達信公司 (TXT) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Textron conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. If you should require assistance during the call, please press 0 and then star. As a reminder, this call is being recorded. I would now like to turn the call over to your host, Douglas Wilburne, Vice President of investor relations.

Good morning and welcome to our fourth-quarter conference call. Joining us here today are Lewis Campbell, Textron's Chief Executive Officer and Ted French, our commander-in-chief financial officers. Before we begin, over the course of our discussions we may be making forward-looking statements. Any such forward-looking statements are subject to various risk factors as detailed in our SEC filings and also today's earnings release.

Now for a summary of our fourth-quarter results. Revenues were 2.9 billion dollars down from 3.2 last year. Primarily due to the divestiture of automotive trim and more revenue in the finance segment partially offset by higher pricing and a favorable impact of foreign exchange. Our reported GAAP earnings in the quarter were 95 cents per share, which included the following after tax items. 17 cents per share in charges and costs related to restructuring; a 17-cent per share non-cash charge of stock holdings in Collins & Aikman; and a 25% change in the sale of the Snorkel business according a tax benefit associated with the transaction. Excluding these items our fourth-quarter adjust diluted earnings per share was $1.04 compared to 47 cents last year. Our reported full-year '02 GAAP earnings before the cumulative affect in exchange of accounting principal was $2.60.

These reported earnings per share, the follow after tax items, 55 cents per share charges and costs related to structuring and 11% share lost loss of various transactions associated with automotive trim and 25% share gain from the sale of the Snorkel business. Excluding these items, our full year '02 adjusted earnings per share were $3.01 compared to $2.32 last year. A reconciliation of our GAAP earnings and as adjusted earnings is contained in our press release tables and on our web site.

Also, I would like to remind everyone that the segment profits we will discuss today will be before restructuring charges and related costs. They will also reflect removal of goodwill amortization from the prior year in order to provide a consistent comparison. Now let me turn the discussion over to Lewis.

Thank you, Doug. Good morning, everyone. You know throughout Textron, 2002 was a year of action and a year of results. We started the year with an aggressive strategy, and some very specific objectives not only to transform the company but also to create shareholder value, and we delivered as promised.

We strengthened our business's competitive positions, we continued to build a foundation for strong future growth opportunities, and we achieved our earnings per share and free cash flow targets. By 2002, it was a darn tough year. The majority of the markets we served contracted, as a result of the continued soft and certainly uncertain economic environment. And meeting our targets for the year required an intensified effort to accelerate cost savings while at the same time continuing to invest in the transformation strategy we began two years ago. Now by now, you all should be familiar with our shorthand reference to our transformation strategy.

Remember we called that the four Rs, restructuring, re-engineering, reconfiguring and a focus on return of investment capital, the benefits from our first "R", restructuring are quite evident in our 2002 results. In fact, our actual year-over-year savings from restructuring came in at $129 million. As you know, we expanded this program last quarter, and we expect to eliminate an additional $75 million in costs in 2003. These cost savings, combined with the operational improvements we are implementing throughout Textron, enable us to weather the current economic environment this past year and will be equally important in 2003. Going forward, when our markets recover, reducing our cost structure would have made us much more competitive and better positioned to expand and deliver accelerated results. The second "R" is re-engineering which focuses on creating the culture, the processes, the infrastructure required for us to be a truly networked enterprise of strong global businesses.

Throughout the year, we launched a number of initiatives aimed at realizing this vision. I think the most important was our launch of Textron Six Sigma. In 2000 alone, we achieved what took took most other companies years to accomplish. We developed a truly unique Textron Six Sigma curriculum. We trained over 225 full time black belts and now have completed more than 150 projects.

I was personally present to launch every one of the black belt training sessions and I can tell you firsthand seeing the enthusiasm of these 225 men and women around the world, I have to say that we've unleashed their collective energy and talents and this will surely create immense benefits for our businesses going forward. In fact, the pay off from the early projects in our first year has allowed us to break even on our total investment in Textron's Six Sigma, which is clearly an accelerated deployment. Looking to this year, 2003, I expect us -- I expect us to train over 200 Black Belts and 550 Green Belts. By the way I plan to count myself as one of those because I am going to participate in the Textron Green Belt training later this year.

In 2003, we will also launch in earnest the design for Six Sigma or DFFS [Phonetic] element of the Textron Six Sigma triad. DFFS is a rigorous approach for designing new products and services and bringing them to market. It is a systematic process that accurately identifies and converts customers' needs into valued products that can be manufactured and delivered profitably. We believe that DFFS will provide Textron with a competitive advantage for driving future organic growth in each of our businesses. We also made steady progress on other re-engineering initiatives during the year that will create better cost efficiencies and leveraged enterprise. Initiatives such as creating a single I. T. infrastructure, pursuing supply chain excellence.

One of my favorites, Ted's Textron line insulation of FHM, that's a Hyperion's new web-based financial consolidation system. As many of you may already know, we have just completed the implementation of our common health-care program, replacing over 150 unique ones throughout the company. Our third "R" is reconfiguring. We continue to simplify our portfolio through rationalization and business integration and we divested six business lines during the year. The final "R" is our focus on return on investment capital. With ROIC for the end of the year at -- for 2002 at 9.4%, we made progress toward our objective to deliver ROIC 400 basis points above our weighted average cost of capital. However, we fully recognize that we are not there yet. And you can be sure we will continue to aggressively execute against our transformation initiatives until we reach and then exceed our objective.

Okay. I want to discuss now a couple of our business unit highlights. First, I am going to talk about Cessna. We obviously were very pleased to have delivered 307 business jets in '02 which was very near our record of 313 delivered in 2001. Cessna recorded the highest revenues in its history and customer feedback on product quality and support continue to be excellent in fact, during 2002, Cessna now has joined Bell in being ranked number one in their respective industries in product support in ranking comes from the very official professional pilot magazine in their annual independent aircraft survey.

I often get asked why Cessna out performing the overall business market, and I have said before and I will say it again, I think Cessna is truly unique in its industry. For well over ten years, we have pursued an industry-leading strategy of investing in new products. New products that continue to offer our customers the most modern and widest array of jets available from any manufacturer. The launch of the CJ-3 and the Mustang demonstrate the resiliency of demand still out there for smartly-designed, strategically-placed business jets.

For example, we now have 166 orders for the CJ-3, representing backlog of almost $1 billion. And we have over 300 orders for the Mustang, representing another 700 million that will go into backlog later this year -- not now but later this year once we finalize the avionics for the aircraft. It's interesting to note despite of the current soft jet market, if we were to include the pending Mustang orders and they will go in this year, but if we were to include the Mustang order, backlog would have been up in '02. This bodes extremely well for business at Cessna over the long-term. So overall, weighed strong order year at Cessna booking over 300 jets in the backlog with over 100 in the fourth quarter alone. However, we did not receive the sufficient orders for delivery in '03. We were not able to stick with our previous plan to produce 250 jets during the year.

Therefore, we are now planning to deliver about 220 jets, still a very respectable level of production and one that I think we can manage pretty successfully. Bottom line, I am increasingly confident and excited about Cessna's long-term prospects based on the strong demand for our new products and increasing leverage from ongoing cost improvements.

Now let's move to Bell. I think we can all feel pretty good about the progress we made this year particularly on the V-22. You recall at the beginning of the year we said we would redesign the V-22 and the aircraft will resume flight test being midyear. Well, we now have five redesigned Ospreys actively in flight tests and all are performing consistent with or ahead of our expectations. We are now into full-flight envelope testing and just last week, we began on-ship maneuvers. So testing is advancing methodically and successfully, and the war on terrorism and focus on military preparedness continues to result in increased interest in the V-22's success.

Our other defense-related business, Textron Systems, also performed well during the year. Just to give you one quick set of numbers a very important product, our tail activation system for the J-DAM or joint direct attack munition. We delivered 9,000 units in '01, 19,000 in '02 and '03 we expect to deliver at least 30,000 units to our customers, and that 30,000 units would be about $100 million in total sales. Clearly, we are very pleased with the success of this product and the opportunity to contribute to America's defense. Let's move over to Industrial Components.

Kautex achieved record sales of 20% organically as the market continues to transition from steel to plastic. We are also seeing the result of Kautex's expansion into new and high-growth markets such as Asia. Where clearly the leading manufacturer of plastic fuel systems in the world, in part and probably primarily of our success with innovative technology. Case in point. Kautex recently received the world's first production order for a plastic fuel system that meets the new emission requirements in California, write now the most stringent in the world.

We expect these low emission systems to begin appearing on vehicles within three or four years, at which time California alone, just that one state, will require about 400,000 vehicles to meet these requirements. Obviously, this bodes well for increased demand for our projects. At E-Z-GO, like moves of our businesses, market trends in '02 were down. We were able to stabilize our sales volume by improving market position while at the same time implementing modest price increases. Textron Financial, although our overall perform mans in 2002 reflected a difficult economic environment, our core set of businesses thrill performed well. As we noted in the third-quarter, abnormally high charge-offs in our noncore portfolios, particularly in the telecommunication industry. In 2003, we will continue to liquidate or divest our noncore businesses. In fact just last month, we divested is significant portion of our media finance portfolio.

So, you know, while we are disappointed in TFC's 2002 financial results, we are still very confident about its future. Let me also take this opportunity to again welcome our new Chief Operating Officer Steve Warringer who is listening in on today's call. Steve is directly responsible for Textron's manufacturing units, as well as Information Technology and enterprise improvement functions. And as I said when we announced Steve's arrival he comes to us with a strong reputation for operations management, as well as a passion for enterprise improvement initiatives such as Six Sigma and supply chain management.

Okay. Here is my summary. 2002 was a tough year in our markets. We delivered on our business objectives. We met our financial targets. Looking forward, we do not yet see any near-term improvement in the general industrial manufacturing environment. In fact, we expect 2003 to be another difficult year. I'd say somewhat similar to 2002 unfortunately. So, the entire operating team is fully committed to continue to make meaningful operating improvements and significant reductions in our cost structure worldwide. That being said, we are also committed to maintain our strategy of investing in high-return businesses.

We can't let up on this. We will continue our progress toward our goal of creating a much stronger, much more robust platform for future growth and increased profitability. Now let me turn it over to Ted. Ted?

Thank you, Lewis. Good morning, everyone. Thanks for being here with us this morning. Let me start off with an overview of the key drivers of our results for the fourth quarter. Earnings of $1.04 a share were 57 cents better than last year. -- the key drivers of that change are as follows. 3 cents positive from volume. 13% -- excuse me, 13 cents related to higher pricing. 55 cents was due to net cost improvement year-over-year at both the segment and corporate levels and that includes 14 cents from year-over-year restructuring savings. We picked up 4 cents from the lower tax rate and share count, and 14 cents came from the elimination of goodwill amortization.

All those positives were offset by the following three negative items: 22 cents of inflation, 7 cents lower performance at Textron Financial, and 3 cents as a result of divestitures. Let me run through those one more time for you starting with the positives, 3 cents per volume per mix. 13 cents pricing. 55 cents of cost improvement. 4 cents tax rate and share count. And 14 cents of goodwill, offset by negatives of 22 cents of inflation, 7 cents at Textron Finance, and 3 cents for divestitures. Let me tell but our cash flow results for the year. Free cash flow before restructuring came in at $336 million, and that exceeded the $300 million target we discussed with you during the third-quarter call. We did better than expected on working capital due to improved collections, as well as lower inventories.

Now let me take you through the segment performance for the quarter. Aircraft segment revenues decreased $25 million while profit remained stable at $137 million. Bell's revenues were up $15 million, primarily due to higher revenue from the U.S. Government, partially offset by moderately lower commercial sales. Bell's profit increased $40 million. Primarily due to improved profitability in the V-22 and H-1 development programs, and improved commercial profitability driven by higher spare parts volume, as well as lower overhead costs. Bell's total backlog ended the quarter end of the year at $1.2 billion.

At Cessna, revenues were down $40 million, primarily due to lower sales of Citation business jets, single engine Piston aircraft and aircraft engines. Cessna's revenue decrease was partially offset by favorable pricing and higher used aircraft sales. Profits were down 40 million as a benefit of favorable pricing was more than offset by the lower sales volume and mix, the timing and level of supplier rebates, inflation, and a higher net writedown for used aircraft evaluations. Used aircraft inventory ended the year under $100 million, reflecting the sales of 51 used jets during the year and particularly strong sales of used jets in the fourth quarter which hopefully is a positive sign. Backlog at Cessna ended up the year at $4.9 billion and again as Lewis mentioned that does not include any orders for the new Mustang.

Next is Fastening Systems. Revenues and profits for the fourth quarter increased $39 million and $36 million respectively. Revenues increased primarily due to higher sales volumes, and the favorable impact from foreign exchange, partially offset by customer price reductions and the divestiture of some noncore product lines that we sold during '01. Profit increased primarily due to improved cost performance, including the benefit from restructuring, as well as the higher sales volume and, again, partially offset by price reductions. In Industrial Products, revenues were down $14 million, while profits increased $28 million. The revenues decreased in most of the segment's businesses primarily due to lower sale from depressed markets, as well as some noncore divestitures from '01, partially offset by higher revenues in golf car and the turf care businesses. Profits increased primarily to stronger cost performances which included restructuring savings, partially offset by the unfavorable sales volumes. In Industrial Components, revenues were down $306 million and profits were up $12 million. Revenues and profits were down $379 and 8 million respectively due to the divestiture trim.

If you take trim out of the numbers, the remaining businesses revenues were up $73 million and profits increased $20 million. The revenue increase was primarily due to higher volumes of Kautex as a result of new product launches, continued strength in the automotive market and favorable impact of foreign exchange, partially offset by price reductions. Excluding trim, the profit increase was primarily due to the higher sales volumes and improved cost performance, which included restructuring savings. The increase in profit was partially offset by price reductions. And finally for the segments in finance, revenues and profits were both down $15 million, quarter to quarter. Revenues decreased primarily due to a lower average yield, reflecting the current low-interest rate environment as well as a gain from a leverage lease prepayment in the fourth quarter of '01, partially offset by securitization gains and incremental income related to higher average asset -- receivable balances.

Profits decreased primarily due to lower interest margin, higher legal and collection expenses, and the impact of that lease prepayment gain in '01. Credit quality indicators at TFC reflect the current economic environment. 60-day delinquencies came in at 2.88 in the quarter versus 2.78 at the end of the third quarter. Nonperforming assets were 3.33 up from around 3% at the end of the third quarter. Chargeoffs were $34 million in the fourth quarter. That was positive news, down $10 million sequentially from the third quarter and bringing the full-year ratio in at 2.17. And our ratio of allowances for loan losses to nonaccruing loans remained flat at 92% despite a $17 million increase in nonaccrual loans during the quarter. Now I want to spend a few minutes on several other issues and let's start with restructuring.

As Lewis ventualed earlier on the call, we continue to execute well on our restructuring program. We reached $2 53 million in ongoing annual savings at the end of the year. To date, we have incurred restructuring cost of $261 million, that's roughly -- 55% of the total program which expected to come in at about 475, the same number we talked about last time. We have reduced our head count by about 7400 people. We shut down 80 facilities, including 35 manufacturing plants. In '02 alone, we took out 2400 people, closed 37 facilities, including 18 plants, and in '03, we expect our annual ongoing savings to reach $325 million, and an additional 1000 head count reduction. At the end of the quarter, we sold OmniQuip's Snorkel product line as well the OmniQuip holding do L wood holdings. I want to pull out the pieces of this transaction since you can't separately see the tax benefits in our financials. You can see we booked a pretax loss of $20 million on the sale. Then imbedded down in the tax line, there is a total tax benefit of $54 million from this transaction. That's in that as reported column. We take this out for the as adjusted comparison.

A large portion of that is driven by the tax benefit related to the good will write-off of OmniQuip and came as a result of selling the holding company itself. So net-net, this transaction resulted in a $34 million after tax gain in the quarter. But now here is the really good news. We will collect the cash benefit sometime later this year of this transaction and that will amount to about $100 million. The cash benefits appreciably larger than the $54 million we booked to earnings for the quarter in large part because a portion of the tax benefit was booked in conjunction with the goodwill write-off in '01. When we do receive that $100 million in cash, it will be recorded as reported in the cash flow from investing activities section. So that won't be in our free cash flow number, but indeed $100 million of cash coming into the company.

Another item during the quarter also related to reconfiguring our portfolio was a non-cash after tax charge of $23 million we took to adjust the value of our Collins & Aikman common stock holding. We sold our holdings to Collins & Aikman for an after tax gain of $12 million. Next subject is stock repurchase. When we announced the sale of automotive trim, we said we would use a portion of the proceeds to buy back between 6 and 7 million shares of our stock. During the fourth quarter, we continued to opportunistically invest in our stock, 1.2 million shares. As of today we repurchased 6.2 million shares since we announced the sale of automotive trim.during '03, we plan to continue to repurchase shares primarily to offset dilution from stock-based compensation. Next, I often get a lot of questions about our dividend policy. Seems to be a popular topic these days.

I just want to share with all of you that we continue to view our dividend as an important component of the total return to our shareholders, and management has no plans to propose making any changes in our dividend to our board. Now let me switch gears and talk about the performance of our pension plan and our estimates and assumptions for '03. Through the end of the year, the actual return on our master trust assets came in at a negative 5.7%, which in life the performance of the overall market was very reasonable. As a result of our plan's strong performance in prior periods, FAS 87 income was about 47 cents a share in '02, compared to 41 cents in '01. We made $23 million in cash contributions across all of our plants during the year compared to $18 million in '01. That's been a pretty steady number of around $20 million as we have told new the past for a number of years. We have also recorded a direct non-cash adjustment to equity. That happens through other comprehensive income of $91 million to reflect an additional minimum pension liability under several of our plans. Basically, this was due to a combination of more conservative assumptions, primarily the discount rate, as well as the performance of planned assets last year. In terms of our assumptions going forward, our long-term rate of return assumption has been adjusted down to 8.9% compared to 9 and a quarter in '02. We have lowered the discount rate assumption to 6.75% versus 7.25% previously. And we have adjusted our assumed compensation growth rate to 4.2% versus 4-5. Ways -- based on those assumptions and the actual return on assets during the course of '02, we expect pension income for '03 of about $34 million or 17 cents a share, which if you will recall is right in line with what we had discussed with you last quarter. While we are talking about '03, let's move on to our outlook. As Lewis indicated, we still haven't seen anything that suggests this economy has begun to recover. In fact, we believe we are in for another year of sluggish markets. We expect earnings per share to be approximately $3.05. And I want to walk you through an analysis of how that relates to the $3.01 we achieved in '02 and obviously $3.05 is an approximately so I am going to talk about it as if it is a specific number just to help you understand what's going on inside of our projections. Number one, we are projecting that total revenues for Textron will be down about 6% on a year-over-year basis, and that is primarily the result of the lower jet deliveries at Cessna. In fact that's the vast majority of it. So if you start walking through, then, the 4 cent year-over-year earnings improvement, let me give you the pieces. We are estimating that the impact to those lower volumes across all of the company will be about $1.15 per share. So that's -- that's a negative number. $1.15. We then are looking at a negative 42 cents a share from the combined impact of lower pensions, as well as significantly higher insurance costs across a variety of different insurance products. Keep in mind, of that 42 cents, 30 cents of that is non-cash. That represents the change year-over-year in pension. Going on, we estimate that we will see about a 95 cent negative impact from inflation. That represents about a 2% inflation rate, and another negative 9 cents due to the one-time tax settlement that we talked to you about during the third quarter. Those negative items will be offset by the following six positives. Number one, about a 40-cent year-over-year improvement in pricing. Not quite back to inflation obviously. We are getting about 1% pricing versus the 2% of inflation. We will pick up favorably about 15 cents from not repeating the cost related to Lycoming customer care and recall program. We are expecting 24 cents of improvement from less unfavorable used aircraft value adjustments that you know we have had all through the course of the year this year. And we are expecting $1.71, driven by net cost improvement. This consists of benefits from Textron's Six Sigma, supply chain, and a variety of other cost reduction programs, as well as improved credit performance we expect in '03. That also includes 38 cents in restructuring savings. Going on, we expect 11 cents in improved performance at Textron Financial year-over-year and 4 cents from lower shares outstanding. Now let me go through those for you again. I will start with the negatives. $1.15 of volume, 43 cents pensions and insurance, 95 cents inflation, and 9 cents from the one-time tax benefit. The positives, 40 cents for pricing, 15 cents for Lycoming, 24 cents for used aircraft, $1.71 of cost improvement, 11 cents from Textron Financial, and 4 cents as a result of the lower share count.

Now with that, I am going to turn it back to Doug, and Doug is going to give you a few pieces of additional information on our plans for '03.

Thanks, Ted. Yeah, I have got a couple of items here that should help everybody with their models looking into '03. The first item is that within our manufacturing segments, we are targeting a manufacturing operating profit margin improvement of about 90 basis points. The free cash flow target that Ted talked about -- or actually we didn't talk about our free cash flow target is about $400 million, and that target contemplates a Cap Ex program in '03 of $325 million compared to $302 million in '02 and over $500 million in '01 and 2000.

Ted just mention we had would repurchase shares to offset stock-based compensation so we expect our share count will be about 138 million shares throughout the year. Interest expense in '03 is expected to be relatively flat year-over-year at about $105 million. And we are targeting corporate expense at about $155 million. This is higher than '02 due to the following items: Lower pension income, lower incentive compensation expense in '02, lower royalty income, and higher expenses for transformation initiatives. And finally we expect our '03 tax rate to be 31.5%. That prepares -- concludes our prepared remarks. We are now ready to take your questions. Before we do that, would like to remind members of the media they are in a listen-only mode. If any of the media do have questions, please feel free to call my associate sue Bishop or me after the teleconference.

Operator, we are now ready for your questions

Thank you. Ladies and gentlemen, if you wish to ask a question, please press 1 on your touch-tone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by depressing the pound key. If you are using a speakerphone. Please pick up the handset before pressing numbers. The first question comes from David Bleustein from UBS Warburg.

The January 17 sale of the joint venture of Collins & Aikman, was that for cash?

Yes, it was.

Can you give us an update on the remaining balance of C & A common and preferred stock still on your books and at what valuation you are carrying it?

Yeah, we have -- let's see if I can get this right. I have it in front of me. You can do the math, 7.2 million shares and I think we are carrying that at about $3.70-something cents, so below its current trading value. And then we have about $235 million of preferred that we are carrying at about 45 cents on the dollar. You know, net, we have had a lot of pluses and minuses post this transaction. When you add them all together, we are just about break even on transactions that have happened so far. I think we have some potential upside down the road with the carrying value we have on -- on the preferred and where we are trading with common right now. But you know in the accounting rules, when the common trade is down for you, protracted period of time, we take that bad news and obviously we won't recognize any upside on that until we actually have a transaction.

All righty. And then, Doug, you said tax rate for next year, 31.5%?

That's right. About the same as this year if you take all the other -- all the odd timers out of it.

Okay, and then at Cessna, maybe I missed it, how much was the writedown of used aircraft in the fourth quarter? And then I didn't -- and then the last question is, could you give us some color on the cost to the supplier rebates and what exactly those were?

Yeah, the -- the year-over-year about $5 million worth. Remember the actual number in the fourth quarter? I don't know about the fourth quarter. For the year it was about $63 million.

$63 million for the full year of used writedowns and overtrade allowances.

On a -- on a basis, how much? $63 million on sales proceeds of, what, $300 million?

Well, we sold -- I don't know, we sold 51 -- I would have to -- there is a lot of churn. There are planes that came in and planes that came out. I don't know the answer to that.

Our average balance we started at -- at a little under $100 million and ended the year a little over $90 million, about $100 million average balance.

But we ran five times -- three times that through.

Yeah, we --. Probably 300 is probably pretty close. I would tell you valuations have fallen off in kind of the high teens so that's probably about right.

Okay.

Yeah, that's pretty close. We will see if we can find something more accurate than that. Supplier rebates is -- is kind of two things that are happening. It is a timing issue to some extent, and an absolute level issue. We have a lot of major supplier programs with Cessna where we have adjustments to price based on take volumes during the course of the year. And we have been trying and particularly this year with pretty good forecast with where we are going to be to amortize those into the quarterly earnings on a straight-line basis based on our expectation. That really didn't happen last year. We weren't quite sure what they were going to turn out to be and we got a pretty significant amount in the -- in the fourth quarter last year. So the overall level was little down because total jet sales were a little down '02 versus '01. It wasn't a big issue on a full-year basis but it was a big issue on a quarterly bases. We got a pretty big amount booked through earnings in the fourth quarter last year and a lesser amount this year.

Got it. Thanks a lot

Your next question comes from the line of Steve Volkmann from Morgan Stanley. Please go ahead.

Good morning.

Hi, Steve.

I just wanted to to see if I could get a sense of the business jet outlook or how things have played out over the past few months. I think the last thing you told us if I am not mistaken you were about 85% sold out for the 250. I think that was at the third quarter, if I am not mistaken, which tells me --

It was 70, Steve. The third quarter.

So I had the number wrong. Okay. -- can you give us a sense of what type of order intake and potentially what type of cancellation stuff you had during the quarter and for the year?

Yeah. It's been a fascinating fourth quarter and year in a lot of respects because overall order intake has been tremendous, but order intake available to ship in '03 has not been. So we are sitting right now with -- including holds, which means it is a order but we haven't gotten the cash yet, at about 74% of the 220 sold for -- for 2003. Yeah, we just had an incredible order year. We have taken 600 orders, you know 300 of them are on the Mustang but 300 of them are on other product. But the majority of them have been either in products that are not yet deliverable period like Sovereigns, CJ-3s and Mustangs or orders for jets where the customers just don't want them. We had a tremendous December.

We sold 14 Citation 10s in the month of December but none of them are deliverable to the customers in '03. Kind of this glass half empty, half full, the future looks incredible for Cessna. We have great product coming. We have got great order intake. But bottom line is, we have a hole in the backlog for the '03 and kind of early '04 time frame before the this thing is really going to kick back in and be a great contributor. And I think, you know, we are making great progress on the cost side at Cessna. We are getting ourselves well-positioned. You know, we told everyone that if we could do 250 jets year-over-year we could hold Cessna's earnings about flat and the answer is, we would have done that.

We are right now looking at, you know Cessna probably on a year-over-year basis being down about 20 cents. And if you think about jets, the real simple equation is one jet equals one penny. So at 220 jets versus 250 jets, you know, we lost about 30 cents a share as a result of that. Otherwise, you know, Cessna's performance from a cost standpoint in -- in everything they are doing is just been tremendous. We are getting the used over trades down on a year-over-year basis, as we anticipated, or at least that owe our projection at this point. We are getting the cost out. We are going to be positioned really, really well at Cessna, but we probably got, you know, six or seven or maybe eight pretty lean quarters ahead of us but then see tremendous performance out of this business. With this cost base when the volume comes back, it will really perform.

Hey, Steve. This is Lewis. Let me add just a few more points on this. You know, I have said several times that there are only -- there are only two or three strong -- or I'll say big competitors in our space of light and mid-sized jets, and if you say then how is everyone doing versus Cessna, obviously it would appear us to and I think if you study the numbers you will come to the same conclusion, that when you see a downturn in the economy, you know, the strongest competitor ends up really taking share from the weaker guys and that's what you are seeing happening. So that's a good point.

The second good point is that we have given you guys another good data point, and that's the used aircraft that are up for sale that are Cessna products. How much -- what's the used availability to be purchased out there. And we like to see that about 10% of the total installed fleet up for sale any one time. It got up to 20%. It crept down to 18% in the fourth quarter. It looks like it is about 16% now. So that's -- that's kind of good news. It looks like that -- that the year's market is kind of drying up a little bit. In fairness, I can't really point to any price improvement yet, but at least it is moving in the right direction. So, you know, we have got some signs that things could be a little better than we think, but on the other hand, until they get better, they are what the heck they are.

Let me give you one other data point too because you will ask on our used that I think is interesting. We started off this year with 18 used aircraft in inventory at about a $98 million carrying value. We took in 53 trades. We sold 51. So we are ending the year with about -- with 20 planes at about a $93 million carrying value but I think the interesting statistic of the 51 we sold, almost half of those sold in the fourth quarter. So started off really slow.

Yeah.

And with he did see a significant pick-up. As Lewis said, I can't say we got a lot more money for them, but we did see some strength in the fourth quarter.

Okay, that's encouraging. Maybe I am just over analyzing this but let me go one step further here. I think you just told me you were 72% -- 74% sold out for the 220.

74 with holds, 70% with cash.

Okay, so you have kind of 163 firm orders, and, again, going back to what you had told us before, if you were 75% sold out for 250, that suggests kind of 187. I want to get to whether you are seeing cancellations in the quarter with, was that a big deal? Maybe if you could give us how many you had for the year and what the trend has been for the year. Obviously dub -- I mean I think the key thing is what this thing is going to look like, you know, maybe beyond '03 and whether -- whether the 220 is achievable and so forth. I think that's what we are wrestling with.

I think the bottom-line answer here is, Steve, we saw as many orders get pushed out of '03, not necessarily cancelled. We saw a lot of orders get pushed out of '03 as we got new orders. So basically we have stood pretty still on '03 shippable orders for a while here.

Two more points. One is it looked like we got a little better on cancellation right near the end of the year. In fact, real good -- but that's only one month so you can't really count it, but at least it is in the right direction.

I think the guys that are going to cancel though when they stare '03 in the face. Hopefully that's behind us

'04, we didn't give through data, but we already have 1.1 billion of backlog for '04. That tells you pretty good stuff too because people would be canceling those orders now if they had plans to. That's a pretty good data point, at least that's one we use. And you know, I've got to say this. You know, Cessna has been in the jet business since 1972, I think. They have been through a lot of tough periods. You have got -- you know, an organization that knows -- in fact the same guy running it now has been running it for over 20 years. You know, I think I feel reasonably confident this 220 number is one they will do and maybe do a little better, I don't know, but I am not ready to say that now. You know, this is not some number we hope to hit. This is a number we plan to do.

Good, thanks very much.

Yeah

Your next question comes from the line of Jack Kelly from Goldman Sachs. Please go ahead.

Good morning, just two questions. Ted, you had mentioned kind of the spread between inflation and pricing, when inflation is 95 cent and pricing up -- that is a 55-cent kind of spread this year. We are hearing this kind of stuff from a lot of companies. Can you give us a little granular tee on why that's opened up quite so much and then secondly on Cessna, the $63 million adjustment on used aircraft sale. We had -- out to your facility in Wichita late last year. That number seemed to be 44, 45 with hopefully the expectation of it maybe going to 20 this year. So I guess two-fold question. You know, why -- why the jump from, let's say 45 to 60-plus. Was it the used aircraft sales being you are know, at a lot lower price. And then secondly, baked into this number that Cessna meeting off 20 cents this year, what are you kind of assuming on that 63 number. Coming down.

Well, let me do that backwards. Yes, our view of values did get more conservative during the court course of the year and until 9 fourth quarter right there at the end, we also took some additional reserves for what we called longevity. The market was weaker in general, but, you know, we were bring building up some inventory and it was moving slower. We have moved them out. We have had some recoveries which means for the first time we sold a few used planes in the fourth quarter for more than we had written them down too, not big numbers. But anything positive is good.

So you know, it got a little tougher in the market and we built up a little inventory and as you have heard, we got it back down to two jets higher at the end of this year from where we were at the beginning of last year. We are looking for that number to be down in the teens in '03. We have a few jets that we have already committed to take back in that we know we have a little bit of an issue on but we have been really tough in trying to shut this thing down over the whole course of '02. We are not taking in jets on purpose that we think are not going to be sellable at the price we are taking them in, but you know the market continued to weaken.

As Lewis pointed out, the availability has improved from, you know, 20% of the fleet down to 16% of the fleet. We are hoping we have kind of seen the bottom from a price perspective. We will work hard on not having that kind of a hit again in '03. But that's where we are assuming in the kind of mid to high teens. On your pricing question, I think, you know, you almost have to get into each of our businesses. We have a couple of businesses, as you know, that sell under the automotive markets that kind of regularly have negative pricing. We have fought hard to improve that, and, in fact, we have improved that.

We were successful in putting through some price increases to pass through steel tariffs and the Fastening Systems business for the first time in a while and actually had positive pricing the fourth quarter, but that's not been typical. We have a little bit of negative that's in the works for next year there. And then you have the same thing at Kautex. Every year in these component businesses contractual reductions and you have to generate big cost savings on the other side.

What's causing our number and for a total company to GAAP out versus inflation at quite that level is obviously the businesses that traditionally get pricing, like Cessna and others, are getting price, but they are getting less price than what they would -- would normally do.

So, you know, obviously that puts us in a hole, and this says driving cost reduction is fundamentally critical to our company next year, and I think we have got a great plan.

We have worked hard on what we call "hard wiring" so that every penny of that $1.71 we are expecting to get out on a cost side, be it a restructuring program, a Six Sigma project, a capital investment to reduce cost, an out sourcing project, whatever it is, we have name, rank and serial number by each one of them and we feel pretty good that, you know -- we don't know what this market is going to do in '03 and a lot of uncertainty but we feel good we are going to deliver the internal performance we have got in our plan.

Thanks.

Your next question comes from the line of Harriet Baldwin from Deutsche Bank. Please go ahead.

Good morning.

Hi, Harriet.

I was wondering given that a year ago you said that your $3 number was real doable in a lot of ways and a little more of an effort than you might have expected.

It was.

Today the 305 for '03, do you feel any more or less confident than did you a year ago about the $3?

Well, you are correct in one respect. We thought $3 was going to be a slam dunker. And boy it turned out to be a lot of work to get $3. Yeah, we feel pretty good about $3.05, or we wouldn't have put it out there if we didn't feel good about it. And we feel good about it, because we think the largest driver in there is us being able to execute on the cost side and, you know, our team has had a good track record of executing on the cost side. We can't control what goes on in the market, but basically, we have a plan for '03 that says we are not expecting any help from any of our industrial markets. We know where Cessna is. We just had that conversation and Lewis gave you his comments on the ability to do 220. So a lot of this plan depends on our execution of that $1.71 of cost savings and we wouldn't have put it out there if we didn't think we could do it.

Given cost efforts you have been doing where do you think you moved your incremental margin today versus two years ago today before the plan started?.

That's a business-by-business discussion. I am not sure I can give you an overall number, but as -- you know as Doug pointed out, if you think about it, we are looking at a 6% decline in total company revenues year-over-year in '03, and a 90 basis point improvement in margins on the manufacturing companies, so obviously that's a big move.

Definitely. Finally the Cap Ex outlook a little more in '03 versus very depressed '02. Any specific thoughts of where most of those monies are going, new products, efficiency improvements?

We have been really brutal on -- on capital expenditures. You know, we slashed '01 dramatically from where we thought it was going to be. We planned a pretty tight '02 and actually ended up spending less than our plan for '03. We got an '03 number in there right now that is about equal, it is about 9 million higher than depreciation. But it's -- it's well allocated capital. We were really tough on some of the industrial businesses and the businesses that don't have organic growth where we are driving them to out source and reduce their invested capital appetite.

So we have some of our businesses who you might expect like fasteners where we are at under 70 cents on the dollar Cap Ex to depreciation. But on the other hand, we are making significant capital investments in areas where we can get organize organic growth. We are obviously fully funding our new product development programs at all of the businesses around the world where we have good organic growth prospects and then wave fairly significant amount of capital. In fact, the company would have been well under depreciation in '03, but we have made a decision that we really have to make an investment in expanding service center capabilities for Cessna. We are just flat out of capacity in our service centers.

A great margin business.

Yeah, a great great margin business, a parka jets. This is still a baby industry, if you will and the park is growing and a great potential to make a lot of money there and we have got pretty significant investments of capital in '03 and a little bit in '04 as well for service centers or we would be even a little bit lower, but, you know, we're comfortable with Cap Ex about equal to depreciation with a very aggressive allocation among our businesses so that we know we are putting it where the growth opportunities are and where we don't have a stronger growth opportunities, we are using out sourcing, restructuring, factory consolidations to reduce our capital appetite.

Great, thanks

Your next question comes from the line of Crist Suzanne from John Levin & Company. Please go ahead.

Sorry, Jack Murphy.

Hey, Jack.

How are you doing. Can you clarify the $400 million cash flow guidance for me a little bit next year or this year? One, is that cash benefit from the OmniQuip in that $400 million?

No.

It is not?

No. We will have usable cash flow net year of $500 million. We will have $400 million -- let me give you a couple of pieces -- let me give you a rundown there. If you just take approximately $3.05. You have got about 420 of net North Carolina. As I just mentioned to Harriet, we have got Cap Ex to depreciation is about $10 million bad news. We have $34 million worth of pension income that's non-cash, so you have to back that out. We have $83 million that is the cash spending related to the Lycoming reserves taken in '02 and the big Bell reserves if you remember in the third quarter of '01. We set up the big charge at Bell.

A lot of that cash relates to the H-1 program and a lot of that cash gets spent in '03. So between the two of those, there is $83 million. And then we are expecting a little over 100 to make the numbers round precisely, a little over $107 million coming off the balance sheet. So a combination of lower receivables, lower inventories, cash versus book taxes, et cetera. Offset by some bad news in payables year-over-year, and that's an unique phenomenon of our year this year. For the last couple of years we have ended our year in December. This year, for example, on the 28th and that has allowed us to pay some suppliers on the 30th and 31st.

For '03, we started our year in December and don't end our year until January 3 of '04. We will see bad news payables but more than offset that with all the improvements on the balance sheets. That's the $400 million we will call free cash flow. While -- you know Snorkel is a combination of the sale of Snorkel but relates to the sale of the OmniQuip holding company generating that other 100. When we have acquisitions and divestitures we don't count that in free cash flow. We will have $500 million of available cash coming in the '03 time period.

I guess two questions. If you liquidate pieces of the finance company and it creates extra cash. That gets dividend back to the corporate parent?

To the extent that we don't need that for -- for growth there. And you will see some of that is causing the -- you know, one of the items I didn't give you from the 420 of net income to the free cash flow is -- is normal years, I would have given you a number that said "dividends versus earnings at Textron Financial." Because for a number of year we always dividend out less than what they earn on a net income basis because we are growing that business. That won't happen in '03. Our plan right now is that we will dividend out pretty much all of their net income, and that they will use the liquidation of the noncore business to fund their growth.

Gotcha. Only offsetting option with issuance -- share buy back, what's -- what's the goal of the rest of it? Some small deals? The dividends in there as well.

Let me walk down that because there is one thing for you to be aware of too. As you say free cash flow is 400. We get the tax thing from Snorkel for 100 so that's half a billion.

We do have a phenomena that we have five common stock difficult -- dividends in '03. A little higher dividend to be two and a quarter and that's a function of that weird year I told you about that we are on a 4-4-5 accounting basis so we catch an extra dividend. That's the two and a quarter. We have got restructuring cash after tax of about 62.

And that leaves us, you know, somewhere north at 200 million that's available for combination of stock repurchases, acquisitions, or if we don't find anything attractive from that perspective, you know, temporary debt reductions, although we certainly are not looking to deliver from where we are on any kind of a long-term basis. But, you know, those will be the possibilities for where that, you know, 200 million plus would go. Plus, by the way, you know, we may divest of other things during the course of the year shop that number of -- you know, a little over 200 could be higher than that.

Gotcha. Thank you.

Your next question comes from the line of Adam Herwit with Ulysses Management. Please go ahead.

Good morning, adam.

Quick question, the 11 cent improvement -- just a clarification, in Textron Financial, to what do we attribute that?

Predominantly lower loan losses on a year-over-year basis. We took some pretty big hits particularly in the third quarter this year, but also to high receivables balances, but not tremendously. It is tremendous dominantly going to be driven by lower loan loss

Got it. Refocus to the core business.

That's right.

Thank you very much.

Operator, I think we have time for about one more call. We are coming up on an hour now

Okay, one moment please. And the next question comes from the line of Chet levy with Barclay's Capital. Please go ahead.

It is Chet Louie from Barclay's capital.

Good morning. A couple quick questions.

My apologies if my questions have been answered. First question, can you talk about how you will be allocating your free cash flows for the year. And the second question would be, could you comment in your conversation with the rating agencies. A lot of them seem to have negative outlooks on your rating. What are you guys doing to avert a downgrade?

Well, let's start -- I just ran through free cash flow. Half a billion dollars. We are going to pay dividends. We have some restructuring and the balance will be some combination of stock repurchase acquisitions or debt reductions. Relative to the comments with the rating agencies, you know, our -- our issue with the rating agencies on the negative outlook is all around free cash flow generation. It is not capital structure. We are well-positioned for our ratings relative to debt to cap. We need to continue to work to get our free funds flow to debt to improve in order to solidify our position and get off of negative outlook.

Just a point, though, we have been on negative for quite a while but we did have a confirmation of ratings from all three rating agencies in the fourth quarter, in conjunction with a debt offering that we did with TSC. So we have had regular and ongoing discussions. The ratings have been confirmed. Here very recently.

But the negative outlook kind of sits there until we start to see the market improve and our cash flow improve and the rating agencies know exactly what our plan is for '03, and as long as we continue to March down the road of that plan, I think we will hopefully first see the negative outlook go away when we continue to execute and when maybe we see a glimmer of light in the industrial marketplace, and then we will go forward from there. Thank you. We are on -- we are on solid ground, but we need to perform, and we all understand what we need to do to stay on solid ground.

When was the last time you guys met with the rating agencies and when are you guys meeting with them?

We have had numerous discussions over the second half of last year. Including discussions as recently as December as a prelude -- prelude to a debt offering.

And today's announcement on lower than expected earnings for '03, the agencies have been apprised about this and they didn't really --.

I have not talked to them after today's earnings, but the -- let's put it this way, the cash numbers for '03 are better than anything they previously have seen.

Okay, great. Thank you.

Let me close up our conference today with just -- make a few comments. I was thinking about Harriet's question earlier about -- to Ted about the $3.05 and what do we think about it. And I think as the Chairman of this company, having been here for ten years, and I want to tell you a little bit more about what we really think about it. First, I think we feel good about the guidance of $3.05. We really learned a lot about how our company operates under a very depressed economy in 2002.

And, you know, we took some pretty big and unexpected hits near the end of the year, and we still achieved our guidance of $3. In fact we turned in $3.01 for 2002. I think the operating performance now that we talked about that intended to implement, that is now history in 2002 and I have to tell you not just Ted, not just me, not just Steve, but there are literally hundreds of people now who feel confident of what they were able to do in 2002 and that confidence gives them confidence in being able to turn in the 2003 numbers that we, in turn, talk to you about this morning. The fact that we are climbing over 42 cents of negative performance on pension and insurance, admittedly 30 cents of that is non-cash, but that's another topic.

The fact we are climbing over that 42 cents, the fact we are climbing over, you know, a weaker assessment than we thought just a few months ago, I think it makes us feel pretty good that we know all these factors now, we factor those into the $3.05 and quite frankly, I feel very good about the $3.05. There is another element here, too, and that is, don't forget 2001, that was an ugly year for us. We break a ten-year strain of consistency. Over ten years we met or exceeded guidance for ten straight years and I for one and our leadership joins with me on this. We don't intend to let that happen again as long as we are here.

So I would really be telling you that I would be shocked if we don't meet or exceed this guidance we are giving you today. It is what we think we can do. There is a lot of uncertainty out there. You know it as well as I do, but I think this teem will do what we say we need to do quarter after quarter after quarter. So Doug.

Right, that concludes our call for today. I know that we still have some questions in queue. So quinton and the rest of you, we will hook up with you after the call. Thank you very much.

Thanks, everyone

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