達信公司 (TXT) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron earnings conference call.

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

Later, we will conduct a question and answer session.

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As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. Doug Wilburne, Vice President of Investor Relations, please go ahead.

Good morning and welcome to our third 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 forward-looking statements are subject to various risk factors which are detailed in our S.E.C. filings and also in today's press release.

In August, we completed the sale of the remainder of our OmniQuip business to JLG Industries.

We reclassified the financial results from this business, as well as all of the previously sold OmniQuip businesses as discontinued operations in the third quarter.

Please note that last year's third quarter adjusted EPS was 68 cents.

However, with OmniQuip now classified as a discontinued operation, last year's adjusted EPS from continuing operations was 71 cents.

EPS for '03 year to date was not affected because OmniQuip was approximately break-even through the date of its sale.

The earnings per share in cash flow amounts that we will discuss today will be from continuing operations and before restructuring costs and other special items.

The reconciliation of these items to GAAP measures, as contained in our press release, a copy of which has been placed in the investor relations section of our website at www.Textron.com.

A reconciliation of any additional nonGAAP measures that we may discuss today will also be placed in that section of our website.

Now, for a summary of our third quarter results.

Revenues were $2.2 billion, down from 2.5 last year, reflecting lower volumes at all of our businesses except Kautex and Textron Systems partially offset by the favorable impact of foreign exchange at the Fastening Systems and industrial segment.

Our reported GAAP earnings in the quarter were 34 cents per share, which included the following after-tax items; 18 cents per share in costs related to restructuring and a 7 cent per share charge for unamortized issuance costs related to the redemption of $500 million in preferred securities in July.

Excluding these items, our third quarter '03 adjusted earnings per share from continuing operations were 59 cents compared to 71 cents last year.

Now, let me turn the discussion over to Lewis.

Okay, Doug, thank you and good morning, everyone.

Now, we are pleased that we were able to turn in earnings above our guidance in spite of slightly weaker demand than we had expected in most of our industrial businesses.

And, kind of a summary, our favorable performance came from four primary areas: First, we continued to make progress on the cost front across the entire company, including lowering corporate expenses.

Second, Cessna actually over achieved relative to our internal estimate, after their seven week furlough, work force downsizing and production line reset.

Third, we had slightly stronger than expected sales at Kautex, they are doing well this year and finally, through good tax planning, we were able to reduce our ongoing effective tax rate retroactive to the beginning of the year and Ted is going to talk more about that in a minute.

On the other hand, we are still not pleased with the margin performance at Fastening Systems or industrial.

Now, we are making significant cost reductions in these businesses but unfortunately, so far, the lower sales volumes have consumed the savings we have been able to generate.

On the positive side, we expect sales volumes and, therefore, margins and operating profit to increase in the fourth quarter due to the normal seasonality of that business and you can be sure we will continue to aggressively execute our restructuring program and all other cost reduction initiatives.

During the quarter, there were a number of important accomplishments and developments and I am going to review some of those with you now.

Let me look at Cessna first: In addition to having managed the restart of their manufacturing operations, I think they did a good job there, they were also very effective on the sales front.

As we announced last week, we are now 100% sold out for delivering 195 jets in '03.

When we reset our redelivery expectations back in March, we said we would deliver between 180 to 195 jets this year.

At that time, the Cessna team was confident that the market would support deliveries at the high end of the range and they delivered.

We now expect that the market will support somewhere in the range of 165 to 170 new Citation jets for delivery in 2004 and, obviously, with 2003 sold out, the Cessna team has shifted their attention to selling the open slots for 2004 and I would say that kind of brings me to the next topic which is last week's National Business Aviation Association Convention.

At the convention, we basically brought forward two upgraded jets at the show.

The first is a Citation XLS, a faster, longer range modernized version of the very successful XL.

The XLS will come with a more potent engine, it will actually fly 33 knots faster and also go 225 nautical miles of extended range.

Now, we also are pretty excited about an interior lighting innovation that we are introducing.

Cabin lighting in the XLS will be based on a new LED system, that system is superior to the traditional products because it is easier to maintain, lighter in weight, produces less heat and has a longer life.

We are offering the new XLS at pretty good price point, too, $9.9 million which includes a standard options package based on the most popular options chosen by previous XL customers and the reason I bring that up is that's a real win/win for us because it adds value to our customers who buy our products and, also, we can manufacture these products more efficiently because they are consistent in their option makeup.

The XLS begins to roll down the production line later this quarter and first deliveries will happen in the middle of next year.

Also at the show, we announced an upgraded interior for the Citation 10, which will begin production shortly and be available for delivery beginning early second quarter of next year.

The new 10's interior includes improved, larger passenger seats, upgraded pilot seats, a new cabin control system and new LED cabin lighting.

Overall, I would have to say NBAA was a very positive event for us, in fact, I think Cessna probably had the most positive news at the show.

We took in over 300 provisional orders for our new single engine piston aircraft, for example, and that was driven by a major change in the cockpit area where we've now added Garmin's new G1000 all glass integrated avionics system.

We were also encouraged by renewed customer interest in purchasing jets and we believe we could book up to probably 20 new orders, as a result of the activity at the show.

So, at Cessna, our strategy of continuously introducing new and improved products is working.

I thought I'd also give you an update on the Mustang.

Remember, that is our all new entry level jet introduced at last year's NBAA and I think it provides another good example of Cessna's ability to hit the market right between the eyes, so to speak.

During the quarter, we began the process of converting the provisional orders that we talked about previously.

Remember, we booked those as provisional because the contract required us to specify the engine and avionics system before we can go to firm customer contracts.

Well, we finalized that now and we have just added 145 Mustangs officially into our backlog and that is worth $365 million.

So, that 145 number in backlogs should go to over 200 Mustangs by year end in backlog.

Okay, the combination of investing in new aircraft and making ongoing operational improvements, I believe, is setting the foundation for good future growth and increased profitability at Cessna.

There are also clear opportunities for future growth at Bell.

During the quarter, we continued to make progress in both our commercial and government businesses.

On the commercial side, we continued to expand our parts and service business, which is good and by the end of the quarter, we began to see an improvement in orders for new commercial aircraft.

On the government side, as we have discussed previously, we continue to pass important milestones with the V-22 and H-1 development programs and as we have talked before, you know, we were keeping these programs on track because they are important to us, we expect them to reach a combined annual revenue rate of about $2 billion by the end of the decade.

Our other defense related business, Textron Systems, also performed well during the quarter and this is another good growth story.

Today, Systems is best known for its precision strike weapons, the most famous would be the sensor fused weapon and the tai actuation system used on J-down but Systems is rapidly becoming a leader in both the intelligent battlefield and sensor and surveillance markets.

In fact, they recently won some strategically important development contracts in each of these areas, including the Terrain Commander for the Australian Ninox program, a future combat system related program called Intelligent Munition Systems, and unattended ground sensor programs for both U.S.

Army and U.S.

Air Force.

Clearly, we are very pleased with System's performance, its growth prospects and also for the opportunity to contribute to our Nation's Defense and Homeland Security efforts.

Moving on to our industrial businesses, Kautex is performing very well, they obviously continue to ride the penetration curve in the conversion from steel to plastic fuel systems and second, I think probably more important, they are the technology leader in their market space and an increasing number of OEM customers are specifying their fuel systems on their best performing platforms, so, good news there.

And third, you know, Kautex has an intense culture of relentless process improvement and that has made the company really world-renowned as a component manufacturer and my point here would be, just this past month's issue of "Industry Week", Kautex had two manufacturing facilities that were recognized by "Industry Week" as two of the top ten plants in North America, so, that is quite an accomplishment.

To some degree, all of our businesses are learning from Kautex's example of how to drive world class manufacturing processes and, obviously, that is what we are all working toward.

Turning quickly to Fastening Systems, as I mentioned earlier, we are disappointed with this performance and we are working hard to pick up the pace of improvement here.

The entire management team is focused on accelerating the progress and we are also, still very focused on streamlining and restructuring their manufacturing facilities, in fact, you may have noticed earlier this week, we announced the closure of two additional major Midwest plants and we are currently in negotiations for a third plant closure.

With this type of action, we know it is tough, we know it is tough on employees but it is absolutely necessary to improve the competitiveness and performance of this business.

My summary would be, first, our operational improvement programs are generating real results, they are enabling us to weather the current weakness in demand.

Long return, we are optimistic about our prospects for future growth, as we continue to invest in new products and services and we are making excellent progress with our major government programs.

In addition, the operational improvements that we are implementing today are taking costs out of the enterprise permanently.

Going forward, we believe that the combination of a growing industrial economy, production ramp ups of our new products and a much lower cost structure will translate into accelerated financial growth.

Ted?

Thank you, Lewis.

Good morning to all of you and thanks for joining us in what I know is a very crowded earnings release morning.

As Lewis indicated, we slightly outperformed our expectations for the quarter but we continue to be in a weak revenue environment and, for the most part, cost savings are what are really driving our results.

Similar to last quarter, to really appreciate the cost improvements we are achieving, you have to understand what happened at the sales line.

Revenues were down $242 million versus the prior year but actual volumes were down $327 million.

The offsets were $68 million in favorable foreign exchange and $25 million in higher pricing and Textron Financial revenues were down $8 million to complete that analysis.

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

Earnings from continuing operations of 59 cents were lower than a year ago by 12 cents.

The largest negative driver was volume and sales mix which accounted for 55 cents.

Inflation contributed a negative 17 cents, that is about a 1.6% cost increase and pension income was down 10 cents.

On the positive side, we had 11 cents of favorable pricing, or about 1.1%, so, only partially offsetting inflation.

Foreign exchange contributed 3 cents positive and cost improvement was obviously the largest factor at 51 cents and inside of that 51 cents were 17 cents from restructuring, 23 cents from our other transformation initiatives and 11 cents from overall better performance and lower corporate expense.

We had 3 cents in higher earnings at Textron Financial and then, finally, 2 cents positive from a number of other miscellaneous items.

So, let me just recap those for you one more time, starting with the negatives; 55 cents volume in mix, 17 cents inflation and 10 cents from pension income.

The positives; 11 cents for pricing, 3 cents for foreign exchange, 51 cents of cost savings, 3 cents from Textron Financial and 2 cents of other.

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

Bell segment revenues were down $5 million while profit was up by $36 million.

Revenues were down due to lower commercial helicopter sales, partially offset by higher U.S.

Government helicopter volumes.

Segment profit increased principally due to the cost of last year's recall in customer care program at Lycoming, as well as this year's higher revenue and favorable mix in the U.S.

Government helicopter business.

These increases in segment profit were partially offset by lower earnings in our commercial business primarily due to lower aircraft sales.

Backlog at Bell was essentially flat and ended the quarter at $1.2 billion.

At Cessna, revenues were down $229 million and profit was down $53 million.

The decline in revenue was largely the result of delivering 42 jets compared to 74 a year ago.

Higher pricing and higher sales of spare parts and service partially offset the decline.

Profits assessed a decrease with the lower sales volume but were helped by improved cost performance and higher pricing.

Backlog at Cessna increased $279 million during the quarter and ended up at $4.5 billion.

Backlog of $4.5 billion includes approximately $850 million for deliveries now in '04, that's a $50 million increase over last quarter, as the sales force has now shifted their focus to selling aircraft for '04 delivery.

At this point, we are a little more than 50% sold out based on our anticipated deliveries of 165 to 170 jets next year and considering the current level of activity in the market, we are on track to meet that schedule.

While we are still working to finalize our operating plans, I know that next year's revenue at Cessna is on the top of my mind for many of you, so, I am going to provide you with some rough and very, very early guidance.

Although we expect jet unit volume to be down between 13 and 15%, next year's mix will be slightly richer, as it includes the new Sovereign and combined with modestly favorable pricing and continued growth in our parts and service businesses, Cessna's revenues could be down less than 5%.

At this point in our planning cycle, even with revenues down slightly next year, we hope to be able to achieve comparable profitability at Cessna.

This, of course, is going to be dependent on our ability to achieve our targets for cost reduction and operating improvement but, I have got to tell you, we are working very, very hard on those subjects.

Next is fasteners;

Fastening Systems reported revenues decreased $7 million and profits decreased by 11.

Sales volume was actually down by $34 million and was partially offset by a $32 million boost from foreign exchange and pricing also had a slight negative impact on revenues during the quarter.

Profits decreased primarily due to the lower sales volume and unfavorable mix.

Improved cost performance in foreign exchange offset the impact of inflation and pricing.

Industrial segment revenues increased by $7 million and profits decreased by 13.

The increase in revenues was primarily due to foreign exchange and higher sales volumes at Kautex and was partially offset by lower sales volumes in the other industrial businesses, particularly at E-Z-GO and Jacobsen.

The decrease in profit was largely due to the lower sales volume and unfavorable sales mix.

Improved cost performance and favorable exchange were offset by inflation and pricing.

Lastly, finance segment revenues were down $8 million while profits improved by $5 million.

The decrease in revenues was primarily due to low average finance receivables and lower securitization gains and the increase in profit largely reflected lower provisions for loan losses during the quarter, partially offset by higher legal and collection expenses.

For the third quarter in a row, Textron Financial has shown some stabilization in its credit statistics.

For example, nonperforming assets dropped to 2.9% compared to 3.2 in the second quarter and 3.3 at the end of last year.

Sixty-day delinquencies dropped to 2.5% compared to 3.2% in the second quarter and that is a $39 million improvement.

However, year-to-date charge offs, on an annualized basis, now stand at 2.3%, compared to a full year last year of 2.2.

We expect full year charge offs will end this year approximately flat with last year and, longer term, the charge off should track the positive trends developing in our delinquency and nonperforming asset levels.

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

Year-to-date, cash flow from operations was $300 million, compared to $33 million during the same period last year.

This resulted in free cash flow before restructuring of $183 million this year, compared to a use last year of $99 million or a $282 million improvement for that nine-month period.

While $108 million of that improvement was the result of the tax refund we received in the first quarter, the balance was driven by improved working capital management.

As Lewis mentioned, part of our performance during the quarter was due to a lower tax rate.

The lower rate is primarily due to a reduction in unbenefited foreign tax losses.

Our ongoing effective tax rate on our basis business operations should now be about 30% and we expect that we will be able to maintain that rate, at least through all of 2004 and possibly beyond.

The rate change was worth about 3 cents in the quarter, as it was a cum catchup for the balance of the year, for all of the year.

Another tax issue that is going to affect our results this year is a prior year Federal tax dispute settlement that was resolved just two days ago.

That settlement will result in a benefit to fourth quarter earnings of about 9 cents a share and that is unrelated to the reduction in our ongoing effective tax rate.

So, you will actually see the rate be lower in the fourth quarter for that item but the ongoing rate is at that 30% level.

Now, let me quickly address corporate expenses which came in at $19 million and, at first glance, probably caught your attention.

While we have been successful in managing corporate expenses down, there were some timing issues in the quarter and we do expect that the full year will come in somewhere around 120 to 125 million, so I wouldn't want you to think that 19 was a new run rate for us but it was, obviously, a very good quarter.

One last item that I want to cover before we wrap up with our outlook, is pension asset performance and pension expenses.

Preliminary reports indicate that our master pension trust has earned about 12.7% through the end of September, so, we are having a pretty good year.

As you know, the realized return on assets is one of the two primary factors that are going to determine the impact on our pension costs for '04.

The other factor is the discount rate which has bounced all over the place this year and we won't really know the answer until we see the prevailing rate at the very end of the year.

So obviously, we are not going to know what our pension costs are going to be until we speak to you in January.

However, we had previously indicated that we expect about 14 cents in higher pension costs for '04 based on, at the time, our expectation of a discount rate of about 6.75%.

The rate could well come in a little bit below that and, just to give you some understanding there, every 25 basis points under that will impact our earnings in '04 by about 2 cents.

Also, back during our first quarter call, I talked to you about the fact that we should probably anticipate another noncash adjustment to equity through other comprehensive income for pensions at the end of this year.

I indicated, at the time, that based upon pension performance, based on discount rate, that could range into the several hundred million dollar range in the worst case scenario.

Fortunately, our pension plan asset performance and interest rates are far from that worst case scenario and based on current rates and returns, the OCI adjustment is likely to be well down at the lower end of that range, probably somewhere just north of $100 million and, obviously, that is subject to moving around a lot but we will keep you up to date on it.

Now, let's move on to our outlook.

With better performance in the third quarter, continued cost performance and the expected tax benefit coming in Q4, we are increasing our earnings per share target for the year from our old estimate of $2.40 to $2.60, to a new range of $2.60 to $2.70.

That means that we expect fourth quarter earnings to be between 71 cents and 81 cents.

Also, we expect that cash flow from operations for the year will come in at about $600 million and that will result in free cash flow before restructuring of about $400 million which is at the top end of our prior range.

Now, I am going to turn it back to Doug and we would be happy to take your questions.

Thank you, Ted.

That concludes our prepared remarks.

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

If any of the media have questions, please call me after the teleconference and, with that, operator, we are now ready for questions.

Ladies and gentlemen, if you wish to ask a question, please press star then 1 on your touch-tone phone.

You will hear a tone indicating that you have been placed in queue, you may remove yourself from queue at any time by pressing the pound key.

If you are using a speaker-phone, please pick up the handset before pressing the numbers.

Once again, if you do have a question, please press star 1 at this time and our first question comes in the line of Steve Volkman with Morgan Stanley, please go ahead.

They also messed up bad there, Steve, good morning.

Is he there?

Mr. Volkman, your line is open.

Operator, perhaps we can go to the next call, we will get Steve back in.

Certainly.

Our next question comes from the line of Jack Kelly with Goldman Sachs & Company.

Please go ahead.

Good morning, just two questions, one on Cessna, one on the guidance that just went over, Ted.

On Cessna, if we look at the margins on a sequential quarter basis, meaning third over second, they sell off to about 6% and they were kind of running 10 plus and you said, basically, revenues were down 10% and profits down over 50 and it didn't look like the mix changed that negatively.

Could you just talk about, give us a little color on that, is it because of the realignment you were referring to and, therefore, can we expect margins assuming shipments get back to 46 jets in the fourth quarter which is what you are your estimate would imply, that we are getting back to a more normal margin level?

Yeah, I think if you look at the downside conversion on the loss of revenues in the quarter, Cessna downside converted about 25% which, given that kind of a falloff on a quarter to quarter sequence, is a pretty darn good performance but obviously, we are going through a significant period of change with the line rates being reset, with a lot of people working in new jobs and that is going to continue, I think, into the fourth quarter, to some extent.

We've still got some file ons, happened in a lot of departments but we have got follow on impacts of that as it works its way through the build cycle of a jet.

So, I think we have got another quarter, in the fourth quarter that is going to come in pretty comparable to where we were in the third quarter from a margin standpoint and then, obviously, we have got a lot of additional cost reductions we are still executing at Cessna.

We are, unfortunately, still in the process of taking more head count out and realigning our overhead structure to the expectation of the 165 to 175 jets next year, so, we clearly expect to see margins improve significantly in the '04 time frame but in the fourth quarter, I think you are going to see something pretty comparable to what you saw in the third quarter.

And then, in '04, we would just see a ramp up from that, you know, roughly 6% level?

Yes, we would hope, I mean, if we are going to, I know you guys can always say we gave you specific guidance, we are really trying to be as open and honest with you as we can about what we think right now and what we are working on.

You know, it is our desire that if we can bring Cessna revenues in, you know, down less than 5% because we have got pickups in mix and pickups in parts and service and maybe a little modest price improvement, etc, that, at that level, with a cost structure fully in place by the time we get into the early part of the year, we will be able to hold our NOP levels pretty much comparable and by comparable, I mean counting plus or minus 10% to this year but we have got a lot of hard work to do to do that and we are working really hard on it.

Just on the guidance, basically you went from midpoint of 250 in the previous guidance to, let's say, 265, so we are up roughly 15 cents.

Well, no, I had a range, Jack, from 240 to 260, I didn't have a point estimate but, go ahead.

Okay but just taking the mid points for argument's sake, we can start from the low end.

Let's assume, let's say we start at 240, to be conservative.

Bottom line here, you are bringing up the guidance by 20 cents at the low end, 10 cents at the high end.

Is it fair to look at it, you know, you picked up 3 cents from the tax rate in the third quarter and another 9 from the special item in the fourth, so, that is kind of 12 cents of the increase.

And then, looking at special charges that you talked about or were in the reconciliation in the June statement, special charges were 97 cents then and 89 cents now, so, that is 8 cents less on the special charges and I am sure there are other puts and takes here but it looks like more than the increase in the guidance, you know, came from just those two items?

Well, the guidance is before special charges, so there is nothing in the guidance related to any changes in special charges.

The guidance is before restructuring special charges and, yeah, you know, we picked up a dime.

So, we are clearly saying, we are at the top end of our old range plus a dime is I think, or up to a dime is the way to look at it and that up to a dime, clearly, is coming from the tax benefit.

Okay, good, alright, thank you.

We have a question from the line of Dan Whang of Lehman Brothers, your line is open.

Yes, good morning, everyone.

Hi, Dan.

How are you?

I was just wondering, could you just, from a high level standpoint, can you just provide an update on the business jet market from what you said in the second quarter, I think, one of your competitors noted they had experienced a couple of cancellations from Net Jets and I am just trying to see how the environment is.

Yeah, I will do that, Dan, this is Lewis.

You know, the facts we put out are pretty clear that we, obviously, feel better about the market this year because we now have sold out to the top of our range, 180 to 195 and we feel good about the range we put forward for 2004, 165 to 170.

So, that tells you, as I said in my press release, that says for our business jets, we are seeing, you know, some strengthening.

How much is some?

You know, is a little too early to tell but, obviously, we feel better about the market.

We haven't had any cancellations, we took all our cancellations earlier in the year from the fractional shares that we sell to Citation shares and Net Jets.

So, quite frankly, I think we have done all we need to do there, so, I don't see that changing much for our product lines although, it is understandable, you know, it's kind of hard to compare Cessna to almost anybody else right now because we really are so strong in the light and mid size and that tends to be probably the more popular jets right now, so, you know, we will just see a slight improvement in the market but my view at that is it is a little too early to tell.

All right, good.

Just jumping over to industrials, can you provide a little bit more detail in the current market trends at E-Z-GO and Jacobsen and what you see going on there?

Well, there is a little bit of a different story in each of those.

In all cases, you know, the golf market is going through a tough year.

Obviously, we have got the economy, we have had some bad weather issues in some parts of the country with courses and then we, frankly, have the situation of some over building that occurred in the boom years, in the late 90's and that is all kind of working its way through the cycle.

You know, both of those businesses in the quarter saw revenues down in the double-digit range.

A little bit different story in each of them.

E-Z-GO has had a little bit of volume decline due to the market but a lot of margin pressures that are kind of one time things, we had some inventory corrections, we had some bad debt issues that we hope we are getting past there on the E-Z-GO side and, if you take some of those one-time things away, margin performance was pretty good in that business.

We hope the market is going to pick up here as we get some of the excess wrung out of the system.

Jacobsen, you know, we have seen some weakness in a number of the turf markets and we, frankly, have just taken an aggressive position to take production levels down in order to insure that we keep field inventories well under control in the turf care business until we see some more solid signs of stronger revenues there.

So, we are taking production levels down for the next couple of three quarters in order to insure that we are well protected there and then I think, you know, as we get into the middle of next year, we will start to take those back up again.

Let me add some, just for a little more on both of those, we have also really stepped up the pace from the marketing side at Jake and they've got a brand new, across the product line, marketing effort, a new look, a new logo and they are also trying to push their products, not only into the golf world but also, into the non golf world.

So, there is a lot of grass being cut other than on the golf course and we intend to get more of that grass cut by Jake equipment.

On the E-Z-GO side, you know, we also are pretty now in moving into the utility market and some of the traditional nonE-Z-GO markets, we talked about Clay's car for a minute, which is a car designed for the guy who shoots sporting clays and, eventually, we will get even more involved in that business.

So, in addition to what Ted said, you know, you can expect us to be more aggressive in the non golf field using what these guys are good at, both Jake and E-Z-GO and expanding market share there.

Great and finally, on Textron Finance, I think it was about a year ago that you talked about, I guess, approximately, 18% of the portfolio being earmarked as being noncore or in runoff mode.

Can you provide an update on that in the portfolio at this time?

I will have to try to do it off the top of my head but we have made substantial progress.

We have sold probably, out of about $250 million in three different traunches of sales out of our franchise finance business, all of that went to GECC.

We sold probably about 50% or about $140 million worth of our media finance business in a couple of different transactions to Foothill and to Wells Fargo.

All the other businesses where we have shut down our originations efforts and our focus soley on collecting and running down those portfolios with the one exception, which is our Small Business Direct Business out in Little Rock and, there, we are really working a pretty successful turnaround program.

We have actually grown the receivables there as we are trying to improve the overall strength of that portfolio and get better performing business there so that we can position that business for a sale at a future date, probably, you know, sometime out in the early '05 area.

So, we have made good progress but this will be a long term program.

I would add, though, you know, TFC is really good at running off businesses, you know, when I came to Textron 11 years ago, we decided to run off a big piece of real estate receivable base and we did very well from the standpoint of running those receivables off and selling them but not taking a loss and, so far, year-to-date we have got a slight positive as far as.

Yes we are a net small gain.

Right.

On all the dispositions to date.

And just to put this in perspective, that real estate portfolio, we had zero loss but it took seven-years, so, it was well done but it is not going to be an overnight effort but we feel like we made really good progress this year.

You know, if we can get Small Business Direct up to a level of performance where we can get a nice transaction on that by sometime early in 05, that takes a big, big chunk out of what we are trying to accomplish.

Okay, great, thank you very much, I guess I will turn it over to someone else.

We have a question from the line of Ron Epstein of Merrill Lynch, your line is open.

Good morning.

Good morning, Ron.

Two questions for you, one along the Cessna line and one about Fastening Systems, why don't we start with Cessna.

Next year, you brought up the number 165 to 170, what gives you comfort about that?

I mean, can you give us any color on what you have been seeing in orders or anything that just kind of, you guys feel better about that?

Sure, we are never going to say anything with absolutes relative to the market but, right now, we have sold a little over half of what we need to sell for next year.

We have seen cancellation rates, really come down here of late, I mean, we had a couple, I think, in all of the third quarter.

If you just look at the run rate of order intake in the third quarter and you mix out, you know, not every order we took in the third quarter was for, obviously, we sold out '03 in the third quarter and then we took, let's just say, well more than a handful of '04 orders during that time period.

Now, our attention is going to be focused heavily on the '04 time frame.

If you just take the order intake rate of activity in the third quarter, you add to that, that we have a fairly significant number of LOIs and/or provisional orders that we took at NBAA, they don't show up in any of the backlog numbers that I shared with you because they still have to be converted into final contracts and cash deposits before we will count them as orders and put them into backlog.

If you just take that run rate, we are pretty comfortable that we will get to the 165 to 170 level, you know, we are also seeing a lot of people showing interest in the ability to capture the bonus depreciation levels which really works perfect for us, if you think about it.

We are fighting a battle to get through '04, so we can get to '05 backlog where the Sovereign and the CJ-3, you know, start to have some real numbers in backlog that we can deliver, so, '04 is kind of our challenge year and now, we have this 50% bonus depreciation sitting out there expiring at the end of '04, so, I think that is also going to be a plus.

You know, I won't tell you where we have got double the number of orders coming in every day that we need to get to that number but, if the run rate of the third quarter continues throughout and, you know, hopefully it will improve with the economy improving but if the third quarter run rate just continues, then we feel pretty comfortable we will get inside of that 160 to 175 range.

That is what we are basing that on.

Okay, okay.

About Fastening Systems, I mean, is it safe for us to assume, if we look at this before restructuring expense, that Fastening Systems actually was zero margin or lost money?

Can you just give us some color on what is going on in Fastening Systems?

Fastening Systems made money during the third quarter but it was not acceptable and a very disappointing quarter for us, you know, volumes fell down in third quarter, below more that we'd expected, in particularly in some of our higher margin businesses inside of fasteners and, kind of caught up all of the positive work than has been done on the cost side but we have got to do a lot more and we are going to do a lot more.

I think you can expect to see fasteners margins improve well into the fourth quarter and then see some much more substantial improvement next year.

We really have turned up the pace of restructuring.

These three plants that we have just announced this week, are very substantial, they are much larger plants than the smaller fastener plants we have been consolidating to date.

In fact, from a charge standpoint those three plants represent about 15% of our total Textron-wide restructuring effort from a charges taken standpoint, so, they are pretty meaningful.

We are going to get at, starting that effort real quickly here and it will take several quarters to proceed but there are some other programs coming down the pike, so, you know, we know we have a lot more work to do.

We are very disappointed with the performance of the fastener business in the third quarter.

We hope to see a big improvement in the fourth quarter and then continuing improvement through next year.

The meetings I had I guess with Lewis and Steve, that the topic of moving some fastener systems manufacturing offshore was brought up.

How does that stand?

Where is that going?

We are doing some of that, as we speak, into facilities that we have in China and in Mexico.

These three plants that we are dealing with will be moved to a lower cost area as well.

Some of that is going to go offshore, not all of that is going to go offshore, it is going to be consolidated and we will end up in a lower cost area.

Okay.

So, we are making progress but again, we have got a lot of work to do.

We know we have a lot of work to do but I think we have the team on the field to get it done and we have a plan that we think will work which is just a tough plan to execute and it is going to take some time.

Okay.

Thank you.

We have a question from the line of Greg McGowan with Langenberg & Company, please go ahead.

Good morning, this is Greg McGowan

Hi.

I was wondering if you could quickly go through the segment and break out sales by core M&A and FX for me?

There is no M&A to speak of, you know, other than OmniQuip which has already been broken out as a disc. op., so you really don't have any other pieces other than foreign exchange.

THe numbers are; fasteners sales were positively impacted by 32 million of FX, so without FX,, sales were down 9% and the rest of the industrial group was positively impacted by 36 million from FX, so, excluding FX, revenues would have been down 4.2%.

Okay and do you have anything for Bell and Cessna?

No impacts.

Great, thank you very much.

All right, operator, do we have any other questions in queue?

At this time, there are no further questions, please continue.

Okay, well, obviously it is a very busy morning, so, if there are those of you on the call who do have questions, if you want to call into the IR office later, we will be here to take them.

In the mean time, we thank everybody for joining us today and that concludes our call.

Have a good day.

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