Really three pieces that are moving around a lot that are going to impact that number; let me just try to give you a little perspective.

The one that's hardest to get our hands around is for the actual earnings of the assets this year.

We had an assumption that we thought was conservative that was basically flat to up a couple of points for the year.

As of today, we think we are down between 5 and 6%.

Darn good performance compared to a number of our peers.

Our team did a good job there.

If we were to stay down in the 5-7% range at the end of the year, that could reduce pension income next year by about a nickel.

Take that 26 cents down by about a nickel.

The two other things moving around that is the discount rate.

We already planned in the number we gave you before a reduction in the discount rate at year end from 7.25 down to 7% ; with the 10-year bonds where they are right now, that could come down a little bit more and who knows where they will be when we get to December 31, which is the measurement date.

If they were to stay where they are right now, the discount rate impact could impact us another 2-3 cents.

Lastly we are examining the long-term rate of return and virtually all the big plan sponsors are meeting regularly and having conferring about what everyone will do with the rate.

We are a pretty good place to begin with, a lot lower than some guys out there.

We are looking at whether or not we want to make an adjustment.

It won't be monumental, but it could be another few cents.

If we end the year where we are today with plan performance where it is today and the bond rate where it is today and if we decide to be more conservative on the long-term rate, it could trim a dime off of where we were the last time, and we could be down around 15 or 16 cents of income versus the 26 number.

But again, you can't take that as a forecast.

This is a bunch of assumptions moving around, but I want to give you an update on it.

I appreciate it, you obviously done a lot more math than other companies have demonstrated on Q3 calls.

Thanks a lot.

Thank you.

The next line is the line of Harriet Baldwin of Deutsch Bank.

Please go ahead.

Good morning.

I'm wondering if you can go over any business sense you are getting on any changes of customer psychologist or order trends.

Are things relatively stable or are there any signs in particular areas of strength or weakness.

I will do that one.

I want to be careful of this because I have to tell you my overall summary would be that we are not seeing too much out there.

I can give you a few positive and negatives.

On the positive side, one of the benefits of oil prices being where they are, oil exploration is getting focus and of course our helicopter sales into the oil exploration segment have always been strong.

We are seeing increased activity there and helicopter interest in foreign countries pick up.

I just looked at a chart that showed -- and do not over react to this.

We have probably 11 or 12 programs that is vary between 100 million and 4-500 million or 750 million for helicopter sales.

Probably $6 billion of quotation activity going on.

So that kind of tells you that the Bell franchise is strong and the world continues to think we have the right products.

Overall, Bell has really performed well and on the two big programs on the call and the commercial market in general is the softest.

We see signs and a little bit of signs of hope.

Cessna is what it is. 250 next year.

Our customers really like our products.

The Mustang is almost unbelievable the orders we took there.

But that value sells.

The aircraft sectors is how we described.

We are taking more than our fair share of new golf course sales.

There aren't that many of them.

They are down.

On the negative side, most of the Industrial products that we sell basically to keep America's factories running are just flat.

Not down, but not up.

I think in balance, we see pick up activities at Textron system that haven't been realized in the revenues yet, but activity as we think about what could happen in Iraq and other places.

Homeland security is a positive force.

It hasn't materialized much yet.

There is a slight positive, but I wouldn't give it much.

What our guys are focused on now -- we don't talk much about the economy.

We are focused dead-on doing the things we have control over.

Which is taking costs out and trying to improve every product or service we produce so our customers want what we are selling.

I am encouraged by organic growth, but that's tackling everywhere in every market.

Yeah, restructuring will be the driver during the next three quarters.

We are pleased with Sicsigma.

That picked up and we learned from our assets, and we're probably six months ahead of where anybody else has been and we're trying to keep ahead of that time table.

Then I'm thinking about the planning process for '03.

Are you doing anything different in contingency planning?

On the rest of the year--?

We always try to have an element of contingency planning in all our businesses.

We are certainly not going into this planning process.

We are just in the starting points.

With any notion that people will assume the economy will help them make what they need to make next year.

You know, Harriet, I don't remember whether -- how familiar you are with this, but about three or four years ago we thought we were doing good on contingency planning and took it up a notch.

I think each one of our segments and businesses does a good job of almost [INAUDIBLE] downside planning as well as upside planning and we're much better than we were two or three years ago; thank goodness we did this year.

This has been a tough year, but we knew that going in and we made provision and unfortunately they had to be used.

Thank you.

Thank you, and once again, ladies and gentlemen, if you have a question or comment, please press the 1 on your touch tone phone at this time.

The next line is the line of [INAUDIBLE] at Wellington Management.

Please go ahead.

Just two questions.

I may have missed this if you already discussed it, but the status of the V-22, any developments there and I know Lewis, and you touched about credit quality and I was wondering if you can give more color in terms of of charges as we look ahead in the next couple of quarters, and where the problem areas are in terms of portfolio.

I will do the V-22 and maybe Ted can start on the TFC and I'll add to that.

On the V-22, first of all we returned to full flight operations on May 29 of this year. 2002.

Right now we have three aircraft flying.

They are going through a prescribed test program.

All of the feedback that we get through our own channel and witness as we are participants in the test program and as you are reading about in the press is that that testing is going almost flawlessly.

That's a good thing.

Believe me.

We expect that, but that's a positive.

We have been authorized for funding for lots five and six and we just received long lead funding for lot seven.

We have a contract that has been signed for lots five and six.

So far everything we see tells us the program as it has been rescheduled and reconstituted, is on track and fortunately we haven't had any negative that is have suddenly come on the forefront.

I don't want to give the impression that this is all but done, because this is a major government program.

A lost things change.

We all live to the call last quarter.

Things are more positive than they were because we have another quarter under our belt and people are starting to appreciate the value of the V-22 and a lot of military situations.

Those Block A changes I mentioned, basically take the aircraft that are being reworked to the new configuration necessary to meet all the requirement that have come out of all the fussing and the issues that happened over the last two years.

We will deliver 10 ships in 2002 and eight ships in 2003.

I guess the only other thing I can tell you is the first totally redesigned from production without mods in it, the first redesigned V-22 will be delivered to the customer in '03.

We feel good about it, the customer feels good about it.

Revenues pick up a little bit in 2003 over 2002.

I'm not sure I have a lot more I can add on TFC, but I will repeat a couple of things.

Charge offs in the 3rd quarter came in at 2.13%.

That was up from 1.73% in the 2nd quarter.

That 2.13% represented $44 million in charge offs in total and two telecom-related assets were 18 out of the 44.

Maybe almost 19 out of the 44.

Hopefully we don't see that kind of repetition going forward.

Those were large and unique cases and we'll see that number drop down in future periods.

Again, most of the difficulties if you look at historic run rate versus current run rate, most of the hits are coming in nonTextron aircraft in telecom and in business units within TFC that we are winding down the portfolios on right now.

Hopefully they are not wound down in some case and we have a few more quarters to go, but hopefully the 3rd quarter will be the peak of the charge offs and we will start to see it moderate.

But like I say, we will have a few more rocky quarters.

Thank you.

The next line will open is the line of Jack Kelly at Goldman Sachs.

Good morning.

Ted, you mentioned on the 300 million in free cash had something to do with -- sounded like accommodating customers.

Is that with regard to Cessna?

Can you elaborate and secondly you mentioned aircraft losses.

A couple weeks ago you indicated they might total 40 million this year.

Is the excess [INAUDIBLE] aircraft.

Maybe going down to 10ish next quarter.

Wondering if you can discuss this issue.

But on the finance side, can you briefly go through the major components of the portfolio and maybe the provision for losses that you took.

I know you gave us the telecom, but to see the vulnerability.

I'm thinking about something a couple of weeks ago, American skiing renegotiated some of their financing agreements with you and it didn't say you took a loss, but that gets into a key area.

The resort financing time shares.

I will go backwards.

If you strip out businesses we are getting out of, if you strip out aircraft not related to our Textron manufacturing, if you strip out telecom, the rest of the portfolio is holing up amazingly well.

Very little increase in loss rate versus what we saw in better times.

I don't have anything more specific than that.

I'm going to go backwards on your questions.

On the used over charge at Cessna, the current forecast is $44 million for the year, up about 10 from last year.

We think we have stemmed the tide of this thing and we expect some next year, but it will come down substantially in the '03 time frame.

Last on cash flow, I will try to over simplify this.

We took the number down from 3 in the quarter to 300.

One customer payment--and I don't want to get too specific-- relates to foreign government payment in the aircraft that slipped out of the year for $30 million.

It's a timing issue.

That's the principal driver.

We also obviously are starting to spend cash on the customer care piece, but that's a smaller amount.

It's really one customer payment and cash flow is interesting because we have pretty big lumps as we generate cash.

Particularly in the aircraft business.

That we thought we would get in the 4th quarter of this year will be delayed.

Thanks.

The next line is the line of Larry Baker, of [INAUDIBLE].

Thank you.

Ted, could you detail what the 34 million Cessna loss was in the third quarter, that you talked about.

We will find it.

I want to say 8.

I might be wrong.

He is clear on what that is, right?

Yes.

Okay.

Resale and write down of used aircraft.

Write down of used aircraft and a mark to market that we do every quarter.

Six million in the 3rd quarter, Larry.

Thank you.

The corporate overhead declined in the 3rd quarter, can you talk about 4th quarter and a run rate for 03?

We are still negotiating the run rate.

I will make a general statement.

We are really across the entire company using Textron Sicsigma to get at everything that needs to be improved whether it's how you process a pay raise or a transaction in finance to how you make parts faster on the factory floor.

We are starting to get traction at the corporate office and the corporate offices on eliminating waste and cutting out level and trying to take responsibility to lower levels and so we are looking to really continue to make improvements in corporate overhead.

Good companies do that and, we have [[INAUDIBLE];E] to work on, some require automation and computerization.

Some things you like to do now require programming and things that might take a while, but in general you will see us focus on that.

Ted, you can add the going rate if you like.

Specifically to the 4th quarter, we are back to like the 2nd quarter level in terms of our over all guidance.

Your number ought to be good.

Same number would get you below 120 for the year.

Is that a run rate to use for '03?

We haven't said yet.

There a few things, for example we have $13 million this year and the number of royalty income that relates to the sale of [INAUDIBLE] next year is going to be $6 million.

There is one right off the top that's $7 million higher next year.

We are also as Lewis said, going after other cost reductions.

We haven't settled on the number yet.

We have all the expenses that are still there that will dissipate overtime during the launch of Textron Sicsigma, because We staffed up to be able to train our own for 2003.

That will then wind down after next year.

That's a positive coming at us, it's a negative expense, but it's again every day..

Just to follow on that, the expanded restructuring program and the additional savings from that, how should we think about fitting Sicsigma and the benefits from Sicsigma into that restructuring program?

Sicsigma is being used in almost every aspect of the business including restructuring.

When we train men and women to be good at taking cost out relative to variation reduction or waste elimination, when we go into a major facility to close it and move introduction another facility, we often use black belts because you want to set the process up right when you reset it in the new factory.

We have a pretty thorough way of separating the savings of Sicsigma differentiating it, but we also track it throughout our existing program.

You find Sicsigma savings in supply chain and savings in restructuring.

Price realization.

Price realization.

It's kind of a -- if you imagine a list of major projects like restructuring, that's a huge one.

Full supply chain and pricing, etc., if you imagine a list of those down the left hand side and at the top like in a matrix, that's how we think of Sicsigma.

The raw savings associated with just Sicsigma, that would probably be minor in nature compared to the savings they deliver in other programs.

We like to talk about it in terms of total performance.

We don't want to double count.

Very careful there.

Thank you.

That's where I was headed.

Does this tax settlement change anything in your tax outlook or the 4th quarter of next year?

Doesn't change anything at all, Larry.

This is a 10-year-old settlement through the tax courts.

Finally got resolved and booked in the 3rd quarter.

It's truly a 1 one-time event.

Our next question comes from the line of Bob Decker of Pearless Investment Management.

Please go ahead.

Two questions, could you break out the debt at finance that you have on your balance sheet.

Shows about 600 liabilities in debt [INAUDIBLE].

Most of that that shows up is liabilities would be debt.

The current outstanding cp, I believe, right now is about $1.3 billion or a little bit less.

Okay.

How much has the debt gone up?

End of the year.

Your total is 600 million and is that increased mostly debt?

That's following the increase in receivables balances.

Okay.

What's your bank line status right now?

How much do you have. 1.5 billion throughout and what's available?

There is for finance a $1.5 billion revolver.

Actually about 1.6 with other [INAUDIBLE] lines that they have.

There have been running about less than $1 billion of cp outstanding.

We just had some bonds come due and we are about to go back to the market.

It's higher than average temporarily right now.

It's like 1285 or $1.3 billion. [INAUDIBLE].

Then just one last question, what's your Cap-X looking to be?

We're in the process of negotiating, but we are targeting to get Cap-X number close to the D&A number next year.

Thank you.

Our final question comes from the line of Adam Werlitch at Ulysses Management.

Three quick questions.

One, in terms of modeling going forward, should we look at the margin structure of deals like [INAUDIBLE] or sales of planes like the Mustang differently than other jet sales?

No.

In other words, that won't have an impact one way or the other going forward?

No.

Jets, the caveat is we don't have a huge margin difference from small to large jets.

We have big margin dollar differences if we sell a large versus a small jet, but the percentages are pretty close.

The other phenomena that you have in the jet business is that new product margins in the period of introduction tend to be a little bit lower and they mature as they have been in production for a period of time.

Let me add a little bit more.

I'm going to come on top of you and say if we have a jet in production that has been there say five years versus a new jet there for a year, the 5-year-old jet is down a learning curve and has a higher margin as Ted just said, than the other one.

The net jet sales, I said no quickly, but there was a known fact out there I want to reinforce.

The way everybody sells to net jets is you take the base price of the aircraft and you sell it to them and I think at a clean discount which is known, it's hard to determine whether that sale really pulled your margins down because it absorbs overhead.

It costs a lot less to make the sale.

Yeah it costs a lot less, and therefore they are more plain vanilla because they want the jets to be the same in general, you won't hear us talk much about the fact that sales to net jets has an effect on margins versus other sales.

They get a better price because it's lower cost.

Very good.

Just what was the gain on sale in the finance unit this quarter?

I'm sorry, gain on sale?

On the securitizations.

I'm sorry.

Hold on a second.

Gain was 13.5 versus 18 a year ago.

Okay and last, but not least, maybe I missed something on the balance sheet.

There was a big drop in the other current assets.

From 900 to 434.

From the beginning of the year?

Right.

That was at the end of last year after we told trim for an interim holing period, we had no debt to pay and downed loans 508 million from 8 to TFC as a holding period.

They had CT to pay down and [INAUDIBLE] did not.

Thank you very much.

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