達信公司 (TXT) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Textron First Quarter Earnings Call.

At this time, all participant lines under a listen-only mode.

Later, there will be an opportunity for questions and answers.

If you do have a question at that time, please press the one on your Touch-Tone phone.

You will hear a tone indicating you've been placed in queue and you may remove yourself from queue by pressing the pound key.

Should you be using a speaker phone, pick up the hand set before pressing the numbers.

If you need assistance, press zero then star.

As a reminder, today's conference call is being recorded.

I would now like to turn the conference call over to Vice President of Corporate Communications and Investor Relations, Mr. Doug Wilburne.

Good morning.

Welcome to our first quarter conference call.

Joining me here today is Lewis Campbell, Textron's Chief Executive Officer, and Ted French, our Chief Financial Officer.

Before we begin, let me add over the course of the our discussions this morning, we may be making forward-looking statements.

Any such forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release.

I would also like to point out that the net income earnings per share and cash flow figures that we will discuss today are before restructuring costs and special items.

A reconciliation of these items to GAAP measures is contained in our press release, a copy of which has been placed in our investor relations section of our web site at www.textron.com.

A reconciliation of any additional non-GAAP measures that we may discuss today will also be placed in that section of our web site.

Now for a summary of our first quarter results.

Revenues were $2.5 billion, up slightly from last year.

As higher revenues and industrial components, fastening systems and finance offset lower revenue in aircraft and industrial products.

Our reported GAAP earnings in the quarter were 48 cents per share, which included the following after tax items. 15 cents per share in costs related to restructuring and a 9 cent per share gain from the sale of our interest and an Italian joint venture.

Excluding these items, our first quarter '03 adjusted diluted earnings per share or 54 cents compared to 47 cents last year.

Now, let me turn the discussion over to Lewis.

Thank you, Doug and good morning, everyone.

Overall, our results this quarter reflected the continued effective execution of our business strategy.

As most of you know, this strategy includes transformational initiatives such as restructuring Textron six sigma, supply chain management, just to name a few.

Now, while revenues in the quarter were up slightly, as Doug talked about, the increase was primarily due to improved pricing and foreign exchange.

Unit volumes across most of our businesses, however, were actually down during the quarter.

And as you know from our call several weeks ago, our results included four fewer jet deliveries to our largest customer than we had planned.

Nevertheless, we were still able to increase both margins and earnings reflecting the continued progress we're making in improving our cost structure.

During our previous call, we also revised our near term outlook for business jet deliveries.

Ted will talk more about hat.

And we also reduced our expectations for many of our other businesses due to the continued uncertain economic and geopolitical environment.

Consequently, we've taken further immediate actions to reduce costs to help ensure that we meet our new targets.

For example, we're reducing additional head count throughout the enterprise adjusting our compensation and benefit plans and significantly reducing our planned corporate overhead expenses.

However, and I think this is a key point, we are not reducing our investment in R&D, engineering and those things related to developing and launching new products.

We stand fast and firm on the fact that we believe these investments are producing solid advances in new technology and strategic product development and believe these are critical to our future growth.

Let me talk about a few of our new products.

Let's start with the V-22.

We now have six aircraft flying in the test program at Pax River.

During the quarter, we successfully completed an initial series of flight tests related to three key mission suitability requirements.

Fondly known as H-ROD, high rate of descent performance, shift board operations, and low airspeed maneuverability.

In May, the Defense Acquisition Board will conduct its next major review of the V-22 program, which marks a key milestone.

Now, you know, given the nature of this program, we obviously remain ever vigilant to ensure it stays on track, however, considering how effective and successful the initial testing has been, we have every reason to believe that the outcome of this upcoming government review will be positive.

Okay, another example of technology leadership for new product development can be found in our turf care business.

Jacobsen and Ransons recently responded to increasing customer's desires for environmentally quiet machines.

And they've developed products that run on propane gas and now significantly reduce noise pollution.

Caltex provides another example.

They continue to develop many new products and proprietary technologies including the first plastic fuel system that meets the new low emissions standards emerging around the world.

Technology successes like this and others bode very well for continued above industry growth rates at Caltex.

Let me move now to Cessna.

We remain confident in the fundamentals that will drive our long-term growth in this business jet market.

Therefore, we are continuing to invest significantly in new product development for this profitable expanding market.

Our ability to consistently launch smartly designed and strategically placed jets will enable us to continue to stimulate new demand for Cessna products.

We remain on track to begin delivery of the sovereign and CJ-3 in '04 and the Mustang in' '06.

In fact, we've just selected the Mustang's avionics system so these orders will begin entering backlog in the next several quarters as customers sign formal order contracts.

Okay.

In summary, while our new product development activity is encouraging for future growth, we're still facing continued near term softness in most of our markets.

Accordingly and as I said, we're taking the right actions to reduce our costs even further.

We have the right strategy for these times, we believe, and also for better times ahead.

As you know, over the past two years, we've been aggressively transforming our company to establish a foundation for increased shareholder value.

We're on the correct path.

We're making good progress and leveraging the full capabilities of Textron in concentrating on strong branded businesses and attractive industries and investing in high-return businesses.

The significant progress we've made on our transformation strategy to date we believe affords us the ability to manage well through a very challenging economy.

Ted?

Thank you, Lewis.

Good morning, everyone.

We appreciate you being here with us this morning.

Our segment profit and earnings growth suggests we're making good progress with our cost structure and that we made good progress during this quarter.

Unfortunately, we do expect challenging markets for most of our businesses for the rest of this year so let me first review the key drivers of our results for the first quarter and then we'll come back and talk about outlook.

Earnings of 54 cents a share were seven cents better than last year.

The key driver of our performance was a very strong 39 cents net cost improvement that included 12 cents from year-over-year restructuring savings.

We also saw a 14 cent improvement in pricing.

Only about 1%, but positive nonetheless.

And we generated 5 cents of improvement for a combination of better performance at Textron financial, foreign exchange and a lower share count.

Now, those three positives were partially offset by two negative items. 30 cents from unfavorable volume and sales mix and 21 cents for inflation of about 1.5%.

So let me go through those for you again starting with the positives.

39 cents net cost improvement, 14 cents for pricing, and 5 cents for Textron financial foreign exchange in the lower share count.

The negative items, 30 cents for volume and mix and 21 cents for inflation.

Now, I'm going to run through each of the businesses for you.

Aircraft segment revenues and profits decreased 49 million and 4 million respectively.

Bell's revenues were up 40 million, principally due to higher foreign military sales partially offset by just slightly lower revenues from the U.S. Government.

Bell's profit was up 16 million, driven by a lower charges for international receivables, that's versus what we had last year, and improved profitability on the V-22.

Bell's backlog was up 180 million during the quarter and ended at about 1.4 billion.

At Cessna, revenues were down 89 million as a result of the lower volume of citation jets as well as lower sales of used aircraft.

Profits were down 20 million due to lower sales volume partially offset by higher pricing.

The backlog at Cessna closed the quarter at 4.4 billion.

That reflects the removal of 370 million in order cancellations that we previously talked to you about.

Now we'll take just a moment to review Cessna's first quarter order and delivery status.

We delivered 50 jets during the quarter, and we took 22 net orders of which 18 were deliverable in '03, the other four are scheduled for out years.

With those orders, we ended the quarter about 83% sold out based on 195 jets which if you'll remember, is the high end of our jet range forecast.

Now, we've been getting a lot of questions about Cessna's backlog and outlook for '04 as people attempt to forecast jet deliveries for next year.

We're not going to quantify the '04 backlog because we believe it is much too early to draw conclusions about expected deliveries from that data.

However, I can tell you that we have reconfigured our manufacturing capacity and we are aligning our cost base in anticipation of a flat to possibly lower number of deliveries next year.

By '05, we believe we will see a recovery in jet growth as the impact of our new products and a recovered economy translate into new jet sales.

Now I'm going to turn to fasteners.

Revenues and profits in the first quarter increased 33 million and 8 million respectively.

Revenues increased primarily due to the favorable impact of foreign exchange and somewhat higher sales volume.

Profit increased primarily due to improved cost performance and foreign exchange, was partially offset by an unfavorable sales mix.

In industrial products, revenues and profit were down 38 million and 7 million respectively.

Revenues decreased due to lower sales volumes primarily in the golf car and turf care businesses, partially offset by higher revenues in our aerospace and defense business.

Profit decreased primarily due to lower volume and an unfavorable sales mix, which was partially offset by positive pricing and improved cost performance.

In industrial components.

Sales were down 87 million and profits were down -- excuse me, increased 87 million and profits were up 10 million.

The drivers of industrial components results during the quarter were pretty straightforward.

The revenue increase reflected higher sales volume in each of the segment's businesses as well as the positive impact of exchange rates from the weaker dollar partially offset by price reductions.

The increase in profits what driven by higher volume and improved cost performance partially offset by price.

Finance segment revenues and profits increased 6 million and 1 million respectively.

Credit quality indicators at TFC remain steady in what continues to be a very challenging credit environment.

Our nonperforming asset ratio for the quarter was 3.23%, that's down from 3.33% last year.

Charge-offs were 1.84, also down from 2.17%.

Our ratio of allowances for loan losses to non-accrual loans improved during the quarter to 94% from '92 and 60-day plus delinquencies came in at 2.9%, essentially flat with where we were in the fourth quarter.

Now I want to spend a few minutes on several other issues, and I'm going to start with restructuring.

We continue to make excellent progress on our restructuring program.

We now expect to deliver 350 million in annual ongoing savings this year, which would be an incremental 100 million in savings over '02 and 25 million higher than our prior forecast.

To date, we've incurred restructuring costs of 289 million.

That's about 60% of the total expected costs of the program.

We've reduced our head count by about 8,000.

We've closed 81 facilities including 35 manufacturing plants.

We expect that we will complete this restructuring program by the end of '04 and that at that time we will have reduced head count by about 10,000, closed 99 facilities and in that, 49 manufacturing plants.

Moving along to our balance sheet and cash flows.

We used 66 million in free cash flow during the quarter, compared to a use of 209 million a year ago.

You all know this is the quarter where we tend to consume cash.

Our improved performance was largely due to the 109 million dollar tax refund we received in the quarter related to various ongoing business operations.

Separately as we previously communicated, we also received a $108 million tax refund related to the snorkel sale.

Since that refund was related to the sale of a business, we recorded it in cash flow from investing activities so that's not in our free cash flow number.

We did use some of that incremental cash to buy Textron stock.

Year-to-date, we've repurchased just about 2 million shares.

Now let's move to our outlook.

As Lewis indicated earlier, we're in for at least another year of sluggish markets and therefore we have taken steps to accelerate our cost reductions.

One of those steps is to reduce corporate expenses which we now expect to be in a range of 135 to 140 million this year compare to the previous guidance of 155.

With these actions, we expect full year earnings per share will come in between $2.40 and $2.60 and the second quarter earnings will be between 65 and 75 cents a share.

Free cash flow before restructuring is expected to between 300 million and 400 million, depending largely on the number of jets that we deliver and of course none of those are changes in any of our guidance.

With that, I'm going to turn the call back to Doug and we'll take your questions.

Okay.

Thank you, Ted.

This concludes our prepared remarks.

Before we take questions, I would like to remind members of the media that they are on a listen-only mode.

If any of the media have questions, call Sue Bishop or me after the teleconference.

With that, operator, we are ready for questions.

As a reminder, ladies and gentlemen, if you do have a question, press the one at this time.

One moment, please.

Our first question will come from the line of Jack Kelly with Goldman Sachs.

Please go ahead.

Hi, Jack.

Good morning.

Just a couple of questions.

Just maybe starting with Cessna.

Can you give us an idea of what the loss on used aircraft sales was in the first quarter and if you still think 15 or 20 million is still a good estimate in terms of a loss for this year?

Secondly, if indeed, let's say, Cessna's deliveries are flat next year, so let's flat 195 aircraft, given the resizing of the cost structure, do you think that would result in earnings being up next year or flat, et cetera?

I know it's a tough question, But maybe just kind of some sense.

And finally on the tax rate, it was a little under 31% for the first quarter, and maybe, Ted, if you could just give us an updated number and what you think the full year will be?

Thanks.

Okay.

Let me start with the first one.

Used overtrade and mark to market costs for the quarter were about $6 million versus roughly double that last year.

I think it was 11 or 12 in the prior year.

That, we expect, will be the worst quarter of the year based on the fact that we had previous commitments for a number of planes to come in.

Right now, our total committed, that is things that we've already agreed to take that we expect to have overtrade allowance hits on is about 8 million.

So most of that went through already in the first quarter.

We have a couple million more that's already committed.

As we said in the past, we will use overtrades as a sales tool as we go through the year, but right now, that, you know, 15 to 20 kind of range is still where we think the forecast is going to come in.

I think one positive light in the first quarter, we did sell a few aircraft out of the used inventory at values in excess of what we had already written them down to.

So we had a little of what we call recovery in the quarter.

That's a little bit on the positive side.

You know it's really too early for me on the second question, to give you any specifics on what Cessna would look like.

Obviously, if, you know, we would expect -- if revenues, if jet deliveries were to be flat, I would expect that we'd have some positive result to that on a year-over-year basis because we're obviously taking a lot of cost action at Cessna.

We haven't done all that, but, you know, right now, it's just too early for us to even tell you where we think jets are going to come in and to really understand where the cost structure's gong to be.

So as we get more clarity on that we'll give it to you.

The tax rate for the year came in a little under 31.

We had projected for the year, you know, 31.5 as a forecast.

That's still probably our best projection.

We may have a little bit upside to do a little better than that, but I wouldn't come off 31.5 right now.

Thanks.

The next question will come from the line of Dan Wang of Lehman Brothers.

Please go ahead.

Good morning, everyone.

Good morning, Dan.

I just had a question, of the 22 net orders you received of the business jets in the first quarter --

Yes?

How much of that was due to demand from the fractional versus nonfractional customers?

Oh, I'm going to say we didn't get any fractional orders at all in Q1.

We had the cancellation obviously with our major customer and our really, our only other big fractional is our own citation shares, and citation shares order board has been set for this year for a long time.

So I'm sure the answer is zero.

Okay.

And in terms of a current backlog.

In could you provide some color as to the percentage coming from fractional customers?

Higher in the backlog than on the delivery basis.

And that's really because the fractional guys put the longest forecast out into our backlog so I think the answer, Doug will correct me if I'm wrong,about a fourth of the backlog but maybe even a little more than that, a little more than a fourth of the backlog versus our annual deliveries which tended to run in the teens.

Got it.

And in terms of the backlog, how far out does that go out?

Oh, on some models it would go out in, you know, '05, '06.

I'm sure there's some '06 in there.

The predominance is through '06.

There's some beyond '06, but you know, you capture the couple of standard deviations.

That's why the fractionals are bigger in the backlog because the guys that are on more of a program have much longer projections out there, obviously other than net jets and citation shares we mostly sell one jet at a time.

Those don't tend to be way out in the backlog.

Right, right.

Okay, and I have a final question.

Regarding the foreign currency exchange impact during the quarter.

How much impact was there to revenues and operating profit?

And what do you anticipate for 2003?

Total impact to foreign exchange on revenues was a plus 62 million.

And the total impact on earnings was a little under 5.

You know, I think we're seeing some reversal of the weakness of the dollar that we had in the first quarter, so I'm not anticipating that we would maintain that level of performance throughout the entirety of the year, but I think it's going to be a positive lift to us.

Great.

Thank you very much.

Your next question will come from the line of David Bluesteen of UBS Warburg.

Good morning.

Can you walk through the acquisition divestiture and currency impact by business?

I think so.

Let's see.

I've got currency.

You got the other?

Yeah.

Well, the organic growth for each of the segments is the following.

Then a I'll give you the effects.

Aircraft is 4.7% negative.

Fasteners is a positive 8.1% organic.

And actually I'll give you the effects with it -- the FX with it.

The FX impact within that was 5.4

Million.

No, percent.

So the organic growth adjusted with FX out that would be 2.7.

Industrial products was down 8% with a positive .6% FX impact so organic was down 8.6.

Industrial components was up organic 23.9, the FX impact on that was 10.4 for a net of 13.5.

And finance is as reported, 4.2, up organic, no FX.

Okay.

And I know it's early, but you mentioned aligning cost base for flat to lower number of deliveries.

Is that flat against the 195-type number or the 180-type number?

We are trying real hard to do 195 this year but we've set our range as 180 do 195.

I don't think we can be much more specific than that.

All right.

Thanks.

We'll now go to the line of Jeff Sprague with Smith Barney.

Please go ahead.

Hi.

Thanks.

Good morning.

Hi, Jeff.

Couple questions.

First, you know, just looking at the citation shares backlog growth, I guess Ted, you mentioned that's been the -- the plan's been relatively fixed but the backlog in citation shares is up a lot over the last year.

And seems to be a little bit contradictory from the back-pedaling that some of the other fractionals are doing.

I --

Did you think about the plan there and the support for that backlog?

I'm pretty sure that the answer to that is that they added backlog for the newly introduced products.

Right.

And that that's really what's driving that number almost in its entirety.

Right.

Okay.

So when I look at the -- the real big jump happened in Q4, which would have been after the September show?

Right, exactly.

And CJ-3's in the backlog?

Correct.

I guess the other thing I'm grappling with, and maybe all of us are is, you know, you are kind of pointing to success in the restructuring, but, you know, when I kind of look at the numbers, you know, the industrial company actually had revenues up a little bit, and there really wasn't much profit growth.

I know, you know, there's a lot of mix issues going on, but, you know, you had 5 million less of used aircraft [pain].

You had 5 million of currency benefits.

It sounds like, you know, you probably had some gains on the sale of some other used aircraft.

So, you know, I guess we're just kind of wondering why we're not seeing more coming through on the margins.

Are you talking aircraft or the industrial?

Which businesses specifically?

Well, when I look at it all rolled up, you know, you had 7 million in manufacturing profit growth basically.

You know, and obviously there's a lot of puts and takes, but there doesn't really appear to be a lot of margin coming through across the portfolio.

Well, obviously, we've got a, you know, big volume falls off in some of our businesses like Cessna, which, you know, are more significant than the impact of 5 billion dollars in overtrade, unfortunately.

You have a lot of exchange in these numbers.

So, you know, real volume is actually down on a year-over-year basis.

That's not up as it would imply by the sales number.

Roughly, if you look at revenues real quick, real volume is down about 60 million.

Pricing's up about 40 and a little under that, and exchange is up more than 60 million, so a lot of it is foreign exchange coming through, which gives us some lift on the bottom line, but not a normal conversion.

And then you've got, you know, various mix factors happening, depending on which business you're in.

You know, the industrial products business, Frankly, we have businesses like defense, which are doing real well but the golf business is pretty awful right now.

I would imagine some of it's pension and post retirement.

Can you give us the Deltas there?

That's spread through all of the businesses.

We're about $60 million for the year, so divide that out and call it $15 million for the quarter of lower pension income, which would be spread through all of the businesses.

We also have significant increases in our insurance costs, which are going to probably run about, I would say, six or seven in the quarter that are also spread through all the business but most predominantly in the aircraft businesses.

Bottom line, we did have a total of 39 cents in net cost improvements from restructuring six sigma, supply chain and the like so it is definitely there.

And 30 cents bad news on the volume side, unfortunately.

And on the SFAS 87 income, Ted did a little rough math there.

The actual number in the quarter was about 12 million, about 12 million down on the SFAS 87.

Okay.

And how about the nonpension?

That's probably several million hit, also, isn't it?

I'm not sure what you -- what do you mean by non?

37's the pension hit.

Don't have you have -- don't you have other rehire?

The FAS-106 stuff?

Yeah.

I don't have that.

Yeah, that was worse by about 3 million.

So Ted's 15 million number is representative of 87, 106 together.

Hey, Jeff, it's Lewis.

Let me say this another way and see if you are reading this loud and clear here.

You know, I -- we had some concern, I know, when we announced our first quarter earnings -- I'm sorry, when we announced our year end and provided guidance for the year, and we talked about, you know, a savings number of about $1.71, I think.

Is that right?

Yes.

And I know there was some skepticism that came through in different conferences and people were talking saying I wonder if these guys can do that.

So a couple points -- oh, and we also have been making a very strong statement over the last 18 months that we're locked down tight on doing things a lot differently than we've ever done at Textron before.

That's what we call transformational initiative.

So let me give you some hard data.

We said we were going to do 1.71.

Under or inside the 1.71 restructuring initiatives had to count -- I'm sorry not restructuring -- transformational initiatives which are primarily restructuring, six sigma, full supply chain, have to count for about 300 million of savings and 2 million's a penny so that's 1.50.

So transformational initiatives in the guidance we provided three months ago underline that 1.71. 1.50 of that or $300 million had to come from the transformational initiatives which there was some skepticism about as we got the feedback as we went through the quarter.

The fact that we turned in almost 40 cents should then begin to validate the fact that we do have those initiatives, they under place and they are delivering the numbers as we thought they would.

Second, you know, although we, you know, the last call we made, we weren't particularly proud of the fact we had to take our numbers down and we've gone through that.

We also thought it prudent to be much more agressive in taking other costs out because I've always known that when we had to do it we could.

Our employees and executives, everybody had to come to the table here.

It's a little painful but it's something you do during tough times.

So when Ted gave that you new guidance for corporate expense as an example from 135 to 140 as our new guidance, it was 155, and you say well, what is that?

Those are real budget cuts in every functional area of the corporate office, period.

And we've done some other things, too.

So we've not only, I think, tied down the fact that we have the 300 million or beginning to see the contribution of that 300 million of transformational initiatives in the first quarter.

We've also put extra insurance in place in case, you know, something else happens.

And the difference between the 1.50 and 1.71, by the way that 21 was, I believe, mostly a delta with bad things that happened last year versus not seeing those reoccur this year.

I hope that helps you on the cost save side because -- and also you remember on the call we had to climb over a pretty darn big pension delta and a pretty big D&O insurance -- not D&O but insurance including that delta.

So it's a little bit of a complicated story but the first quarter should be indicating that we're doing what we said we would do.

All right.

That's good color, thanks.

Yep.

Next question will go to the line of Ron Epstein with Merrill Lynch.

Please go ahead.

Sure.

Good morning.

Hey, Ron.

Two questions for you.

One, could you just walk through the pension plan in terms of what it looks like in terms of funded status and so on and so forth, just to get an idea of what's going on with the pension?

Sure.

You know, we're in pretty good shape with our pension plans.

We obviously would like to see the stock market turn around to give us a little bit better shape.

Right now, we have pension plans that on a PBO, projected benefit obligation basis, which is the tougher of the tests, are underfunded by about $300 million.

We've got about $4 billion of assets and about 4.3 of projected obligation, about 3.9 of actual current obligations so we're fully funded on that basis.

Essentially, all of our core plans that are fundable plans are fully funded.

So all of our key U.S. plans are fully funded.

Where we have all of our underfunding is largely an intentional circumstances.

We're a little underfunded in our UK plan where's you can fund but the majority of our underfunding comes from plans such as Germany where there is not a tax deduction and there's no real vehicle currently for funding.

So we're in pretty good shape from a funding status standpoint.

Obviously, you know, we are looking for pension income to continue to decline.

We still have about 15 cents or so, I guess, this year of pension income.

We expect that number will go down again on us next year assuming that, you know, we get kind of an average rate of return during the course of this year.

So we are expecting a little decline in income.

From a cash perspective, we're in very good shape.

We have been contributing to those unfunded plans and some of our slightly underfunded plans about $25 million a year for many years.

We expect to continue to contribute about $25 million a year for the foreseeable future.

We would have to see, for example, if our total plan return was a negative 8% this year just to give you an example, that would trigger an '05 cash contribution of about 18 million.

So we have to have some pretty dramatic negatives in performance before we really don't have anything that would drive us to a contribution in '04.

Literally, the plan has to fall 26%.

That's the whole plan, which means the stock market would have to fall far more than that, since we've got a lot of fixed income in there before we'd have an '04 contribution.

So in good shape on the cash standpoint.

One thing I will tell you, though, depending on the performance of the stock market this year, we did take an OCI or other comprehensive income hit last year which is a noncash, non-P&L but a hit directly to equity on your balance sheet.

Mm-hmm.

If we see continued lousy performance in the stock market this year, it is possible that we could take another meaningful OCI hit at the end of this year.

How big's meaningful?

Oh, you know it's hard to speculate.

Tell me what the stock market's going to do, but it could be three-digit numbers.

Okay.

It could be several hundred million in the worst case scenarios but it's likely to be less than that.

But I'm not going to guess what the market's going to do this year.

But again that would be a charge that would hit equity, would go through OCI, would be a noncash event.

Okay.

So that is possible.

Okay.

Let's hope the market does better.

Yeah, let's hope.

Another quick question for you.

Can you just give an update some color on the Mustang program, where it is now, and what's going on with the program.

You guys said you selected avionics for the program.

Yeah, I'll do that.

The Mustang really is right on track.

You know this was such a different aircraft in a lot of interesting ways.

First of all, people have asked me, how are you taking the costs down and still delivering such a high-level of performance and features, and that's because this particular aircraft with a lot of input from the user community, by the way, is being designed to be manufactured more yob line as it goes down the initial assembly line.

Right now what we do for our jets, even though we have redesigned how they are put together, in a very good way, but they come down the initial assembly line and go out the door where they are flight tested, et cetera and then they go into a completion center where they are completed.

The Mustang to the greatest extent possible will be built online first time for as much of its interior and exterior components as possible.

That's new for us.

Mm-hmm.

It's something the car business has been doing for years.

That will be new for us.

Next we did pick the avionics package.

I don't know whether we've released that.

I know who it is.

It is a really good choice but I'm not the designer of airplanes.

I think we've got a good combination of avionics and engines now so our customers now will begun good into transfer their hold in place orders to live orders like we do with every other plane.

I can't recall, unless someone knows sitting on this table, I can't recall first flight. of the dargone Mustang.

I blanked out on that.

It's '05.

I think it is, too.

I don't recall it but the CJ-3 is going to fly any day.

It might be in the air today as a matter of fact, I don't know.

It's just momentary.

If it gets in the air this week, the CJ-3,kind of off your question, but it really underlines kind of how our product development's going right now.

It will be well ahead of schedule, couple weeks probably.

I think Cessna's got kind of a product development machine out there that's working well.

And since the encore -- not encore, Excel and Sovereign and so forth, they have used a big effort to getting their future customer base to help design aircraft.

I think that's why you have such a high initial order rate.

If you have another question, I'll try to answer it.

Yeah, along the same line with the Mustang.

With the Eclipse airplane changing engines to the Pratt engine

Yeah.

Changing the performance of the plane a little bit making it essentially a little bit of a heavier airplane, does that change the product placement for the Mustang at all?

Do you have any comments on that is this

To my knowledge, it has not.

You see, if you -- to understand the Mustang, you kind of to think of Cessna as the total Cessna.

Sure, sure.

You have to think of 11 dedicated service centers, nine of which are in this country.

You have to think of probably 30 unique dealers around the country that also support Cessna products.

You have to think of the fact that Cessna has such a strong marketing arm as opposed to how the Eclipse will be sold.

So we really have never feared the Eclipse.

I mean it will be an issue when it finally gets into production.

It's going to be a while when it gets out there.

But no, we haven't changed.

We think we have the right product based on over 300 orders.

Sure, sure.

Our customers can't wait to get them.

We're going after those guys out flying 12,000 turboprops around.

Good point.

And Eclipse is going after a whole new group of people.

By the way, the scheduled first flight of the Mustang is the first quarter '05.

I don't know why I blanked on that.

Thank you very much.

Yep.

Next question will go to the line of Quinten Nufer with Lazard, please go ahead.

Good morning, guys.

Hey, Quint.

I have quite a few just kind of a few nitpicky questions.

Ted, can you go through the cash flow components?

For the year?

For the quarter.

I don't know.

Okay.

If you can't that's fine.

I can call and get it offline.

Yeah, Doug will give that to you.

I know how the year lays out, but the quarter, we came in at negative use of 66 included the cash of 109, so, you know, put us back at the 175 kind of level.

This year versus, you know, 206 last year.

Pretty typical for us that this is the quarter that we built up lot of inventory in a lot of our are seasonal businesses.

I will tell you we would have and should have done a heck of a lot better than that if we hadn't gotten caught with the Cessna where we, you know, we are making this adjustment on a full-year basis to production.

But we couldn't shut it off quick enough.

So we built some more planes and we ended up with some that we had planned to deliver in the first quarter, didn't get delivered until into the second quarter.

So Cessna hurt us in that regard in the first quarter.

But on a full-year basis, we're still projecting that range of 300 to 400 million.

And if we get 195 jets, I think we'll get at least the 400 million, the top end of that range plus, of course, the 108 of snorkel tax that we're not counting.

So we'll have, you know, 500 million of cash on hand at the top end of that jet delivery schedule.

Okay.

The second is on industrial components.

FX contributed more than I had expected and as well organic growth was significantly above what I had expected.

What is going on there?

Is Caltex are, there some new program ramp ups at Caltex?

Is Caltex the primary driver?

Is the double digit organic growth rate sustainable or does it slow down because of tougher comps in the second or the last three quarters of the year?

Let me give you some numbers first to help you there.

The volume of the increased sales in industrial components, the volume was 54 million dollars.

The exchange contributed $38 million and pricing was a negative five.

So there are the pieces.

So, yeah theres with a pretty big piece of exchange in there.

Again, as I said earlier, I think we're going to get some continued lift through the year for exchange, but I don't know.

You know, with the success in Iraq, we've seen the dollar start rallying.

And who knows where that's going to go, so we're not going to count on that.

But I think when it's all said and done given where the dollar is versus the Euro right now we're likely to get some lift there.

On Caltex, yes, there are some new programs.

Caltex is most but not all of it.

We also have some positive sales growth in our fluid handling business as well.

But Caltex is the biggest piece and biggest part of the growth there.

They have some new programs.

They've had an uncanny ability to get on the cars people actually want to buy, which is I'm not quite sure how they managed to do that, but they have got a good mix of being on the cars that are being hurt the least.

That being said, I think we're going to see and we are starting to see some softness in the automotive volumes both in Europe and North America and unfortunately particularly in Germany.

So I think it's going to be a little bit tougher as we go through the year, but Caltex is really on a, you know, they kind of have their grow faster than the market strategy that has three legs to it.

One is this continued conversion from steel to plastics.

Number two is geographic expansion.

You know, we just opened the second plant in China.

We opened a plant a year and a half ago in Japan.

Asia is the least developed market and going from steel to plastic.

So they're following that growth.

Then Caltex has got a whole line of what they call their advanced products, which are really using their co-extruded plastics technology to get into other things than fuel systems.

They are still mostly automotive but other components from speaker pods to bumper systems to knee bolsters to acoustic paneling that is kind of the third leg.

So really with all three of those, in the short term, if auto market goes to heck, Caltex is going to feel it because they are an auto supplier, but that conversion of plastic -- from steel to plastic, geographic expansion in Asia and the growth of the advanced product system, they are a three-leg strategy for outgrowing what happens in the market at a time and are successfully at it.

Quinn, this is Doug.

Let me make one comment on your easy comp issue.

I think there is a point to be made there.

For the following three quarters of the year, we're probably going to be looking at a little slippage of the top line.

We'll probably end the year low single digits at the revenue line for components as we go into the tougher markets.

That's total or that's organic?

That's total.

Okay.

That would imply basically no growth before FX if you have any FX?

Caltex does not have the big -- the FX opportunity in their forecast that Doug's reading off of.

Right.

So that he have only -- only what's actually happened in their numbers.

Okay.

Lastly, I was under the impression that as we see some of the divestitures and credit quality improving or I guess stabilizing at finance that we would see margins marching back towards the high teens to low 20s.

So I was a bit shocked at the 15.2%.

I know it looks favorable year to year but it's not what I expected sequentially.

No it's not where we need to be and it's not where we think we will be, but in the loss rate, some of that is timing.

We've got, you know, we're driven to book reserves based on our nonperforming assets.

We've got some lumpy issues in nonperforming assets that we think we'll work off more of the course of the year.

More of those frankly hit us in the first quarter than what we had anticipated.

That being said, you know, we had a good quarter.

We saw things stabilize.

I'm not ready to declare that a turning point yet.

I think we've got a few more rough quarters ahead of us, but, you know, as we get towards the end of this year, assuming that the economy starts to improve at all, I think we're going to work our way through most of those issues.

But, you know, could the stats turn around and the second quarter, third quarter and go back in the other direction, yeah that's possible.

Okay, thanks.

The next question will come from the line of Brian Langenburg with Langenburg Company.

Please go ahead.

Hey, guys.

Hey, Brian.

Number one, when you talk about price in some of these businesses, not that we're going to get a big roll back from inflation, what kind of markets are we talking about and is this an incident of new products helping pricing or is this flow through from higher commodity prices, oil, what have you.

And then second question, if you just go through and repeat for the quarter what the delinquency and charge-off data was for finance?

Well, let me do the second one first because I got it right here in front of me.

The finance numbers -- okay.

Nonperforming assets fell to 3.23% down from 3.33.

Charge-offs during the quarter were 1.84.

That was down from 2.17.

Allowance for loan losses to non-accrual loans went up from 92% to 94%.

And our delinquencies in excess of 60 days were 2.9% which was virtually identical to the prior quarter.

Now, your first question was on price.

Mm-hmm.

You know, we got, what, $40 million roughly if I got the right number here.

Sounds right or sounds close.

Let me just make sure that I have the right thing here if I am on the right page.

I guess it's the direction not to much --

Excuse me it's $34 million of pricing.

Virtually all of that came out of aircraft and split a little more at Cessna than at Bell.

And the Cessna numbers are largely driven by the fact that for the first year or two of introductory sales of the CJ-1 and the CJ-2, we had a special introductory pricing program on those that went away.

So the pricing at Cessna so you're not misled there is not really across the board.

There are some units where we're not really getting any rear year-over-year price.

That would be true at the high end of the product offering, but we are seeing, you know, a pricing pickup on a year-over-year basis at the bottom end because that introductory pricing deal goes away.

Bell has pretty good positive pricing.

Fasteners was a tremendous success in the first quarter.

They came in almost zero, which for fasteners is tremendous.

You though, we typically give away price there to certain of our end market customers that came in almost at zero.

The industrial products businesses got positive pricing really in a little bit of each of the businesses.

The only exception to that being the systems business, where we had a lot of cost reductions last year and we had to share some of that with our customer.

And then obviously Caltex traditionally has a significant negative pricing and they were about 6 million negative in the quarter.

Okay.

Okay, thank you.

A little good news in the fluid and power business.

Not a big number.

Okay.

Thanks.

The next question will come from the line of Davis Power with Seneca Capital.

Please go ahead.

I actually didn't queue for a question.

Thank you, sir.

We'll move on.

I believe we have time for about one more question if we could take that and then we'll conclude our call.

That question will come from the line of Don McDougall with J.P. Morgan.

Please go ahead.

Good morning, everyone.

Hello, Don.

Just wanted to dig into the share repurchased first.

You mentioned 2 million bought back in the first quarter and just looking at, let's assume your forecast for free cash flow is the right one for the full year.

If we look at the dividends payments, the restructuring outflows related to what you are doing on the cost side, how much powder do you have left to buy back stock in the next three quarters?

Well, let's start with just under 2 million shares is as of yesterday just to correct you.

That was not all in the first quarter.

Some of that happened after we made our announcement to you guys that we were going to do that and after we received the tax refund.

We have, you know, the free cash flow number there and let's say we hit at the top end of our range of about $400 million.

We have two things that come right off of that.

We have dividend ends which I'll remind people if they've forgotten that this is a quirky year for Textron where we pay five dividends this year because of the calendar year that we are on just happens to catch an extra dividend.

So that's about 2.25 versus our normal 185 or so of dividends.

And then after tax restructuring costs right now are estimated to be $83 million.

Don't mean to be that precise, but that's what's in our forecast right this minute, so that gives you the other two pieces that come off the bottom and, you know, you can do the math on, you know 2 million shares that we've roughly repurchased as of this date.

And, you know, I'll just remind you, also that we said we would use a significant portion of the incremental $100 million of tax refund to purchase shares.

So we have, you know that's really the driver.

That's what we said we were going to do and we have obviously a little bit more to do under that but not a lot.

Okay, so rough math, if we assume an average price on the 2 million of somewhere close to 30, you've got to get to 400 maybe 40 million left?

I didn't run the numbers in front of me, but that sounds right.

Okay.

Just another question on the 21 cents you had cited as inflation.

Mm-hmm.

Costs for the quarter on a year-over-year basis.

Could you run through that in some deal?

I know you've touched on pension and medical a little bit, perhaps some more color there?

Yeah, hold on just a minute.

I want to pull something out here.

The big things that are, you know that are hitting us there, we're getting hit still with year-over-year increases in steel.

That's hitting a number of our businesses predominantly in E-Z-Go Jacobsen, fasteners, OmniQuip would be the biggest piece of that.

Also significantly getting the hit in there with higher insurance costs.

Energy costs in a number of our businesses.

Hopefully that's about to turn around and go in a positive direction for us, but energy costs have been another key driver so far this year.

Those are other than normal wages and overhead kind of things, those are the biggest pieces.

Right now, it's only adding up to about 1.5%.

Unfortunately it's only a bigger number, back to one of the earlier questions on margins, still a bigger number than we've been able to get in price this year.

We've lost, you know, about 7 cents in the quarter to the GAAP between our inflation costs and what we were able to pass through to customers.

We continue to work hard on that.

One of the reasons that I mention that fasteners had virtually zero on the pricing line, which is a big improvement is that we have been pretty successful in that business in going through and passing steel surcharges through to customers not as necessarily a permanent price increase but as a surcharge for the period of time when the tariffs remain in effect.

Okay.

Final question, Ted, would relate to Cessna and your restructuring plans and I guess your comments that you are prepared for comparable volumes next year, whenever those volumes end up being.

I wanted to get a sense for, you know, how much costs on a year-over-year basis you can take out, how much of that is of a permanent nature, you know, fixed costs versus variable to get a sense for, you know, eventually when you know, eventually when things come back how much leverage we might be able to see, et cetera?

Well, a large portion of what we're doing at Cessna.

They're doing as is every other company in Textron some discretionary things to, you know, tone down advertising and some other things for short term.

Those won't stay with you fundamentally, but we are working on a plan right now that, you know, has Cessna coming back up with 3100 less people than they had when we began middle of last clear when we started to see the volumes going down.

So there's a significant amount of permanent overhead that's going to come out of that business.

I'm not going to get into '04 projections at this stage, but they're doing fundamental things basically as Lewis pointed out, everything that isn't product development is on the table and the Cessna guys are working really hard.

They're kind of mantra is whatever the sales are, we want to maintain our margins.

That's a tall order but that's the kind of aggressive costs they're going after.

Yeah, you know, if they can do that, and I think they will, because we're getting good traction on six sigma out there and other things that they're doing.

We just get through this change that we're going to get the rest of those employees out and mark the line rate changes we need to make.

If they do that, and I think they will, the leverage is going to come two ways.

First, we won't see the costs that we had to incur to get there this year repeat next year.

You'll see more leverage on six sigma.

Then of course, you are going to be coming from a lower cost base so when we finally see a pickup in volumes, whenever the heck that's going to be, you expect some really good leverage there because in an up market, we do well at Cessna from a margin and ROIC standpoint.

Very good.

Thanks for your help.

Yeah.

Okay, ladies and gentlemen.

Thank you very much for joining us today.

If there are any folks still in queue, feel free to give me a call or Mark Kaplan in the office.

Media, please call sue Bishop and we'll talk to you soon.

Thanks, everyone.

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