達信公司 (TXT) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Textron first quarter earnings conference call.

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

Later, the company 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 conference over to our host, Vice President of Investor Relations, Mr. Doug Wilburn.

Please go ahead.

Good morning.

Welcome to our first 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.

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

A reconciliation of these items to GAAP measures is contained indeed 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 non-GAAP measures that we may discuss today will also be placed that section of our website.

Now, for a summary of our first quarter results.

Revenues were $2.4 billion, down $45 million from last year.

Our reported GAAP earnings in the quarter were $.26 cents per share, which included 36 cents per share in costs related to restructuring and a $.06 cent per share gain on the sale of our remaining common stock holdings in Collins (inaudible) Corporation.

Excluding costs related to restructuring and other special items, our first quarter '04 adjusted earnings per share were $.56 cents compared to $.54 last year.

Now let me turn the discussion over to Lewis.

Good morning, everybody.

Thank you, Doug.

We have a solid quarter.

Good top line growth as fastening systems, Caltex and Greenlee, strong orders at Bell and Cessna.

EPS slightly ahead of the top of our target range.

I thought excellent cash flow performance, and good cost execution across all of our businesses.

In fact, I'm going to start with that execution point.

A little bit later Ted will walk us through the (inaudible), but I want to make the point that cost benefits of our transformation efforts were evident in our first quarter results.

Consider that we were able to overcome a number of challenges, such as the impact of shipping 34 jets versus a 50 a year ago, lower sales at Bell, higher steel costs and some continuing operating issues at our Windsor Caltex plant.

Clearly, the benefits of transformation activities primarily restructuring, integrated supply chain management and Textron 6 Sigma delivered the productivity improvements we needed.

As I think about our future performance, you know we are developing momentum with our integrated supply train and Textron 6 Sigma activities.

As a matter of fact, the savings from these programs were up more than 10% from a year ago, and we have plenty of additional opportunity going forward.

At as I mentioned, we also benefited from higher revenues at most of our non-aircraft businesses.

The signs of recovery are beginning to emerge in some of our end markets.

Even at E-Z-Go and Jacobsen, our golf-related business, which were essentially flat during the quarter from a revenue standpoint, we're beginning to see prospects for improvement.

Let me give you examples.

February marked the fifth month in a row that rounds played were up versus the prior year.

While this was in large part weather-related, we believe it signals the beginning of a gradual come-back.

As another example, our dealers at Jacobsen are projecting a stronger retail market versus last year.

So we're expecting a positive sales result in the second quarter at both E-Z-Go and Jake.

Turning to Greenlee for a minute, strong retail sales in electrical tools and European plumbing business were matched with solid new order rates.

With (inaudible) in power, we're in the process of pruning non-profitable product lines and accounts and our cost reduction efforts are beginning to bear fruit there as well.

Now, just to be clear for a minute, organic growth was actually down a bit at fluid and power, even though reported sales were up, due to the impact of foreign exchange and some improved pricing.

Caltex on the other hand, again generated solid organic growth during the quarter.

We also locked in future growth by signing up two new fuel system platforms, one for Volkswagen, one for Nissan, and this is for production at multiple facilities around the world.

In addition, Caltex was awarded a new development and production order for a high value window washer system.

Finally, at Fastening Systems, solid organic sales gains in the quarter -- those were really the results of several of our end markets improving year-over-year.

Fastening Systems also advanced its full service provider strategy, adding programs with two automotive suppliers during the quarter.

Now let's move to Bell and Cessna.

While sales were down, the order environment was decidedly strong.

Bell had its best heli expo trade show since 1998 and we booked a total of 48 commercial orders during the quarter.

Now, while I'm on Bell, let me give you a quick update on the V22.

During the quarter we surpassed the 1700 hour mark for total flight testing time and we delivered two additional units.

Overall, the program remains very much on track, but we continue to develop and implement numerous process enhancements to improve the reliability of the supply chain, to tighten production product quality and to reduce costs.

Our next major milestone is coming up in June with another Defense Acquisition Board review, and then we'll begin preparing in ernest for operation evaluation, or op eval as we call it, scheduled to begin in January of 2005.

Cessna also had an excellent first quarter.

We booked 70 net new jet orders.

In fact, we increased our jet production plant for 2004 to reflect the higher demand.

So we now expect to deliver between 170-175 jets in 2004, up from our previous plant of 165-170.

In addition, the used market showed further signs of stabilization and improvement during the quarter on both the pricing and availability basis.

As a result of the stabilization of pricing, we incurred no costs for used aircraft market valuation.

This is the first time we have not made any mark-to-market costs in over three years.

Now, while we have budgeted for modest amount of used market costs this year, we may still see some impact in later quarters actually.

You would have to say it's pretty encouraging indeed to see these prices begin to stabilize.

The market seems to have absorbed a significant amount of used inventory during the quarter, as used aircraft availability actually declined.

We now have only 13% of the total fleet now currently for sale worldwide.

In fact, we sold 12 of our used units during the quarter and ended up with only five used aircraft in inventory.

So all in all, we're encouraged by what we're seeing in the jet market.

To wrap up on the quarter for Textron, in spite of a number of unexpected head winds, we slightly over-achieved our plans.

Looking forward to the rest of the year, we believe that 2004 will be both a positive and an important year for Textron.

It will be positive since we deliver improved year-over-year earnings and it will be positive due to the benefits from our transformation activities combined with modest growth in most of our businesses.

It will be important because we're making substantial progress building the foundation upon which we'll deliver superior shareholder value, not only this year, but also well into the future.

I mentioned a solid foundation.

This foundation will include a world class enterprise operating infrastructure, a portfolio management process that will continue to allow us to sharpen the focus among the companies we operate, an improved backlog of jets at Cessna, solid progress on the V22, H1 and other military programs at Bell and Textron systems and continued improvement in the talent and result in performance in all of our businesses.

Now let me turn the call over to Ted.

Ted?

Thanks, Lewis.

Good morning, everyone.

We appreciate you all being with us here this morning.

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

Earnings of $.56 cents were higher than a year ago by $.02 cents.

In spite of the fact that unfavorable volume and mix cost us $.31 cents a share and virtually all of that was from lower jet deliveries at Cessna.

Inflation contributed a negative $.21 cents, that represents about a 1 1/2, 1.9%, excuse me, increase.

Pension income went to zero in the quarter, contributing a non-cash, but negative, $.04 cents.

On the positive side, cost improvement had the greatest impact on our earnings during the quarter, contributing $.43 cents and of that, $.14 cents came from restructuring.

We also produced $.04 cents from favorable pricing, foreign exchange added $.04 cents, and Textron Financial was up $.04 cents and finally, we had about $.03 cents of other miscellaneous items.

Let me go through that one more time, starting with the negatives.

$.31 cents volume and mix, and $.21 cents of inflation. $.39 cents for cost savings.

That's net of the $.04 cents of pension, and then $.04 cents each for pricing exchange and Textron's financial and $.03 cents for miscellaneous.

Now let me go through each of the businesses and I'll start with Bell.

Bell segment revenues were down $29 million, while profit was up $12 million.

Commercial revenues were down due to lower foreign military and commercial helicopter unit volume, partially offset by higher aircraft engine shipments.

And U.S. government revenues were essentially flat.

Segment profit was up.

As a favorable mix in the commercial businesses, a charge at the aircraft engine business in 2003, and higher spares volume in the U.S. government business were only partially offset by a proposed settlement between Bell and the U.S. government to resolve a potential claim.

And backlog at Bell Helicopter ended the quarter approximately flat at $1.4 billion.

At Cessna, revenues were down $170 million and profit was down $37 million.

The decline in revenues was largely the result of delivering fewer jets, as Lewis mentioned earlier.

Profits at Cessna decreased primarily due to the lower jet volume, but were helped by improved cost performance, lower used aircraft overtrade allowances and some modest pricing.

With the strong order intake, backlog at Cessna was up $329 million during the quarter and ended at $4.8 billion.

As a result, we're now about 90% sold out to the mid-point of our higher target to deliver between 170-175 jets.

During the quarter, we also added to our order backlog for deliveries in 2005.

At this time, we're planning to deliver north of 200 jets next year, and I got to tell you, it's way too early to say how far north of 200 we're going to be, but we thought it was important to share with you our thoughts at this time.

Next, let me turn to Fastening Systems.

Fastener's revenues were up $68 million and profit was up $2 million.

The increase in revenues was the result of higher volumes and foreign exchange.

Profit was up due to improved cost performance, higher sales volume, and exchange, but was partially offset by inflation and lower pricing.

One of the components of inflation during the quarter was significantly rising steel prices.

As steel prices escalated during the quarter, we took appropriate action to impose surcharges, but we were only able to recover a portion of the higher costs in the quarter.

With surcharge arrangements now in place, we're in a position to recover more completely any abnormal costs for the rest of this year.

Industrial segment revenues increased by $92 million and profit was up by 13.

The increase in revenues was primarily due to exchange and also higher sales volume at Caltex.

The increase in profit was largely due to improved credit performance, fair market value adjustments for used golf cart inventory last year and improved cost performance.

Profit increased despite operating issues that we continue to experience at our Caltex plant in Windsor, Ontario.

The quarterly impact of that was probably on the order of about $10 million.

We're making progress in addressing those issues, but they could take a few more months to resolve.

Finally, finance segment revenues decreased $6 million while profit increased $8 million.

The decrease in revenues was primarily due to lower finance charges from lower average receivables reflecting our continued liquidation of non-core assets.

The increase in profit reflected in an improved net interest margin, a lower provision for loan losses, and lower operating expenses.

The decrease in the provision for loan losses was driven by an improvement in portfolio performance and lower average receivables.

Credit statistics continued to be fairly stable or improved during the quarter.

Non-performing assets came in at 2.9%, compared to 2.8 in the fourth quarter. 60-day, plus, delinquencies were at 2.4%, essentially flat with the fourth quarter, and charge offs on an annualized basis stood at 1.5%.

That's a significant improvement over the fourth quarter's annualized rate of 2.1%.

Moving on to cash flow.

Free cash flow before restructuring was $161 million.

That's a positive number, by the way, compared to a use of $62 million last year.

Now, it is normal that we expect to be users of cash in the first quarter.

It's a period in which we typically build inventories at many of our businesses, most notably at Cessna.

This year, in addition to good working capital management, there were a number of other items that led to positive cash flow.

For example, we took in stronger customer deposits on new orders at both Bell and Cessna.

We significantly reduced customer trade-in inventories at Cessna and E-Z-Go.

Dividends from Textron Financial were higher than normal, due to the liquidating non-core portfolio, and we had stronger payables performance than we would normally expect, which is really a timing issue for the year.

Now, let me turn to our outlook.

We expect full year earnings per share will now be between $2.95 and $3.15, reflecting slightly higher operating performances in most of our businesses.

Now let me give you a little color on our quarterly and full-year targets.

We feel pretty confident about our full-year outlook, given what we saw in the first quarter in terms of cost performance and a pick up in demand.

However, we do want to be clear that our target for the second quarter is challenging, as we expect to deliver only between 35-40 jets in the quarter.

Then, as you think about the rest of the year, keep in mind that higher volumes at Cessna and the third and the fourth quarter will leverage profits and margin.

Now I'm going to turn the call back to Doug.

Thanks, Ted.

Let me clarify just one thing.

Unless I miss heard you, I think you said $161 million for free cash flow.

I think it transposed with the $60 million U.S., so it's $131 million, $131 million.

Okay.

Okay.

Now, going to the outlook items, I'd like to start with some operating issues first.

We're now targeting a total manufacturing revenue increase of about 3%, up from last year, and total manufacturing profits will be up approximately $75 million.

At Cessna, we're now projecting revenues could be up slightly, with an improvement both in margins and profits.

Following up on Ted's comments about Cessna's progression through the year, we expect slightly him proved margins in the second quarter and then in the second half of the year as deliveries pick up, will return to double digit margins.

At the overall Bell segment, we still expect a revenue decline of about 7% for the year, with relatively flat operating profits.

At Fastening Systems, we are projecting on a percentage basis, that revenues will be up in the double digit range with a high teen percentage improvement in profits over last year.

We still expect industrial revenues will be up by a low single digit percentage, with margins up about 150 basis points and then Textron Financial will have relatively flat revenues, but we expect between $20-25 million improvement in operating profit.

Our full year targets for items below the operating line, free cash flow and restructuring costs and savings, remain pretty much consistent with what we discussed January.

However, while our total expected pretax restructuring costs have remained the same at $125 million, you may have noticed on our GAAP reconciliation table that the after-tax EPS impact of restructuring costs are now $.65 cents per share compared to $.60 cents previously.

This is solely the result of the reevaluation of the tax deductibility of certain restructuring costs associated with the number of non-U.S. projects.

So that concludes our prepared remarks.

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

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

At that, operator, we're now ready for questions.

Thank you.

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

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

Please go ahead.

Yes.

Good morning, everyone.

Good morning.

I was hoping you could provide a little bit more clarification on your delivery expectation for '05.

I think you said, you know, 200 aircrafts, plus.

I mean what is that based on?

I mean, maybe is it the current outlook over the current backlog for '05?

Any details would be appreciated.

Yeah.

I can give you our thinking right now.

Again, I want to make the point that this is, you know, it's very early in the cycle for us to be getting too specific about '05, but I know that's something that's on everyone's minds so we wanted to kind of share what we're thinking right now.

Right now, if you take the firm orders that we have in hand for '05, plus a most reasoned expectations of what the fraction natural market is going to take, which are not all necessarily in firm order right now, we've got about two-thirds of that 200 number sold for '05.

And based on our expectation of continuing order intake, and by the way, we don't expect to sell 70 jets, or take orders for 70 jets here in the second quarter.

The first quarter was very strong and there were some carry-over from last year, so we don't expect to see it continue at that rate, but based on what we do expect to see from an order intake rate and the orders that we have on hand today, you know, we think we're going to come in somewhere north of 200, but it really is too early for us to get more definitive than that.

As we move through the course of the year, we're now largely sold out, or 90%-ish for '04, so we'll start to take more '05 orders in the next couple of quarters and we'll get more definitive as we go along, but we just wanted to let everyone know kind of what we were kind of thinking right now.

Okay.

Thank you.

I can't be any more specific than that until we get further down the road.

I understand.

Again, based on backlog and a reasonable expectation of additional orders, and you feel pretty confident about 200 and then maybe potential upside from there?

Yeah.

Dan, this is Lewis.

Let me add to that a little bit.

We did say north of 200.

I think that's a pretty good statement to have out there for right now.

You know, there are some, there are some macro and micro reasons why we think that's pretty good number for today.

And that is first, we've always said that corporate profits had to come back before the business market would come back and I don't think anybody's arguing that that's the case because, every day you're seeing profitability of major corporations up relative to the prior years and so that drives future orders.

Second, we have refreshed our product line in '04 and of course we're bringing out two new jets late in the year, the C3-- CJ3 and the Sovereign.

They will be in production the following year, '05.

Next, you have to say that Cessna really has a very, very strong position in the markets they're in so we really are not facing any unusual competitive entries that of course could delay our growth in certain market segments.

So we are well positioned with product.

We have a tremendous brand name.

Our customers, our major corporations have more profits and, therefore, we've gone for years and years and tracked profitability, corporate profitability, with deliveries and they track just unbelievely well.

Remember, it's an 8-quarter lag.

So I think there's some real good underlying reasons why the jet business is coming back.

Then you just underscore that with the used market and, you know, it's pretty clear to me that the used market stabilizing because that percentage of availability, available for sale is creeping down a half a percent to a percent each quarter.

So all those factors are really very, very positive.

And then of course underlying the fact that the Sovereign and the CJ3 are ramping up, we think 2005 could be a pretty darned good year.

Okay.

And jumping over to Bell, I think in the release and also Ted had commented about the, I guess, the proposed settlement between Bell and U.S. government.

Is this regarding the royalties received from (inaudible) take regarding the VA 609?

Yes, it is.

You know, I don't want to get too much more specific about this other than we have had some conversations.

This has been a long-standing issue.

It's been out there for six years now, and we have made a proposal to try to resolve the issue.

The proposal has not yet been accepted.

You know, we continue to believe we're 100% right on the issue, but we're trying to get it to go away, but we have made a proposal.

And as a result, we expensed our proposal, but the proposal has not been accepted yet.

That's about all I can tell you on that issue, as you might appreciate, it's sensitive until we get it resolved.

Okay.

I guess I'll hold off on that one.

And then finally, in terms of the foreign currency exchange impact, company overall impressed by segment?

Yeah, the big FX impacts for-- let's just do on the revenue side.

Sales year-over-year were up $96 million due to foreign exchange, 32 of it's in Fasteners and 64 of it is in the industrial businesses.

Great.

Thank you very much.

Our next question comes from the line of Jeff Sprague with Smith Barney.

Please go ahead.

Thanks.

Good morning.

Hi, Jeff.

The, the orders in the quarter are kind of interesting and encouraging if I kind of think about it.

I mean you took 70 orders.

You're only raising your, you know, your '04 delivery guidance, you know, 5, which kind of clearly indicates those orders aren't some mad rush to beat bonus depreciation.

Am I reading that the right way?

And can you give us a sense of, you know, those 70 orders?

Are those, you know, how many of those actually fall into '05 or later years?

Well, just over 40 were for '04, so about a little over half would be for '04.

The balance are for '05 and later years.

Bonus depreciation, you know, that's a factor, but it's not as big a factor.

You know, it's really a very big plus, but there is not a rush to get the orders in to get the bonus depreciation number.

We're pretty much sold.

A lot of these orders don't qualify.

They don't qualify because they're foreign orders or something?

Well there, are some, and they are orders that are out past the period, the end date now.

Yeah.

We were working hard and we would love to see that end date extended and we think it would be a plus, but that's really not driving the number for '04.

We're pretty much done.

And could you, Ted or Lewis, also just give us a little color on, you know, the comment about '05, you know, what you viewed as kind of a reasonable expectation for the fractionals?

They have been a little hard to nail down over the last 18 months or so and have surprised some people with some cancellations.

Why do you think that's going back the other way?

Well, I don't think we have it going back the other way, per se, in our assumptions now.

We just-- we have orders that sometimes aren't specifically slotted yet, so in order to get a good view of what's sold for '05, we have to make some assumptions on that piece, not on the other piece.

And so we have made what we think are very reasonable assumptions to say that we're about two-thirds sold against the 200 number for now.

You know, that won't be the number in the end, but for now, 200 expectation for '05.

If you didn't sell any additional into fractional, you know we're still well over half sold for '05 without it.

So it's a range that's in there.

We just have to make an educated judgment on it and we've done so.

Yeah.

Let me just add a few more comments.

First of all it, appears that our major customer in fractional business is really pushing hard into Europe now.

In fact, we're having trouble supplying them with enough of the jets that they want.

So that's a good sign.

Secondly, in that north of 200, we don't really have any historically high percentages for fractional ownership in that guidance of north of 200.

You remember the last time on the call I gave you the percentages in our total deliveries at Cessna for fractional, which would be the combination of net jets and citation chairs.

In '01, it was 13% of our total production.

In '02, it was 20%.

In '03, it was 16%, and we don't have that kind of percentage number in our, in our north of 200.

We're a little bit-- you know, we would be in kind of the low teens, I would say.

So if the fractionals, you know, the wild card here is-- the wild cart is the jet card-- the jet card both the net jets, citation chairs and really the unique deals that are coming out now to allow you to get into fractional usage of business jets without having to put the capital dollars down, that really is driving more demand than I think people have recognized yet.

At least that's what we're seeing.

So I think, what I really think is happening on fractional now is people are getting this taste of a business jet by being able to put $100,000 down and then fly 25 or 30 hours.

Then they get used to it, then they fly more hours.

Then they eventually sign up for a fractional piece and put the capital dollars down.

And hopefully, that prediction will come true, but that's kind of what we're seeing as far as the citation chairs and I think in net jets you'll see the same thing.

Just one final one.

You gave us the FX by segment, which kind of allows us to roughly back into organic, but there a little bit of M&A.

Could you give us the organic numbers for the main reporting segments?

Yeah, sure.

Bell is, you know, not much in FX and Bell Cessna.

So Bell was down 5.6.

Cessna was down about 28%.

Fasteners, up about 9.

The industrial businesses were up 4.

Kind of an all in Textron industrial, do you have a number?

Down just under 6.

Great.

Thanks a lot.

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

Please go ahead.

Good morning.

Good morning.

Good.

Couple questions.

On the overtrade number that you have in your budget.

Lewis, is that number remains a zero, which it was in the first quarter.

How much do you have kind of 15-20 budgeted that could flow back if you don't have any overtrade loss?

Hey, Jack, it's-- it's several million.

We're not going to get specific on it.

It's part of the total planning at Cessna and, you know, it's a potential upside, but I-- yeah, I wouldn't count on that and, you know in, a major way.

It's not that much money, but it's enough to cover what we think could possibly happen to, you know, close a possible deal or what have you there.

We got a few more jets coming in where we know we will have some against it.

So it's not going to go to zero.

The encouraging thing is we actually sold a few jets in the first quarter for more than we were carrying them.

That was positive because that hasn't happen in a while.

Okay.

Second, in the industrial area, the profits were up about 38%, sales up 13 and you mentioned FX is a big part of that.

But it doesn't look like there was much operating leverage because the reasons you gave for the increase in profit was improved credit performance.

I guess, you know, no write downs of inventory at Easy Go versus some last year.

So what's going to change there to allow the numbers that Doug had mentioned to happen for the full year?

Again, a lot of operating leverage in the first quarter there.

Jack, unfortunately, I think it was hidden.

Because if you take FX out of industrial, sales were up about less than $30 million, and we had about a $10 million problem in Windsor.

You add that back in and knock was up $23 million on $29 million of revenue.

So I think there was operating leverage there, but the combination of FX on the revenue side and the problems at Windsor, which we hope are just a few months from going away, really did disguise that improvement.

Likewise, you know, even in fasteners where we all know we still have more work going on during the course of this year, the timing issue on getting our customers to step up to the steel surcharges, cost fasteners almost $4 million in the quarter.

We think we're now in a position where we'll fully offset that in the future quarters, maybe plus or minus a little bit, but fasteners, likewise, would have been up, call it $6 million in the quarter, if they hadn't had that steel timing issue and their revenues were up, you know, on a real volume basis about $40 million.

So it wouldn't have been a grand conversion, but it sure would have been a lot stronger looking conversion.

So I guess that price increase you put through to Jim and got the publicity for more or less stuck?

Well, we're still having discussions with a couple of customers.

I won't name any of them, but let's say, by and large, the competitors have all followed suit, and the customers have, by and large, all agreed to the pricing structure and to surcharges, but I cannot tell you that there are not a few customers that are not still haggling with us.

I can tell you that we have not booked any higher pricing to any customer that has not fully agreed.

So we have some customers that are being billed at a higher price that are still arguing over it and in that instance, we have not taken any of that higher pricing to profit until we get an agreement from those customers.

Final question, Lewis, acquisitions.

Can you give us kind of an update, you know, is the market hot, slow, you know, et, cetera, from your perspective?

I think if you read the newspapers, you're seeing some pickup in the acquisition world.

You know, I guess I would reiterate our position, which I have done on most calls and that is, first, you know, we're obviously working very hard on the enterprise management side and I think we continue to make really good progress, which is now beginning to show up in our bottom line results on supply chain, shared services, Textron 6 Sigma.

So what's really encouraging to me is, as we wind down our restructuring program, which by doing that you eliminate the year-over-year delta (inaudible).

We'll have a little pickup next year and that will be it.

We have now created the momentum by just the on going enterprise management activities.

We've created the momentum to now, you know, see year-over-year cost reductions that should be pretty significant as far into the future as we can see.

That being said, we have actually, as I indicated maybe two calls ago, we have actually, you know, turned up our focus some on acquisitions.

We don't have anything pending in the wind.

We would like to add to our core businesses.

We still would love to see an opportunity in aircraft, although we haven't been able to find one.

We might find a small one there.

Defense, we're looking at a few things there to add the systems and of course the tools business which we feel good about and Greenlee continues to be a very, very good performer in that space.

So you know, we're looking at, for opportunities.

We evaluate those more heavily on our ROIC and also on EPS certainly, but our ROIC is such a driver for us that we're going to be very careful on any steps we take but that's kind of the lay of the land as I see it.

Thank you.

Yeah.

The next question comes from the line of David Bustein with UBS.

Please go ahead.

Good morning, everyone.

Hi, David.

Ted, I know you gave us some on this Bell issue, but is it a new issue?

Is this the first time you've taken reserve for this issue?

I'm talking about the proposed settlement with the government.

It's a six-year-old issue, David, that's been fully disclosed for a long time in all of our filings.

And we have, you know, always taken the position, and still take the position, that we are right on this issue and that, you know, there should be no cost to us, but in the spirit of working with our customer, we are attempting to get this thing resolved and, you know, we have made a proposal.

There has been some encouragement to make the proposal and, you know, we're just waiting to see if we can resolve it, but, you know, but good accounting practice says once we've offered something up, we should expense it, so we did.

Okay.

Is this the first time you have taken reserve for this issue or have you --

Correct.

There has never been any expense.

It's just been a disclosure and a disclosure where we said we don't think we have any liability.

But in this quarter, we did take an $8 million expense for it.

And the reason we took it, David, is because we made this offer, so we had to take it.

Yeah, didn't have any choice.

All right.

Second question.

You mentioned you had sold the remaining stock in (inaudible) --

That's correct.

Do you have any preferred stock left--

We have lots.

Do you want some?

Depends on the price, Ted, like everything else.

Yes, we still have preferred stock in Collins (inaudible) that we're carrying at a fairly written down price on our balance sheet.

Kind of the face-- well, it's less than 45. 45% of the original face.

It's down into the 30s now, versus face value and, you know, we are working on what we're going to do with that, but, yes, we still have it.

Okay.

And we probably have about $90 million of carrying value.

We also have a few leases at TFC to them.

All right.

Then last question.

Pension, is that a head wind or tail wind in '05?

Well, it's going to be a head wind.

The range is kind of up in the air right now.

You know, there are-- it really depends on what's going to happen with interest rates during the course of this year.

We got a little bit of improvement.

I mean our worst case number for next year was about $.17 to $.18 cents a share.

The growth in '03 asset in performance will modestly help that.

The more important help will come from any increase in the discount rate.

We're currently at a 6 and a quarter discount rate.

Every 25 basis points is worth about $.02 cents a share to us.

So if the discount rate goes back to, say, 7%, which is entirely possible, it will be more like a $.12 cent head wind.

I would say it's going be a head wind, David, somewhere between a dime and probably at the worst case, $.16 cents.

Terrific.

Thanks.

The next question comes from the line of Jack Murphy with John Levin and Company.

Please go ahead.

Hi, good morning.

Two questions.

One is, I think on the bottom of the first page of your press release you talk a little bit about we're encouraged by the recovery that appears in many of our markets.

I think that's the most bullish statement you've said on the economy in a while.

And what does it mean for the $5.5 billion in revenues that aren't helicopter and planes?

Well, I stand by the statement.

We are just seeing most of our markets -- You know, we're in so many markets, if you look at fastening systems, , Caltex around the world, we are seeing a combination of two things.

One, our products are being accepted by our customers and we're picking up share in some cases, like Caltex, for example, and the markets that we are in are beginning to show signs of recovery and you're just seeing that, you know, pretty broadly.

I'm just kind of-- the only one that really hasn't picked up much yet is golf and turf, but base order what we're hearing from dealers on the turf side and what we are already understanding on the order side on the golf side, and the rounds played, et. cetera, it looks like golf's going to pick up a little bit.

You know, that was essentially flat in the first quarter.

Slower.

We had-- the bottom line, if you take the non-aircraft manufacturing business, so industrial and fasteners, revenue growth in the quarter was about 14%, about half of that was exchange.

So, you know, you're in the 6-7% revenue growth and that's with golf in there at a zero.

And that is the first quarter in a long time that we--

Is that a reasonable sort of internal growth run rate as you look ought two or three quarters, or does it slow down in the second half?

Jack, I, I kind of gave you what our best guess is at this time for total revenue growth for each of the segments.

Maybe just a little additional color.

For the non-aircraft business, the three place where we're getting immediate growth are fastening systems and Ted already told you that that organic growth was about 9%.

Caltex organic growth, which was about 10%, and Greenlee, and of course that's a two-part business.

Our tools business and then the telecom side, and in spite of continuing softness in the telecom side, we saw almost 7% organic growth there.

Okay.

It's just too soon I think to say that we know what a specific run rate is.

I think it's just important that this is the first quarter as you mentioned in a long time that, you know, the numbers make it pretty clear that something is improving.

The second question I had is, you know, with the layoffs you took last year at Cessna--

Layoffs, yeah --

Whatever you call them.

You said it right.

I just didn't hear your wording.

You know, what does it mean for both direct and indirect costs in the Cessna backlog?

You know, from the point of an incremental margin standpoint going forward, how does it change what your incremental margins were in the past?

We saw a very solid cost performance come out of Cessna in the first quarter.

Their ability to convert on that volume declined --

But most of those costs, most of those costs, there's some component of those costs that were still at the higher labor run rates, weren't they?

You mean that are just running through because they were in inventory?

Yeah.

Yeah, that would be true.

So what does that mean though when you don't have any high costs, labor component and the jets you ship two quarters from now?

I think Doug just told you that pretty clearly that based on the volume that we're expecting in the second half of this year, we expect Cessna to be delivering double digit (inaudible) margins in the third and fourth quarter of this year.

Yeah, let me kind of put some, a measurement around that for a minute.

The-- we said double digit margins would be Q3 and Q4.

Now let's just suppose double digits is 10 or 11.

All right?

You know, I've been here since '92 and even when we were running really high volumes, relatively speaking, you know, 280, 290, 300, I don't ever remember margins for a year going over 13%.

Usually you're between 12 and 13 because you're spending money on engineering and development and so forth.

So said another way, even at these low volumes, I would say, you know, 170-plus jets, to be able to run double digit margins really bodes well as (inaudible) production if we're right and we go north of 200, it bodes pretty well for good leverage because they're being real careful on what they put back in now.

And you should understand we have not really dialed down at all the R&D investments that are going on at Cessna because we've got to have that new product coming.

In fact, that's right.

We actually took the number up a little this year.

Thanks.

All right.

You're done there, Jack, then?

Yep.

All right.

Operator, we know that everybody is busy with a lot of releases today, so we'll take one more question and if there are any other questions, we'll take them individually after the call.

Thank you.

Our final question comes from the line of Tony Boyd with AT Edwards.

Please go ahead.

Thank you.

Just following up on the deliveries for '05, you have done a study of corporate profit versus jet deliveries, and just wondering what you would project on that study versus what, of course, you're kind of looking at right now?

I think it's wholly consistent.

We look at that on a longer-term macro basis, but add in order flows and prospect lists and orders in backlog and a lot of other factors to come up with the north of 200 kind of number.

But I think the numbers are consistent that we have been 8-quarter lag to get the best square fit of corporate profitabilities against corporate jets.

And that would indicate that we ought to be seeing pick ups and orders as we get through the end of this year and strongly as we get into early '05.

So I think it's consistent.

It's consistent, but I mean do you think you would actually see a lot more than 200 just based on that extrapolation?

Well, as I said earlier, it is way too early for us to kind of put anything out there that says anything other than our best thinking right now, and, you know, we just don't know how far north of 200 we could get.

And, you know, we don't want-- we want to share with everyone our best thinking at the moment.

We also don't want to put something out there that's going to disappoint someone later.

So we're trying to be as reasoned as we can this early in the process.

Yeah.

We're going try to keep that guidance as current as we can.

So, you know, when we come up next quarter and we know more, we would say more.

You know,--

We don't want to get ahead of ourselves.

No.

Sure.

Could you go over revenue expectations for the V22 for the next two to three years?

Tony, this is Doug.

How about I give you a call afterwards?

We have kind of gone through this a number of times.

I would rather not tie up the whole conference call with that.

Yeah.

I appreciate that.

Thank you.

All right.

Operator, that concludes our call for today.

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Thank you.

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