達信公司 (TXT) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Textron second quarter earnings release.

At this time all the participant lines are in a listen-only mode.

Later there will be an opportunity for questions.

Instructions will be given at that time.

If you need assistance during the call, press star, then zero and an operator will assist you off-line.

As a reminder, the call is being recorded today.

Now I'd like to turn the conference over to the Vice President of Investor Relations, Mr. Doug Wilburne.

Please go ahead, sir.

Good morning.

Welcome to our second quarter conference call.

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

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

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

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

The reconciliation of these items to GAAP measures is contained in the press release, a copy of which is placed in the Investor Relations section of our website 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 website.

In June, Textron reorganized to streamline its management structure.

Under the new structure, Textron systems and Lycoming have been combined with Bell Helicopter to form a new Bell segment, and Cessna Aircraft is being reported separately.

The remaining industrial products and industrial components businesses have been combined and Textron now reports the following segments: Bell, Cessna, Fastening Systems, Industrial, and Finance.

Historical financial results from 1998 through the present have been recast to reflect the new format and are also available at Textron's Investor Relations home page.

Now for a summary of our second quarter results: Revenues were $2.6 billion, down from $2.8 billion last year, as higher revenues at Bell, Fastening Systems, Industrial, and Finance were offset by lower revenues at Cessna.

Our reported GAAP earnings in the quarter were 46 cents per share, including the following after-tax items: 12 cents per share in costs related to restructuring and an 18 cent per share charge for asset repayment related to our announced sale of OmniQuip.

Excluding these items, our second quarter 2003 adjusted earnings per share were 76 cents, compared to 82 cents last year.

Now, let me turn the discussion over to Lewis.

Thank you, Doug.

Good morning, everyone, welcome to the call.

Overall, Textron and its end markets performed pretty much in line with our range of expectations.

Furthermore, and I think equally important, we continue to make very good, steady progress with our various transformation initiatives as we focus and continue to step up the pace on improving our processes, and also rationalizing our infrastructure.

We've talked about the transformation initiatives in the past: Restructuring Textron Six Sigma, supply chain management, implementing a single IT-shared services organization, establishing common global HR processes -- all those things taken together are permanently improving our cross productivity.

And once again, these initiatives clearly made a difference in our second quarter results.

Obviously reducing costs has been painful, but necessary.

Our work force is down by about 3700 since the beginning of the year, and, actually, over 5,000 since a year ago.

You can be sure that we will remain committed to improving operating efficiencies, especially in the current sluggish economic environment, that unfortunately has yet to show any significant signs that recovery is imminent.

During the quarter we had a number of positive developments.

First at Cessna, we made reasonable progress with '03 jet orgs.

We now have 180 new jets sold for delivery this year.

For those of you keeping score, so to speak, that consists of 107 delivered during the first half, and now we plan at least 73, with orders in hand for the second half, totaling 180.

At Bell, in addition to adding a fairly good commercial helicopter sales during the quarter, we also passed, what I think, is an extremely important milestone for the V-22.

You probably read about it in May.

The Defense Acquisition Board gave the program a thumb's up.

This was really important for us because Pete Aldridge, who was then the under secretary defense in acquisition, had previously been pretty skeptical about the V-22.

Well, when he finished his summary at the DAB, he concluded the program -- in his words -- "has done everything he asked it to do, has demonstrated that it's safe and reliable, and can now proceed on a more success-oriented basis."

In fact, what's going on now, Aldridge and the DAB opened the door to the possibility of long-term acceleration in V-22 production, and actually, that possibility of, you know, when can we turn up the volume is being examined by the Department of Defense this summer.

We're excited to be back on track with our customer and depending on the production acceleration schedule, we could be looking at an annual V-22 revenue rate of well over $1 billion by the end of the decade.

Another important source of future revenue growth, as well as current sourcing opportunities, is our ever-present and growing presence in China.

During the quarter we expanded our business development and sourcing capability in Shanghai, and in addition, we opened a third manufacturing plant.

It's a fastener production facility and customer applications center in [INAUDIBLE], and this facility is serving China's electronics and technology industries.

During the quarter we made three moves to further focus on our portfolio.

First, we sold our Camelin fastening business, a small noncore operation located in France.

Second, we divested a $93 million portfolio of franchise finance receivables, a previously identified noncore business line of TFC.

And most recently, we agreed to sell the OmniQuip telescopic material handler business.

That particular sale of OmniQuip is expected to close during the third or fourth quarter pending regulatory approval.

And I guess, as you can tell by the recent announcements we've made last quarter and again this quarter, we plan to continue our efforts to look for opportunities to shed noncore assets.

During the quarter we also took additional actions to streamline our industrial organizations.

We eliminated the operating staffs at Industrial Components and Industrial Products, taking out an entire layer of management, and we created about $10 million in annualized savings.

We also continue to make good progress deploying Textron Six Sigma across the company.

As of today, just 18 months into our deployment, we have 394 full-time black belts and 791 green belts trained or in training.

You know, when you hear people talk about Six Sigma, they often are referring to the cost savings and operational efficiency aspects of the traditional Six Sigma program.

You gotta know that Textron Six Sigma also focuses on ways to generate top-line growth.

Black belts are trained specifically just to focus on that.

The piece of our program that does just that is called DFSS, or Design for Six Sigma, and this is a very rigorous methodology of developing new products that ensures that they contain features and attributes that customers will value in the future.

And an excellent example of DFSS at work at Textron, you could find that at E-Z-GO.

Through the application of DFSS processes, we are designing golf, industrial and commercial vehicles that much more efficiently and completely translate the voice of the customer into new products that incorporate all the durability, quality, function and style that tomorrow's customers will demand.

The other piece of that, which I think's pretty good too, is we're integrating core technologies from other Textron businesses into the new E-Z-GO designs.

For example, Kautex is helping to develop plastic and composite applications for vehicle chassis and bodies.

Fastening Systems is providing advanced low-profile, low-cost fastening systems, and Textron Systems is assisting in developing feature-rich intelligent electrical components.

Obviously, this is just one example of many where Textron is aggressively investing in new product development.

Whether it's three new business jets, three variants of our breakthrough tiltrotor aircraft, next generation fuel systems, quiet commercial mowers, or advanced products for battlefield and homeland security, our sights are firmly set on new products that will drive future growth.

So, during this current economic environment, while we're clearly focused on the cost side of the value equation, we're also investing in the future.

Okay, in summary, while we're confident our new product development efforts will provide future growth, we still expect to face continued softness in most of our markets through at least the rest of this year and in the business jet market through most of '04.

Accordingly, we're still very focused on taking the right actions to reduce our costs even further.

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

As you know, over the past 2 1/2 years we've been aggressively transforming our company.

We've been doing this to establish a firm foundation for increased shareholder value.

We're on the correct path and we're making good progress as this quarter points out.

We're leveraging the full capabilities of Textron, we're developing and improving the talent team, we're establishing robust enterprise processes, and we're investing in strong, branded, high-return businesses.

And the early results of our transformation strategy todate are affording us the capability to manage well through this prolonged down economy.

Ted?

Thank you, Lewis, and thanks to all of you joining us on what I know is an awfully busy earnings release morning.

As Lewis indicated, we continue to be in a weak revenue environment and cost savings are driving our results.

To really appreciate the cost improvements we're achieving in this environment you have to understand what happened at the sales line.

As you know from our press release, sales were down $225 million, but actual manufacturing volumes were down $334 million.

The offsets were $74 million in favorable foreign exchange, $28 million in higher pricing, and finance revenues were up about $7 million.

Now let's talk about what happened at the EPS level.

Earnings of 76 cents were lower than a year ago by 6 cents.

The largest negative driver there, obviously, was volume and mix, which amounted to 66 cents.

Inflation contributed a negative 18 cents.

That's about 1.4%.

And 12 cents came from positive pricing.

So that's about 0.9 of a percent.

So we only were able to partially offset inflation with price.

Foreign exchange provided about 2 cents favorable.

Cost improvement, obviously the largest factor, was 59 cents, which included 6 cents from improved bad debt and obsolete inventory expense, so less expense than the prior year.

And 53 cents being driven by our transformation initiatives.

Inside of that is 12 cents that came from restructuring.

Finally, we had about 5 cents positive from a whole combination of lower share count, lower interest expense, slightly lower corporate spending and tax rate, and lower profits at finance.

Now I'll go through those for you again one more time, starting with the negatives. 66 cents volume and mix, 18 cents inflation, and the positive items were 12 cents for pricing, 2 cents for FX, 59 cents of cost savings, and 5 cents for those miscellaneous items.

Now I'm gonna run through each of the businesses for you.

We'll start with Bell, where segment revenues and profits increased $23 million and $11 million, respectively.

Revenues were up due to higher commercial and U.S. government revenues at Bell Helicopter, partially offset by lower volumes at Textron Systems and Lycoming.

Segment profit increased principally due to pricing and program-related adjustments we took in '02, largely in the commercial helicopter business, and was partially offset by lower volume and higher operating costs at Lycoming.

Backlog at Bell was down $180 million during the quarter, ending at $1.2 billion, primarily the result of timing on V-22 production.

At Cessna, revenues were down $282 million and profit was down $55 million.

The decline in revenues was largely the result of delivering 57 jets this year, compared to 89 a year ago.

Higher pricing and higher sales of used aircraft partially offset the decline.

As a result of the positive used jet sales activity during the quarter, we nearly halfed our inventory of used jets down to $53 million from $100 million at the end of the first quarter.

Profits at Cessna decreased with the lower sales volume, but were helped by improved cost performance and a little bit by higher pricing.

Backlog at Cessna decreased $150 million during the quarter and ended at $4.2 billion.

To further help you in your analysis of Cessna's near-term prospects, let me give you additional color of Cessna's current backlog.

Of that $4.2 billion in backlog, about $600 million is for deliveries during the balance of '03.

About $800 million is for '04 deliveries. $1.3 billion is for '05, and the remaining billion and a half is '06 and beyond.

Now let me make an important point about '04, all of what's in backlog at Cessna is Citation business jets.

We don't tend to get backlog on a lot of our other products.

So just to give you perspective, this year we will sell about $625 million of single-engine aircraft, Caravans, and parts and service.

That parts and service piece, by the way, has been growing at double digits and we expect that to continue.

And the single engine and Caravan businesses are also more likely to respond quickly to changes in the general economic environment.

So you need to have that extra perspective to add onto the $800 million.

Also keep in mind for the longer term, the $4.2 billion does not include any orders for the Mustang.

Now, while it is way too early to finalize our production plans for '04, I know that that is really top of mind for many of you, so I'm gonna give you our best current guess, and that's really what it is, our best guess right now.

If we had to call that one, we think that unit deliveries next year are going to be down somewhere in the 10% to 15% range.

However, through a combination of stronger mix -- and that's largely driven by the fact that we will start delivering Sovereigns next year -- and the continued growth that we expect in our parts and service business, Cessna's revenues could be nearly flat compared to this year.

So that's our best take right now.

We will, obviously, continue to update and share what we think with you as we go through the balance of this year, but I know that's of high interest.

Next we'll return to Fastening Systems where revenues were up $16 million and profit was unchanged year-over-year.

Sales volume at Fasteners was down more than 3%, but revenues were up due to the favorable impact of foreign exchange.

Profits stayed flat as the negative impact of lower sales volume and inflation was offset by improved cost performance, and to a lesser extent, foreign exchange and a somewhat favorable sales mix.

Industrial segment revenues increased by $11 million and profits were up $23 million.

The increase in Industrial revenues was primarily due to foreign exchange and some higher sales volume at Kautex, was partially offset by lower volumes at OmniQuip, and Golf and Turf.

The increase in profit was largely due to improved cost performance and reduced expenses for bad debts and obsolete inventory, partially offset by lower unit sales volume, inflation, and an unfavorable sales mix.

Lastly, Finance revenues were increased $7 million ,while profit was off $3 million.

The increase in revenues was primarily due to higher average receivables, and the profit decline reflected higher loss provisions and higher operating expenses related to increased collection efforts.

TFC continues to weather the current economic environment reasonably well.

Year-to-date charge-offs were 2.03% compared to last year's full-year rate of 2.17%. 60-day delinqencies rose to 3.23% in the quarter, compared to 2.9 in the first quarter and 2.88 for all of last year.

NPA remained stable again this quarter, that's non-performing assets, remained stable again this quarter at 3.21%, comparing to 3.23% in the first quarter and 3.33 last year.

Now, I want to spend a few minutes on a couple of other items, and I'll start with cash flow.

Year-to-date cash flow from operations was $137 million compared to $17 million during the same period last year.

That resulted in free cash flow before restructuring of $75 million this year and a use of cash of $76 million last year.

While $109 million of that free cash flow improvement was the result of a tax refund we received in the first quarter, this is the second year in a row of improved performance in the first half, which is a period where we have traditionally been big users of cash.

And finally, to give you the complete picture on cash, we also had after-tax cash costs associated with restructuring of $27 million for the first six months of the year.

Next, just a reminder.

We put out a press release on this.

Today we are retiring the $500 million worth of preferred securities that we have outstanding.

In the third quarter we will, therefore, incur about a $10 million after-tax non-cash charge to reflect the writeoff of unamortized issuance cost.

By refinancing at current interest rates, we expect that after-tax interest savings will be about 5 cents a share for the remainder of this year, plus an incremental 5 cents a share next year.

So 10 cents combined improvement in earnings per share as a result of this refinancing.

Now let's move to our outlook.

As Lewis indicated earlier, we have not seen any systematic signs there will be a meaningful recovery in our market for at least the rest of this year.

Our cost performance, though, is right on track with our revised plan, and Cessna is right on track to deliver on that 180 to 195 range of jets we discussed earlier this year.

Therefore, we continue to expect earnings per share to be between $2.40 and $2.60 for the full year, with third quarter earnings between 42 and 52 cents.

We expect cash flow from operations for the year will be between $516 and $616 million, and capital expenditures, net of assets sales, should come in around $299 million, with restructuring cash cost of about $83 million, and therefore, free cash flow before restructuring is still expected to be in the same range we talked about, of between $300 and $400 million for the year.

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

Okay, thank you, Ted.

That concludes our prepared remarks.

Before we take your questions I'd like to remind members of the media that they are in a listen-only mode.

If any of the media do have questions, please feel free to call me after the teleconference.

With that, operator, we're now ready for the questions.

Certainly.

Ladies and gentlemen, if you would like to ask a question, please press the star and then the one on your touch-tone phone.

You'll hear a tone indicating you've been placed in queue.

If you wish to remove yourself from the queue, please press the pound key, and we ask that if you're using a speakerphone, please pick up your handset before pressing a number.

One moment please for our first question.

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

Please go ahead.

Good morning.

Just two questions, both focused on aircraft.

Ted, can you give us some feel, if we look at Cessna, we had about a 300 basis point margin decline year-over-year.

I mean, clearly volume accounts for a good chunk of that.

Can you talk about the mix impact -- negative impact -- you know, getting to the fact you didn't deliver any Xs during the quarter.

Did that have any kind of negative effect on margins?

And then secondly, sticking with Cessna, comments by Gulfstream they saw things picking up in June and July doesn't sound like, from an order standpoint, doesn't sound like that was the case for you guys.

Well, I think we did have pretty good order intake during the course of the quarter.

You know, we've improved from -- last time we talked to you we had 162 orders for this year.

We now have 180 orders for this year, and that does not give you the complete order story during the quarter, because it was appreciably more than 18.

There were two other phenomena that happened there.

The first is that we did book, in the quarter, a handful of orders for '04 deliveries, and in addition, we also had a handful of orders that were customer orders for '03 that, as we've gone through the furlough and reline setting of Cessna, we, with concurrence with our customer, have moved those deliveries out into '04 because we had a little bit of a serial numbering problem where we would have had them ahead of their serial numbers that would end up in inventory, and we didn't want to do that.

So, I think we had a pretty decent second quarter, relative to inventories -- excuse me, relative to orders -- and we're in good shape now to come in in that range that we talked about.

We booked you know, somewhere close to a quarter of a billion dollars of income in orders in total for Cessna during the quarter.

Clearly, you know, margins are going to suffer here in the short-term as we're getting ourselves restructured for this lower level of production, and you're correct, we did not have any large -- any X sales during the quarter.

Certainly that's an unfavorable sales mix a little, but we're looking forward to that changing for us moving into 2004, when we will begin to sell Sovereigns.

One of the reasons we could be down in units next year, and with some growth in the parts and service business, and still come in, you know, pretty close to flat or at least within hailing distance of flat on a total sales business, is that we will start selling Sovereigns next year.

That's a $14.5 million plane.

That's like you know, selling 2.5 of our average jet sale.

Okay.

And just finally on the V-22, if that $1 billion materializes by the end of the decade, can you give us a sense how that might ramp up over the next two years in terms of revenues?

Sure.

Well first of all, the $1 billion would be, in my view -- I still think that's a conservative number, but it's out there far enough that I don't think anybody will buy shares of our stock because of it today.

The 1 billion equates to about 24 ships in a single year.

And our customers have been saying all along that the ramp-up they'd like to see would be for us to get to 36 as quick as we could.

That's why I said that we should pretty much expect to see over -- well over a billion.

If that went up 50%, it's be a billion and a half for example.

If you want to look at deliveries -- which most people aren't tracking as closely as you guys are -- we're gonna deliver 6 in '03, 17 in '04.

We dropped back to 14 in '05 because of the way the lots were released, and then we come up to 22 and stay above 20, '06 and beyond, and that's without any change in the production schedule.

So, that's pretty good.

I'd make one more comment on Xs.

We also sold four Xs this quarter out of our used inventory, which was really good --

Which was 100% of our used inventory of Xs.

We have none now.

Yeah, so I'd just add one comment.

I think we're seeing the business jet market about like Gulfstream's seeing.

I think it's just a little too early to get excited right now.

I'd say orders are picking up a little bit this quarter, but too early to call, myself.

I agree.

Good deal.

Thank you.

Our next question is from the line of Dan Wang with Lehman Brothers.

Please go ahead.

Good morning.

Good morning, Dan

My question relates to Cessna.

I was wondering if you could provide a little bit more detail on the used aircraft activity in the quarter.

Yeah, we had a great quarter, relative to our inventory.

I mean, there's two different perspectives you have to look at.

Our own inventory in moving used versus what goes on in the broader sense in the marketplace.

On our own inventory, we had a great quarter.

We sold quite a few more than anticipated, as we said earlier.

We had $100 million of used inventory at the beginning of this quarter.

We have 53 at the end of the quarter.

Our projection right now is we could hold pretty close to that number throughout the balance of the year, and that's a tremendous improvement for us, and, obviously, provides us better protection against some of the valuation issues we had been dealing with previously.

From a broader market perspective, you know, we still have somewhere in the 15% to 16% range of all of our fleet that is available on the market for used.

That's come down from the peak number, which was closer to 19% to 20%, but still higher than what we would say is a healthy market, which would be down more in the 10, 11, 12% kind of range.

That number has you know, it's been creeping down, but it's been coming down very, very slowly.

We did see -- this is you know, purely anecdotal, and I hate to be that way -- but we did get a lot more prospects and inquiries on used during the course of the quarter.

I think there are some people starting to think the economy's going to get a little bit better and that used prices are maybe as good as they're going to get, so there's some more interest and obviously that shows up in what we were able to sell during the quarter.

Okay, great.

And also, in terms of you know, the general kind of positive you know, activities in Cessna in general, what do you think that's driven by?

You know, was there maybe temporary pent-up demand or was there just a turn in perspective from customers, or --

You know, I think Lewis, you can comment too, I think what we've seen on orders is just kind of a steady -- you know, it's not just all of a sudden turned on as a big increase, but it's gotten steadily better.

Another anecdotal one, because I don't think we can prove much yet -- but we are having customers that are looking at the bonus depreciation, and we're certainly aggressively using that in our sales pitch to people, that now is the time because the new tax bill gives you some real advantages to buy.

And you know, there's been a handful of customers who said yes, that's been an important part of my decision.

Lewis, do you want to anything to add?

I still think the best indicator of long-term business jet volume pickup really rests with the U.S. economy, and then back in the corporate profits and individual profits, and our wealth generation, and you know, I think there is some evidence that corporate profitability is improving, and there's some evidence that the stock market's getting stronger, and there's some evidence that the different stimuluses that have been put in place are probably going to have a positive effect, and I think that, taken together with that capital, that depreciation schedule increase to 50%, I think those things taken together might just indicate that, you know, we're gonna see an increasing trend.

We've seen improvement.

We haven't said a lot about it, but we've seen improvement throughout the year, gradually getting a few more orders and a few more orders, and less cancellations and so forth.

But I still think --

It's not a stampede yet.

Still too early to call the ball and say we'll be back in full swing in '04.

That's why we're taking a more conservative stance.

It's a wise thing to do.

Great.

I just have one last question in terms of the quarter, there was some accelerated pace in some of the divestitures at TFS, OmniQuip, and I'm wondering is that accelerated pace due to the timing of how the transactions worked out?

Or do you think that increased pace can continue?

Perhaps, comment on the acquisition side also.

I would have described our pace as steady.

You know, we have been working during the course of the last several quarters.

This is now about our fifth different transaction with the Finance portfolio.

You know, we've got one more we're working on right now that -- and maybe even a second one we're working on right now.

We've kind of been marching through the portfolio.

I think we've done 18 different dispositions and about 8 pretty small acquisitions during that same period of time.

I think we're steadily going about reshaping our portfolio and we have more work to do, but I wouldn't have called it an accelerated pace, per se.

On the acquisitions side, and Lewis you can chirp in on this one, too.

We're out there looking for anything that makes our businesses stronger and opportunities to strengthen the businesses that we're in.

Frankly, we haven't seen very much that gets us excited, of late.

I can't add much to that.

Thank you very much.

Our next question is from the line of Ron Epstein with Merrill Lynch.

Please go ahead.

Good morning.

Just a couple quick questions for you.

So, if I understand what you said, you didn't have to pull any orders forward at Cessna, is that right?

Actually orders got pulled our from '03 to '04, they went the other way?

Yes, we did move some out just because we would have had to build -- you have to sell airplanes by serial number and then the FAA insists you actually build them in the order of the serial numbers, so we had guys with orders in for '03, but we had, you know, a few unsold planes in front of them.

Some of the guys choose to -- chose to sign a new contract, take a different serial number and still get their plane in '03.

Others stuck with their serial number and we worked through that with all of them and that resulted in a handful of jets being moved out into '04.

Now, did anything have to get pulled the other way?

Did you pull potential deliveries from Q4 into --

No.

No.

Okay, that's great.

Just a couple more quick questions.

If you can, give us some color on what you expect margins at Cessna to look like through the rest of the year.

Can you offer some insight on that?

The rest of this year, margins at Cessna will be weaker.

For sure.

You know the third quarter, and, you know, it's incorporated into the third quarter guidance, we'll be coming back up out of furlough.

When we come back up out of furlough, we've got all the lines reset for the new jobs and the like.

So we'll have a little bit of a launch curve.

Hopefully, a short one.

We'll also have some of our most experienced people on the job, so hopefully, it will be a short transition there to get back up.

But you know, we're gonna come back up at significantly lower line rates.

We've got big efforts underway right now to further realign -- you know, we've obviously done a lot during the furlough -- but we have ongoing efforts over the course of the balance of this year to realign our overhead costs to the new level of production, and, you know, hopefully, we'll see margins start to pick up from the third quarter going forward.

Okay.

And just one more quick one.

What kind of activity did you see from fractional programs, if any?

We've had no new orders.

You know, there's not -- you know, we don't expect to see much activity, frankly.

Our Citations share -- you know, we only sell to two guys, NetJets and CitationShares.

You know the story with NetJets.

We've already had the big adjustment to schedule with those guys, and CitationShares has already had their full-year plan in to us for orders and they're still marching along that plan.

Okay, and one last very fast one, Lycoming's, kind of, bounced around a little bit.

Can you give us a better understanding of what the margins at Lycoming are like as you move it around in our models?

Let me see if I can.

The issue we've had with Lycoming, obviously, is we've gone through the recall as their numbers have bounced around all over the place.

I'm gonna mislead you.

Right now Lycoming's margins are miniscule, but that still includes some one-off kind of costs.

I'd ask you to call Doug, and maybe he can do an analysis to make sure we're not misleading you on that, because there's some bumpy stuff in there with the issues that we've been dealing with at Lycoming.

I should add one other important point on your fractional question.

And that is that you know, in spite of the fact that this order cancellation has been a big deal to us and, obviously, threw us off track a little bit, the underlying fractional business still continues to grow.

We just saw an analysis through June to June.

So that's this June versus last June.

The number of fractional owners out there has still groan 11% on a 12-month basis, and it was running at higher levels than that earlier.

As a result we get caught with a little inventory bubble.

But we are still, even in what's been a pretty tough economic environment over the 12-month period of time, seeing 11% growth in fractional.

So, I think we ought to just keep that in perspective.

It's not like this business has all of a sudden turned around in the other direction.

It just quit growing at the rate, which was way up in the 20% that it had been growing.

As a result, we got a little bubble of inventory out there and the fractional providers we have to work our way through.

I don't want it to come across as being doom and gloom.

Not at all.

Thank you very much for the comments.

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

Please go ahead.

Good morning.

Hey, Dave.

Back to Jack Kelly's question, General Dynamics had 8 jets orders in April, and May were weak, but much more solid in June and into July.

Was the activity at Cessna leveled throughout the quarter or did orders strengthen like they did at GD?

Hold on, because I think I know that answer.

I'm doing a little backwards math, though.

There's also a phenomenon at the end of the quarter --

The end of the quarter is always stronger.

Yeah, I guess we got a little less than half in June.

Yeah.

On gross orders coming in, June was a little less than half the quarter, but again, to Doug's point there, that's not that odd.

You know, in all sales cycles, stuff happens at quarter ends.

Okay, and Ted, thank you so much for the data on 2004.

I'm gonna push you a little bit.

How many jets are in the 2004 backlog?

We're just gonna stick with giving out the dollars right now.

Bottom line, David, almost 100% of that you know, 95% or 90-something percent of the $800 million, it's over 95, is jets.

And at an average cost of what per plane?

It's going to go up a little bit next year.

It will be a little richer than that with the Sovereigns.

A little -- we feel a little bit better about this year and next, but that's about all we know right now.

Lewis, can you walk us through where we are in the restructuring in the Fastener business?

Sure.

We are making pretty darn good progress on restructuring Fastening Systems.

We've closed probably a lot more plants -- facilities -- than most people realize and are targeted to close even more.

Let me give you some data.

We currently have almost 60 -- actually 59 restructuring projects, all of which have to come through finance and be proved all the way up through Ted, actually.

So there's 59 projects.

They affect 62 facilities. 39 facilities in North America, 17 in Europe and 3 or 4 in the rest of the world.

Our 2003 savings should be about $84 million.

That would compare to -- $83 million, actually.

That would compare to about $60 million in '02, and the current run rate on savings, which would be annualized, saying if we don't do anything else, what's the annualized savings in '04?

That should be about $110 to $120 million.

So we're still pushing even harder to do even more in Fastening Systems.

We recently put in one of our top guys out of Kautex, who has previously exemplified some really good capability to lean down an organizations, into the operations side of TFS.

So I think we've got good momentum and it should continue.

When do you think you'll be done -- not done, but at the point where you'd be more focused on continuous improvement than on restructuring?

Probably near the end of this year, really.

I mean -- near '04, I mean.

Thanks.

Next question, operator.

That's from the line of Jeff Sprague with Smith Barney.

Please go ahead.

Good morning.

A couple more Cessna questions.

Ted, the issue of the serial number sequencing, I guess, should we take that to mean that 180 units for '03 is really kind of top end and the year's kind of locked in at that 180?

No, , not at all.

No, we can build the next unit -- if a new customer comes in, that's not a problem at all with a new order.

It's a problem with the guy that a year or two ago put in the order for number, let's make it up, share number 10, and we, through cancellations now, don't have orders for 7, 8, and 9, we don't want to build 7, 8, and 9, and put them in the inventory.

But if a new guy comes in and wants to buy the next available jet, we can sell him 7.

So we'll be in the range of 180 to 195, and so I would not, by any means, say 180's the top end.

It will be in that range.

And when we look at next year, although the revenues may be flat, is there anything you know, unusual with the margins, you know, launch costs, that sort of thing, that -- you got a positive mix on a unit dollar basis, but is there, kind of, negative margin mix issues as you ramp up for that?

Let me do that one.

Let's see how to talk about this -- the -- first of all, we should take this year as the time where we get more comfortable with the line rate change.

So this year you'll see us go through the learning curve.

Remember, when you reset a production schedule and change the line shift times, then you can do more work in station, but you need less people, so you rift the people out.

Then, since you do it by seniority -- and this is standard operating procedure for any unionized plant -- you then spread the people across different jobs.

So you go through the learning curve this year, which, obviously, wouldn't happen next year.

On the flip side, we'll be launching the Sovereign, and we'll also be launching, later, the CJ3, so I would say that you take the CJ3, which we'll produce -- I think we'll deliver 4 in '04.

Sovereign we'll deliver 13.

New aircraft carry a little lower margins, although higher profit dollars, as Sovereign does, relatively speaking.

So I think the mix will be toward more expensive planes.

We'll have to finish up the R&D on the Sovereign and Citation jet, but we're still focused on improving margins there.

So we should see improved margins, certainly, over this year.

Certainly over what we'll see in the second half of this year.

Oh yeah, well over.

Great.

And just on used aircraft.

Is there any unusual profit in those?

I mean, were they written down a lot, kind of, when we were in the dark days, there?

And having an undo impact on margins?

We had a $1.4 million recovery buried into our total second quarter impact.

You know, we had total used overtrade of about $6 million in the quarter, but that is net of about 1.4 million of recovery.

As we did in the first quarter, we had a little -- it's not a big number, but that essentially means we sold it for a little more than -- those particular planes, for a little more than we had written them down to.

We think we're still on track for overtrades for the year, to be somewhere between $15 and $20 million, and we're hopeful we'll have some additional recoveries going forward ,if the market gets better.

It's not a big number.

Essentially, what that tells you is when we marked them to market, we've gotten pretty darn close.

And also, with the less inventory, you have less worry of mark to market on the remaining inventory.

Less exposure.

Right.

Just a last one, can you just across each of the businesses, just give us the organic growth numbers?

Yeah.

So this is organic growth.

There's, obviously, no significant acquisition divestiture.

So it's all really FX.

Bell was a plus 3.8%, Cessna's down 33%, Fasteners was down 3%, Industrials down 4%.

Thanks a lot.

Total manufacturing down 11%.

All right, was that it for you, Jeff?

I guess it was.

Operator, I believe we have no further questions in queue?

Correct.

Okay, with that, that concludes today's call.

We thank everybody very much for joining us, If you have further questions, Mark and I will be ready by the phone.

Thank you very much.

Have a good day.

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