達信公司 (TXT) 2003 Q4 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.

At that time, if you would like to ask a question, simply press star then one on your touchtone phone.

You will hear an indication that you are in the queue and you may remove yourself from the queue at any time by pressing the pound key.

Again, to ask a question, press star, then one.

If you should require any assistance during today's call, please press star, then zero.

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

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

Please, go ahead.

Good morning and welcome to our fourth 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 SEC filings and also in today's press release.

In December Textron Financial sold substantially all of its Small Business Direct business, reclassified it's financial results to discontinued operations in the fourth quarter.

As a reminder, discontinued operations also included the results of OmniQuip, which we sold during the third quarter.

With Small Business Direct and OmniQuip now classified as discontinued operations, last year's fourth quarter adjusted EPS from continuing operations becomes $1.12 and full year '02 adjusted EPS from continuing operations becomes $3.20.

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

A reconciliation of these items to GAAP measures is contained in our press release, a copy of which has been placed in the 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.

Finally, I would also like to point out that today, total restructuring program amounts that we will be talking about will be net of amounts associated with the former OmniQuip and automotive trim businesses.

Now for a summary of our 4th quarter results.

Revenues were $2.7 billion down slightly from $2.8 million last year.

Our reported GAAP earnings in the quarter were 60 cents per share which included 31 cents per share in costs related to restructuring.

Excluding costs related to restructuring and other special items, our fourth quarter '03 adjusted EPS from continuing operations were 91 cents compared to $1.12 last year.

Now, let me turn the discussion over to Lewis.

Thank you, Doug and good morning, everyone.

I'll begin my comments today with a few brief observations about the quarter and our major accomplishments during the year, and then I'll wrap up before turning it over to Ted, specifically answering a couple key questions.

What do we expect to accomplish in 2004?

And more importantly where are we headed in 2005 and beyond?

Looking back to October we said that we expected fourth quarter EPS would be between 71 cents and 81 cents, and actually, if you think about it, as we look back now and compare the notes we see at that time volumes across most of our businesses were in the end consistent with what we had expected.

Our ability to exceed that earnings guidance and our original expectations was primarily the result of better execution and that is a key theme that I want to press hard today.

That is exactly how I would summarize the entire year for Textron.

A year of improving execution particularly in gaining real traction with a host of enterprise management initiatives.

During 2003 the majority of our end markets continued to be soft.

And with volumes down, meeting our earnings and cash flow objectives required an intensified effort to identify and deliver real cost savings.

And our transformation initiatives delivered what we needed, cost and productivity improvements, which in turn allowed us to significantly offset the impact of the lower sales.

While our restructuring program, up to now, has been providing the most significant and immediate beneficial financial benefit, perhaps the most important transformation issue that I want to continue to highlight today is our deployment of Textron Six Sigma.

You'll recall we launched this initiative in February of 2002.

February 4th actually.

The benchmarking results from other company's experiences told us back then that we probably wouldn't break even until several years in the program.

Well, as you already know we broke even the very first year in 2002.

Furthermore, now, just two years into the implementation of Textron Six Sigma we've trained over 460 black belts, over 1300 green belts, we've completed 532 black belt projects, we've created a common language and philosophy that is literally linking our businesses together and allowing us to leverage the enterprise, something we have been talking about for some time and we've established a new culture of continuous improvement.

Black belts or green belts using Textron Six Sigma tools, now support literally every other transformation initiative including supply chain management and the establishment of a shared service centers.

In fact, Textron Six Sigma is now the way we approach business at Textron.

Literally, the way we analyze and solve problems, the way we improve our manufacturing, or for that matter, in the other business processes, the way we design new products and the way we exploit new opportunities.

During the year we also executed on our portfolio management front.

As you know, we are in the process of divesting non core businesses that just don't fit our strategic criteria.

Last year we divested a unit of Textron Fastening Systems, our interest in an Italian automotive joint venture, and the last portion of OmniQuip.

Plus at TFC we sold Small Business Direct and portions of franchise and media finance portfolios.

In the aggregate, we pruned about $225 million in noncore manufacturing revenues, plus sold or liquidated about 850 million in non core TFC receivables, and therefore we positioned Textron's business mix further down the road of increased future returns and growth.

Now, let me review some of the major accomplishments and achievements and new product introductions at our businesses, and I think it is most appropriate to start with Cessna.

You know, all things being considered, I think Cessna's responses to the temporarily decline in volumes were quick and I think they were effective.

We adjusted our cost structure and smoothly reset production to match near term deliveries, which enabled us to reach almost 9% margins in what I think everyone would consider to be a very difficult change in the marketplace.

In addition we maintained an aggressive new product development program with the Sovereign, CJ3, and the Mustang.

Furthermore, we recently announced two upgrades to our existing jets.

First: the Citation XLS, a faster and longer range version of of the XL; and second; the 2004 Citation 10 now offers an improved interior design and a nice new LED cabin lighting system.

All of these models will begin delivery in the second and third quarter this year.

Our strategy at Cessna of making ongoing operational improvements while continuing to invest in new products is definitely working and it continues to set the foundation for future growth.

Now let's talk a minute about the positive sides we're seeing in the business jet market.

Excluding fractional operators, we booked 106 net orders during the quarter including, as a matter of fact, 66 Mustangs.

That's 106 net orders including 66 Mustangs.

As a result, coming into the year, we are about 70% sold out for our 2004 delivery target of 165 to 170 jets.

Generally speaking, the used aircraft market now appears to have stabilized and activity levels for new jet inquiries is improving.

So we feel pretty good about our '04 outlook at Cessna and even more confident about its longer term prospects.

Now, let me talk about Bell for a minute.

Here is a business that, just two years ago, was in a difficult position and obviously its outlook back then was uncertain.

Now we still have a lot to do here, a lot more to accomplish, but we've made good clear progress.

We've increased our customer focus, we've reduced our costs, we've expanded our aftermarket business, we continue to invest in new technologies, and we've instituted much more robust project management capabilities.

In fact, the V-22 was lauded by the Department of Defense last year as a model program.

As we talked before, the V-22 has been subjected to the most stringent review and has demonstrated it's viability and operational superiority in today's warfare environment.

At this time we have 11 aircraft in flight and another 31 aircraft are currently under contract for delivery in '04 and '05, and I think we're well on the way to seeing the V-22 go into full rate of production.

As a matter of fact, we're fairly confident about that success and we expect to receive authorization to proceed to full rate production in 2005.

Another '03 success story at Bell was the H1 program under which we are planning to remanufacture 180 Super Cobras and 100 Hueys.

In October of just last year, the Defense Acquisition Board gave the program the thumbs up and approved us to produce the first nine limited production aircraft for delivery in 2006.

Just as with the V-22, we expect to receive authorization to proceed to full rate production in '05.

Now moving quickly on to some of our other industrial businesses, Jacobsen continues to launch new products, their Robomax(ph) and MagKnife(ph) are just two examples.

These two, and other new products will drive future growth for them.

E-Z-GO now has launched the new FT4x4 vehicle designed for rugged landscapes and sporting use.

Greenlee launched the new clock and mini cable crimper.

Kautex , as we've talked before, developed the world's first fuel system that meets the California partial zero emissions vehicle standard.

And Textron Fastening Systems, now has introduced the world's first intelligent fastening technology.

Actually involving some pretty sophisticated microprocessing.

I think some day we may have the potential to redefine, literally, how the OEM world thinks about and deploys fastening systems.

Now obviously, these things don't happen without the right talent in place.

So during the year we also made significant progress in improving and developing talent at Textron, ensuring that we have the right people in the right positions with the right skills to get the job done.

Talent development is among our highest priorities and will remain so for years to come.

So in short, while 2003 was a year of execution, it was a year of innovation in preparing for the future.

Now, looking ahead we see 2004 as another fairly tough year, actually.

But, we are confident that we deliver improved earnings and solid cash flow.

Jet deliveries will be down at Cessna, but we expect to see growing strength in orders as the year progresses.

Bell's delivery volumes should be stable in '04, but revenues will actually be down for the V-22 and H1 programs because we are now moving from a cost incurred, to an as delivered, accounting basis reflecting program transition from development to production for both of these programs.

In our other manufacturing businesses we really haven't planned for a major market recovery in '04.

What we have planned on is continued execution of our restructuring program, combined with more progress on transformation initiatives that will ultimately drive further productivity and performance.

And finally, at TSC, we expect credit indicators to continue to improve and drive higher profits.

Then looking ahead to the rest of the decade we believe Textron will deliver a very strong organic revenue growth story.

This will reflect a full recovery in our end markets; the introduction of new products; and the ramp up of the military programs I talked about at Bell.

And the benefits of our transformation initiatives, combined with this revenue growth, will generate increasingly improved productivity and cash flow.

And ultimately, as we advance our transformation strategy and continue to create a truly strong operating infrastructure, the strength of our balance sheet will allow us to add aquiditive(ph)(sic) growth on top of strong organic growth.

Ted.

Thank you, Lewis.

Good morning, everyone.

Thanks for being here with us.

I'm going to start with a review of our results and then Doug and I will walk you through the outlook for next year.

Once again, cost savings drove our results during the quarter as sales volumes were down.

While reported revenues were down $106 million, actual manufacturing volumes were down by nearly twice that amount or $203 million and Textron Financial revenues were down $17.

The positive offsets were $98 million in favorable foreign exchange and $16 million in higher pricing.

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

Earnings from continuing operations of 91 cents were lower than a year ago by 21 cents.

The largest negative driver was volume and mix which accounted for 45 cents.

Inflation contributed a negative 25 cents.

That is about a 2% cost increase.

And pension income was down 7 cents.

On the positive side, we had 7 cents of favorable pricing.

About half percent so not fully offsetting inflation.

Foreign exchange provided 4 cents and cost improvement, obviously the largest factor, was 30 cents.

And inside that 30 cents, 16 cents came from restructuring and 14 cents from the other cost reduction programs.

The tax settlement item we discussed on last quarters' call added $12.8 million on an after-tax basis or about 9 cents a share.

And then finally, there were 6 cents from other miscellaneous items.

So I will go through those again for you , starting with the negatives. 45 cents volume and mix. 25 cents inflation.

And 7 cents from pension income.

The positives, 7 cents for pricing, 4 cents exchange, 30 cents cost savings, 9 cents for tax and 6 cents miscellaneous.

Now, let's go through each of the business units.

And I'll start with Bell where segment revenues were up $50 million and profit was up by $2 million.

Revenues at Bell increased due to higher revenues in both the U.S. government and commercial markets.

But segment profit increased only slightly, as higher volumes were partially offset by an unfavorable sales mix.

Principally more sales of new helicopters versus lower sales of commercial spare parts and service, where we have very high margins.

Backlog at Bell was up $227 million on a sequential basis and ended the quarter at $1.4 billion.

At Cessna revenues were down $276 million, and profit was down 51.

The decline in revenues is largely result of delivering 48 jets this year compared to 82 a year-ago.

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

Profits at Cessna decreased primarily due to the lower sales volume but were helped by improved cost performance, a lower net writedown for used aircraft valuations and higher pricing.

Backlog at Cessna was flat during the quarter ending at $4.4 billion as new jet orders, including the Mustang, more than offset the CJ3 cancellation by NetJets.

And finally, Cessna ended the year with 15 used jets in inventory with a total value of $57 million.

Still a significant improvement on a year-over-year basis.

Next is fasteners, and Fastening Systems reported revenues up $45 million while profit was down $3 million.

Sales volume was actually only up 11 and was fully offset by lower pricing.

The higher revenues were completely the result of a boost from foreign exchange.

Profits decreased primarily due to inflation and lower pricing.

Partially offset by improved cost performance and FX.

So obviously, we still have a lot of work to do to improve margins here.

In fact, a substantial share of the remaining restructuring investments, which I'll cover shortly, are earmarked for Fastening Systems.

Industrial segment revenues increased by $92 million, while profits were down 11.

The increase in industrial revenues was primarily due to foreign exchange and also some higher sales at Kautex.

The decrease in profits was largely due to higher new product launch costs at two assembly plants, inflation, higher warranty provisions, and higher healthcare costs, partially offset by other cost reductions and foreign exchange.

Lastly, finance segment revenues were down $17 million while profits were up $2 million.

The decrease in revenues is primarily due to lower average financed receivables and lower syndication and securitization gains.

And the increase in profit largely reflected a lower provision for loan losses during the quarter partially offset by lower interest margin and higher operating expense.

The lower loss provision was driven by two factors. lower portfolio growth, and an overall improvement ,across the board in portfolio quality.

Nonperforming assets, after adjusting prior periods for the sale of Small Business Direct dropped to 2.8%.

That is versus 2.9 last quarter and 3.4 at the end of last year or a total of $52 million reduction. 60 day plus delinquencies dropped to 2.4% compared to 2.5 last quarter, 2.9 at the end of last year, that's a $31 million improvement.

And chargeoffs on an annualized basis stood at 2.1%.

That's essentially flat compared to the third quarter's annualized rate.

Now I want to spend a few minutes on a couple of other items beginning with cash flow.

Full year cash flow from operations was $681 million, compared to 495 last year.

That results in free cash flow before restructuring of $483 million, compared to our target of 400 and a significant improvement over the $314 million we delivered in '02.

While $109 million of the improvement was the result of the tax refund we received in the first quarter, the balance was principally related to improved working capital management.

Clearly our cash generation capability is improving and we expect it to continue to improve as our volumes recover and the ongoing benefits of our transformation initiatives increase margins.

Let me cover two other cash items that are not included as part of free cash flow.

First, in the fourth quarter, we received $30 million in cash from Textron Financial, reflecting a return of capital from the Small Business Direct sale.

That amount will show up as cash provided by discontinued operations.

Second, just last week, we completed the sale of the balance of our common shares in Collins and Aikman.

So in the first quarter we will have $38 million that will show up in cash from investing activities and on the income statement there will be a corresponding pretax gain of $12 million that will show up in special charges and will not be reported as adjusted earnings.

Now, let me move on to an update on restructuring. 2004 marks the last year of this four year program.

This year we will incur about $125 million in pretax costs but with an after-tax cash cost of only about $65 million.

And, we expect an incremental $100 million in savings in '04 over '03.

So to recap the total program, we now expect to incur about $505 million in total charges; invest about $235 million in after-tax cash; and generate about $480 million in annual ongoing cost savings.

That is $30 million more in charges than we previously communicated to you, primarily as a result of additional head count reductions but cash spending will be less by $15 million, and most important we increased the projected total annual savings by $80 million.

Our restructuring program has clearly been tough on displaced employees, but the savings that we've made are unmistakable and improving the competitiveness and long-term financial performance of our business.

One last area I would like to cover before we wrap up with the outlook concerns pension items.

Preliminary results indicate that our our master pension trust earned about 22% in 2003, which, by the way, is pretty good considering that we started the year with only 51% of the trust assets invested in equities.

As a result of this performance our OCI, or other comprehensive income equity adjustment ,ended up being only $35 million, far less than what we had previously estimated and communicated to you.

Moving on from the balance sheet to the income statement.

We expect zero income from pension assets in 2004 compared to $34 million in pension income in 2003.

That is primarily the result of prior years, not '03, but earlier year's asset performance, as well as the lowering of our discount rate to 6.25%.

We've made no change to our long-term rate of return assumption of 8.9%.

While we are talking about '04 then let's move on to our outlook.

As Lewis mentioned, we are expecting lower revenues at Cessna and Bell and only a modest improvement in our other businesses.

Nonetheless, we expect earnings per share will be up somewhere in the range of $2.85 to $3.05, reflecting the benefits of our transformation initiatives.

And we are projecting first quarter earnings per share will be between 43 and 53 cents.

This year's first quarter earnings reflect the fact that we will only ship about 35 jets.

Down 15 from a year-ago and the impact of last year's summer furlough works its way through Cessnas production line.

We expect cash from operations in '04 will about between 650 and $700 million, resulting in free cash flow before restructuring of between 450 and $500 million.

Roughly speaking, that represents about $410 million of net income if you take the mid point of our earnings range, plus about a $65 million improvement in working capital.

There are a lot of other factors, plus or minus, that add up to -- plus or minus 25 that get to us that 450 to 500 range.

Moving back to earnings, let me walk you through the major drivers between '03 and '04 earnings per share.

Lower volumes and mix will reduce EPS by about 46 cents.

Inflation, net of pricing, is about 75 cents.

We have 18 cents impact from lower pension income.

Nine cents related to last year's -- the last quarter's tax settlement, and finally 4 cents for other miscellaneous items.

Those negatives will be more than offset by about 3 cents from foreign exchange, 6 cents due to last year's replacement of preferred securities with lower cost debt, somewhere between 8 and 10 cents for improved profitability at Textron finance, 50 cents for restructuring year-over-year, and between 90 cents and $1.10 from a variety of transformation initiatives and other cost reduction activities ,and that number is comparable to the performance that we were able to achieve in 2003.

Now, I'm going turn the call back to Doug who'll give you some additional information on our plans for '04.

Doug.

Thanks, Ted.

Let me start with a few items at the operating level.

In '04 we are targeting about 90 basis points of improvement in overall manufacturing operating profit margins.

This reflects a slight margin improvement at Cessna and revenues at Cessna turned in to be slightly stronger in '03 than we previously expected.

So we are now projecting Cessna revenues to be down about 7% from '03 versus the 5% that we've previously discussed.

At the overall Bell segment, we are planning for about 70 basis points of margin improvement resulting from relatively flat operating profits on a revenue decline of about 7% due to the factors that Lewis discussed earlier.

Then at Fastening Systems, with further restructuring and process improvements, we are targeting margin improvement up to 90 basis points with revenue growth in the low single digits.

Industrial segment margins should be up at least 150 basis points, also reflecting restructuring and process improvements, as well as lower manufacturing startup costs and improved credit, warranty, used inventory and other supply chain issues that we worked through in '03.

We expect overall industrial revenues will be up no more than 1%.

Then let's look at a couple of items below the operating line.

With the retirement of the preferred securities last year, we expect interest expense to be up slightly to about $110 million.

Of course, this increase is more than offset by the savings in the preferred dividends.

We're targeting corporate expenses at $140 million.

That is higher than '03, primarily due to lower pension royalty income in '04 and higher compensation expense, reflecting the increasing proportion of incentive compensation showing up on the income statement as we rely more on restricted shares instead of options.

And then finally, we expect our effective tax rate to continue at 30%.

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 feel free to contact us after the teleconference.

Operator, we're now ready for questions.

Ladies and gentlemen, if you would like to ask a question, press star then one on your touchtone phone.

We will take the first question from the line of Nicole Parent with Banc of America Securities.

Please, go ahead.

Good morning, guys.

Good morning, Nicole.

First could you just comment on the Bell margins?

How much were spares and services off in the quarter?

And what you are, I mean, I think you said you're looking for 70 basis points of margin expansion in '04?

How does the spares and services business pick up throughout the year?

I don't know if I have the exact number.

We can dig it out, Doug.

I don't know if I have that handy.

Okay, I can ask another question while you look.

I think we maybe can find it.

Just give us a minute.

The finance business was exceptionally strong and you cited lower provisions for losses.

The guidance for next year, of '04, is pretty strong and is that primarily driven by the better quality of the business?

Absolutely.

We think we are in most of the businesses starting to see some significant improvements.

I -- you know, it is a lumpy business and we are just in the early stages of seeing some market improvements.

So I wouldn't say we are on a perfect glide path, but clearly, over the course of next year we expect that the ratios will all see improvement on a year-over-year basis and we expect to see a meaningful reduction in our chargeoff levels in '04, much more significantly, though, in '05.

I think '04 will be a year we will continue to work through a few issues but clearly we will be stronger than '03 and we are looking forward to really having a much stronger position by '05.

Great.

The Cessna backlog in the quarter looked flattish which was expected I think.

As we look at the expectations for the backlog in '04 how should we think about it?

And could you also just provide a little bit of color on the fractional market, the NetJets order that went to Raytheon and what that does?

I think you gave us a net number X fractionals and how does that number look in the quarter?

I can talk a little bit about the fractionals for a minute.

I think the fractional business has remained pretty darn strong if you look at NetJets, Citation shares primarily those two together are the most important to us.

Just a few facts and figures, in '03 we expected about or we actually achieved about 16% of the total units shipped from Cessna went to either NetJets or Citation shares.

And based on a pretty conservative look for '04, we are saying somewhere between 15 and 20% of our production will go to the fractional business and that is 15 to 20% of of the 165 to 170 that I mentioned earlier.

I think one of the things that is beginning to really catch hold, we talked about this last time, is this everybody has a different name for it, is the jet card which allows people now to very easily get into a 25 hours of a business jet without having to put a big capital slug down.

And so that jet card is kind of like the latest improvement now in the fractional business which is kind of propelling growth.

We have a fairly modest if you go back over the last four years we had 13% in 2001.

We had 20% in '02, 16% in '03, 15-20 in '04, so fractional is kind of hanging in there and kind of a pretty predictable percentage of 10-20% of any given year.

Okay.

And Nicole, sorry but the parts and service decline at Bell in the fourth quarter was about $20 million versus the prior year.

I would equate that almost completely to just the timing of shipments.

That business in prior quarters had actually been trending upwards so I don't think it really portends anything for the future.

Great, just one last question on restructuring.

You indicated the forecast for the actions went up $30 million due to additional head count reductions.

Where are those occuring?

Well, we have taken them in a number of different places.

We have done some restructuring recently at Textron Financial where we took a whole layer of management out.

Cessna has continued to take out heads a little more aggressively than what we had originally predicted based on their resetting their line rates.

And then throughout the variety of other industrial businesses.

Really spread all over the place.

Okay.

Great, thank you.

Our next question comes from the line of Steven Volkmann with Morgan Stanley.

Please, go ahead.

Good morning.

Hi, Steve.

Steve.

A couple of details.

First, were there securitization gains on finance in the fourth quarter?

There were some.

They were down.

Let me see if I can dig that one out.

I'm also curious about this comment in your press release about the increased warranty charges.

Okay.

We did have.

Doug will dig out the securitizations.

On the warranty side the industrial business, just to be even more clear, we had a number of things that I would characterize as, kind of, one time issues that we had to struggle through in the quarter.

The largest was two launches, the launch of the GMT400 at Windsor, which is kind of a good news / bad news story.

We starting launching this product and the customer had tremendous sales of this truck and took the volumes way up and frankly, we really struggled and suffered through being able to meet our customers demands, and we spent a lot of money doing it during the fourth quarter.

And we also moved our cell phone case production from Arizona to Mexico during that quarter.

We ate up about $14 million of launch costs in Q4 around that.

We also incurred some one time warranty costs, if you will, I don't know if you could call them one time, maybe that is too strong a word, but some specific issues that relate to some products in both our Kautex business and our fluid and power business that resulted in about $8 million in, what we would call incremental warranty expense, over our normal run rate during the quarter.

We think all those issues are behind us in the quarter but they did have an impact.

Doug, did you get the --

Steve, for securitization and syndication gains together, we were down 8.2 million from a year-ago.

That parses out 2.9 for securitization and 5.3 for syndication.

Okay, great.

That's helpful.

From a strategic perspective, maybe for Lewis, we've talked about the portfolio restructuring quite a bit.

Is that largely done now or is there as you kind of move forward is there more that can be done on that side?

Well, you know, I think the way to think about that is we -- TFC you know, has really made good progress.

They kind of and I have been really proud of the work they have done.

They are ahead of schedule in my view.

I didn't think they would make the progress they have made.

We had identified I think, all total, we have probably taken out close to a billion of their assets and we have got more to do there, and we have plans to do it, and we haven't taken any hits to profit as a result.

So we are doing this in kind of a measured way.

On the rest of our businesses I don't think it would be fair to comment too much about our forward thinking but I think we have some more progress we need to make.

We are focused hard on improving everything that we have, whether it is a business we intend to keep or long-term intend to divest of.

We are not in a hurry to make other moves but on the other hand, we've got some ideas in mind that we might want to put in place over the next couple of year.

Okay.

That is helpful, thank.

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

Please, go ahead.

Good morning, gentlemen.

Hi, Ron.

I have a question with respect to Fastening Systems.

There was a press report out about Greenville, Mississippi, and some operations moving there.

I was wondering if you could just give us some more color on the restructuring in Fastening Systems and what's going on, and what is going to move to Mississippi. 'Cause, I mean during the quarter, I think at least with regard to our forcast, everything was pretty much in line or better except Fastening Systems.

Ours, too.

We obviously have more work to do there and we are -- we are aggressively working at getting capacity utilization in the right place and cost structure in the right place in that business.

What we're doing specifically with Greenville is closing three plants in the mid west, and consolidating not a hundred perc - not a perfect one for one, but the easiest way to think of it is, we are taking all of the operations out of three medium sized plants, in fairly high cost areas and consolidating them all into one single facility in a lower cost area where we have very attractive incentives to come into the market there and that is a big step.

These are three - We closed a lot of smaller plants and these are three pretty good sized plants that are going to be closed and consolidated in this one location for a very significant cost improvement.

At one point I think there was some talk of moving some things offshore to lower costs.

We are.

Is that -- what is the status of that?

We are doing all of that.

We expanding our plant in (INAUDIBLE) China.

Right now we have already pretty well filled up all the capacity that we have.

And we are putting an addition there to be able to put more into that market and then selectively we are continuing to outsource some of the product to a variety of low cost global providers.

Some of those three plants products will go offshore but not the majority of it.

The majority of it is going into Greenville.

Great, thank you.

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

Please, go ahead.

Good morning.

Good morning.

Regarding Cessna I was wondering if you could provide more color on the backlog.

I think in the past you provided kind of a breakdown by year, perhaps '04 and '05.

The backlog is $4.4 billion.

We are about 70, just barely over 70% sold for the 165 to 170 we are going to deliver for this year.

The backlog for '05 is about the same as we told you last quarter.

Bust about a billion dollars.

And the rest is in further years.

Right, okay.

Great, and you know and then your comment about being 70% sold out for '04.

And you know, it seems like you expect some of the order activity to kind of, you know, to improve for the rest of the year.

Do you think that 165, 170 forecast can be, you know, maybe too conservative?

I mean just a hypothetical?

No, I think that is what we are going to do. 165 to 170.

You know maybe a few units off here or there.

But, you know, our line rates are largely set and that is what we are planning to do and what we need to do to achieve our objectives this year and once we get those sold we will start booking orders for '05.

For '05, I mean I know it as long way out but you know in terms of you know kind of an initial look at the line rate, you know, that it kind of being proposed, I mean what do you think is sort of the upper limit in kind of the ramp up rate?

Obviously, you know, probably can't see like, you know, double in rate but, you know, could we see 50% or even a 30% pickup?

It to early to tell.

Just kind of jumping at a high level.

Can you provide an update on the overall business condition out there?

I think last time, at a conference, you kind of mentioned in terms of the industrial businesses you weren't seeing any, you know, significant improvement outside of Greenlee.

I can comment a little bit on that.

We just had -- as we do we each month we had a big meeting with all the operating guys and talk a about who is seeing things move positively.

I would have to say you see a few more signs of improvement in different pieces of our portfolio.

There is some happening here in the U.S.

A little bit negative in the European side.

I would say it looks a little better this quarter than it did last quarter, but it's really, I still think '04 is too soon to claim we will see some pickup in '04 and that is why we are not planning on any.

We really think pretty much '04 close to '03 with a little bit of up in some of the markets.

I think Doug tried to cover that in his discussion about revenue increases in some of our industrial segments.

But you know I think the interest rate story is going to be interesting for all of us.

I think automotive has got to stay strong in the U.S., I think housing has got to stay strong in the U.S., I think it will.

But it is -- you know, it is still not -- we are not seeing enough strong signs yet to declare that we are on the launch curve so we are taking a pretty conservative view.

Okay.

Great.

Hopping back to Cessna, just a quick question.

You know, the NetJets cancellations of the CJ3, were there any cancellations fees and were there any change in terms for the remaining jets in backlog for NetJets?

That is a pretty competitive situation there and there is a lot more to that story than I think it is fair to talk about on the call.

But I -- you know, NetJets is a really good customer of ours.

We have a great relationship with them.

Jack Pelton, our new leader at Cessna, has met with Rich and the leadership over there and they have a good team in place, think we got a good team in place.

We are still really working well, together so I wouldn't over react to that.

We have taken some business over the years from other guys too which we always brag about.

Sometimes you loss them.

Didn't like losing this one but it wasn't the end of the world for us.

We got through that.

Thank you very much.

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

Please, go ahead.

Good morning.

Hi, Jack.

Lewis, you talked about, you know, maybe further divestitures, et cetera, but maybe looking on the other side a number of the peer companies and just broadly speaking, acquisition activity has picked up here in the last two to three months.

In the past I think you will have talked about, you know, tools, professional tools as many one area you are interested in.

But maybe Lewis just looking ought over the next 6 months or so give us your view of potential acquisition activity?

I know it is tough to predict, tough to talk about but but just maybe some general color.

And then, Ted, if you could just give us a number on, you know, the loss on used aircraft sales for the fourth quarter as well as the full year '03 and what you kind of have embedded in the forecast for '04 when you look at that 90 basis point pickup in margins for Cessna.

I'll do the acquisition piece first, Jack.

Let's see now, the way I would talk about that would be in this way.

We are not aggressively trying to acquire a major portion of growth in '04.

We really are focused on execution.

We are focused on what I talked about in my portion of the presentation this morning.

Because, you know, we have a known capability now that we have defined in '03 that we are gonna mine '04, and so that is our primary focus.

But, the markets are tending to look a little better now.

There are some deals that are beginning to look a little more interesting to us.

We had identified the tools area earlier and that is still a good one for us.

We have taken a look at a couple things that didn't quite make sense.

I don't think you should expect us to make any big moves here.

We have some things at Bell we are looking at to expand in the very profitable sales and service area, which really worked well for us when we did the acquisition about two years ago I think it was.

We are going to do some more of that.

Cessna has ideas on improving their sales and service.

There is not really many properties out there that I can think of that are available in the aerospace world, other than sales and service.

So I think you will see us move there which is I think a good move for us.

Kind of like adding an annuity.

I don't see us doing too much else.

You know, we have always got our eyes open.

We have really increased our search process, if you will.

Let's see.

You would have to say Textron Systems has got their eyes wide open on a few ideas.

You won't see real big moves but some pretty interesting product enhancements to what they offer capability wise.

Bottom line, I wouldn't expect any moves on acquisitions this year, Jack.

The answer to your question, the used aircraft valuation adjustments in the fourth quarter was $3 million which made the full year of '03 $22 million and our plan for '04 is about 12.

Um-h'm. $12 million.

Really been sequentially improving over quite a few quarters here and we think we have largely got that behind us.

Plus, you know, we are not carrying a large number of used aircraft in our inventory so to speak.

We take planes on trade and then we refurb them as we need to and sell them, and we've got -

We are down to $57 million.

Down to $57 million.

Not a historical low but pretty close.

Things are beginning to look up a little bit on that.

You've got to see the used market stabilize and improve before the new market picks up, and we're starting to see some of that.

This is the last question, Ted.

As you look at the fastener business you have the margins roughly under just a little under 4%.

You mentioned that is where the bulk of the restructuring is probably going to be in '04.

If we were to look at it -- an as margin for fasteners let's say in the fourth quarter of '04, where do you think it could be?

I mean you're gonna be getting some savings from what you did in '03.

Maybe some savings for what you do.

But as as you move into '05 where could the margins be just on the restructuring savings?

Just on the restructuring savings?

Yeah.

At least a couple of points higher.

Okay.

All right, thanks.

I agree with that.

Yeah.

Good, thank you.

Yep.

Our next question comes from the line of Greg McGowen with Langenberg & Company.

Please go ahead.

Hi.

Good morning.

It's Greg filling in for Brian.

Good morning.

First of all, I was wondering if you could break out core M and S and FX by segment?

What?

I'm sorry, you broke up.

I'm looking for core M and A and FX breakup by segment.

Can you do that?

Hold on.

Let me find that.

I mean there is very little M&A so let me give you organic growth rates excluding FX?

Right.

Bell, this is for the quarter, Bell was up about 8.

Cessna is negative 30.

Fasteners is positive 1.

Industrial businesses are up 5%.

Okay.

And you said there was very little M&A, right?

Yeah, very little.

The only thing of any consequence is at the finance company.

Got you.

Okay.

And going over to Cessna I know you're looking at 165 to 170 in 2003, and I have seen that some of your competitors are thinking they might do a little better year-over-year so I wonder why you're guiding us to the same type of level at 165 to to 170.

Because that's what we're planning to do.

Is that capacity constraint?

No, not capacity constraints but it is --

It is a long cycle business and once we set the production rates for the year we are not going to move them tremendously and that is the number that we have set for the year based on our current order boards and what we think order intake rates are going to be and that is what we are going to do.

Let me add one more thing on that comment, because you mentioned some of our competitors.

You know, I continue to say and I stand by when I continue to say that we have the best bar none product line-up in the markets that we I'm aim to serving versus any of our competition.

There is no comparable company that offers the number of Models and there is no comparable company that offers the variety of Models in the two main areas that we focus on in the business jet market.

We are not in the very large.

We don't compete against the Gulfstream 5G35 or G4 or the global express and then if you look at our other competitors, they are just -- there is no comparability so if you look in -- in our market space, we will continue to keep the same share if not more share in the available sales in those market spaces so no matter what you are reading about somebody else when we finish this year in '04 we will have equal to or better than market share than when we went into '04.

That's what I I was looking at.

That's what I was trying to get at.

That is a key point.

Let me add one thing to that.

When you look at '04 being down from '03 it is more a function of the rollout schedule of the new airplanes.

Sure.

Than it is market dynamics per se.

Other than the systemic down tun that we are having to basically when you look at Cessna the driver of incremental jet sales is very much related to when we rollout a new model and obviously with the CJ3 and sovereign just introduced late they are year that picks up more in '05 than in '04.

To answer the question a little differently we said we weren't et con trained but that in that case we have a normal launch cycle for those two jets.

We are pretty good at launching new jets so if we could bring them out sooner we would sell more of them because there is a good backlog. 2005 is going to be a big year for those two aircraft and '04 a launch year.

And the converse to what I said we wrote off of the CJ1 in 2000 so the early tail of that is coming down now.

Yeah.

And finally, the Bell V-22, the opportunities for four military customers, I was wondering if you might be able to talk about that because I think that based on what I have been reading there is like a certain amount of interest in the V-22 by four military customers.

First of all, there are no contract negotiations or anything like that going on so you got to start there.

Okay.

This would be a long-term, not a short-term thing as far as foreign military sales.

But if you just trace the history of military helicopter sales, whether it is ours or anybody elses, usually when we put a significant new ship into the inventory of our armed forces, it is not -- it is just -- it is not -- I was going to say it is not unusual, it is expected that eventually foreign military sales occur because the NATO forces want to be pretty much aligned with the ships that we have in our inventory here in the United States.

So I think the V-22 really is a longer term prospect for us but it is a really a strong , strong store tray has really picked up over the last two years for a couple reasons.

You know, it has really been through the scrubber and it is coming out to be a model program which if I would have said we were going to do that two years ago you wouldn't have believed me.

Secondly the other armed forces in addition to the marines are beginning to take a look at the V-22 because it goes out and comes back before any other helicopter gets throughout.

Speed has always been the factor in almost any product you have ever tried to sell and final hi seeing interest in unmanned tilt rotors, little V-22s if you will and the reason you are seeing that is you don't need a flat surface to land or takeoff on and they are fairly reliable.

Use them again and again and again without the use of a crashed when you try to land a fixed wing unmanned vehicle.

I think we have a good forward story on the V-22 and I wouldn't expect foreign military sales until the end of the decade probably.

Foreign military sales probably good but too early to start talk anything kind of numbers, right.

That's right.

We a good launch story on the V-22 any way so we are happy with what that is going do for us.

Thank you very much.

Yep.

The other calls in queue operator?

We do have question from the line of Steve Seral with Asset Management.

Please, go ahead.

Can you, first of all, refresh me your definition of free cash flow?

Is that before dividends?

Yes.

Okay and if you're not planning on inch the way of acquisitions pry pry or advertise where the cash flow will be used.

We will have dividends, first of all, which will be down next year.

We had the odd quirk of calendar that in '03 we paid five and in '04 we will only pay three so dividends will be about $135 million.

We our best estimate right now is that we will have to spend between 150 and $200 million repurchasing stock in order to offset dilution from objection ex- sighs in other benefit programs during the year.

So that those two things will take up a good portion of about half of the cash.

And the rest of it, you know, is to be determined based upon what kind of opportunities we find out in the marketplace.

Do you expect that -- I'm assuming not much in the way of debt reduction?

Well, we're -- we are in good shape there right now.

We are at finished the year at about 29.5 debt to cap which is several points ahead of our stated objective to kind of be in the low to mid 30s.

So we are in pretty good stead there.

We could do that for the short-term but I don't think you know reducing leverage from where we are right now is not a strategic objective.

No.

Sounds like the pension plan is in good shape so won't need to put any money into that this year?

We don't anticipate any big runup. , we put $25 million to $30 million into our intentional unfunded plans on an ongoing basis.

The funded plans end up '03 fully funded.

The underfunding is all the result of executive plans, some union and foreign plans where we intentional don't fund them up so we will continue to be putting that kind of cash in, $25 million to $30 million a year going forward.

It takes a pretty brutal stress test on the big master plans for us to have to put any cash in them for 1E6B years to Dom.

Later all right, ladies and gentlemen, that concludes our call for today.

Thank you very much for your time.

We will be talking with you soon.

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