達信公司 (TXT) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Textron fourth quarter earnings conference call.

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

However, there will be be a opportunity for questions. (Operator Instructions).

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

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

Please go ahead.

Thank you.

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.

As we begin, let me point out that we will be making forward-looking statements during the course of our call.

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.

This morning we'll be discussing adjusted results which exclude 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 website at www.textron.com.

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

You will also notice in our press release and tables that we are now reporting financial results for our InteSys business as discontinued operations.

InteSys had previously been within the Industrial segment as part of Greenlee.

An ExceI spreadsheet download with the 5-year recast financial data is available on our website.

Now for a summary of our fourth quarter results.

Revenues were 2.8 billion, up 154 million from last year.

Our reported GAAP earnings in the quarter were $0.89 per share, which included $0.21 per share in costs related to restructuring.

Excluding costs related to restructuring other special charges, our fourth quarter 2004 adjusted earnings per share were $1.10, up slightly more than 20 percent from last year's $0.91.

Now let me turn the discussion over to Lewis.

Thank you, Doug, and good morning, everyone.

Our fourth quarter results capped off a very positive performance year.

And given recent order trends in our current backlog, we believe we're positioned for continued growth and strong performance going forward.

Looking back at 2004, overall, the year progressed even better than we anticipated, with stronger than expect results at Cessna, Bell, and several of our Industrial businesses more than offsetting weaker performance at Fastening Systems.

Now, let me give you some more details.

At Cessna we said deliveries would be down, that we'd introduce new products and that orders would strengthen during the year.

So here is our report card.

As it turns out, we delivered 179 revenue jets, down 18 from 2003, but more than our January 2004 guidance of 165 to 170.

On the new products front, we began delivery of the new XLS in the first quarter, the Sovereign in the third quarter and the CJ3 in the fourth quarter.

We also introduced 2 new jets at NBAA, the CJ1+ and the CJ2+.

Our strategy of investing in new products continues to bear fruit as demonstrated by our order results.

Listen to this one, in the fourth quarter we received over 120 new jet orders.

Including jets for Citation shares, this adds up to over 330 orders for the full year of '04, and we now have 225 orders for delivery in 2005.

With a strong order rate in the fourth quarter, we've now adjusted our 2005 production schedule to the extent that our supply chain could reasonably accommodate it, bringing our 2005 delivery plan to about 235 jets.

That's up 10 from our third quarter plan.

The further good news here is that the order book beyond 2005 is also very strong.

As we've already had about 185 orders an hand for delivery in 2006.

So unless something happens to disrupt the general economy, we believe that jet growth will be solid for the rest of the decade, especially if you consider the impact that the new Mustang will have on demand when it begins in earnest in 2007.

Another very positive achievement last year at Cessna was a solid improvement in productivity.

Even with fewer debts, Cessna expanded margins significantly, benefiting from Textron Enterprise Management initiatives like Textron Six Sigma, integrated supply chain and restructuring.

And we expect to see continued year-over-year improvement in margins at Cessna as volumes grow and our ongoing Enterprise Management initiatives yield further manufacturing productivity improvements.

Okay.

Let's go to Bell.

We expected that revenues would be down, as work on the V-22 transitions from a cost-incurred to an as-delivered accounting basis, reflecting the conversion from development to production with newer program lots for the V-22.

That impact occurred, but we're pleased that transformation initiatives here also contributed to an expansion in margins.

While we can't sustain higher margins over time due to the nature of the our government contracts, this a very positive event for Bell as it improves our competitiveness on both the commercial and military sides of the business.

And we'll continue to pursue opportunities to make Bell even more competitive in 2005 and beyond.

2004 was an important year operationally for the V-22 and H-1, as these programs made substantial development progress.

Obviously, this year, 2005 will be pivotal on both of these programs because they enter OPEVAL to prepare for a full rate production decision by the Department of Defense.

At Textron Systems, we continue to see very good growth in the deliveries of our Sensor Fuzed Weapons and tail actuation systems for air-launched weapons.

We also received new orders and long-term interest for our armored security vehicle.

This is ideally suited for the type of engagement currently underway in Iraq.

Overall, we see strong growth at both Bell Helicopter and Systems and continue to expect that segment can double in revenues by the end of the decade.

Last year, we said we are were looking for only a modest recovery in or Fastening System and Industrial markets, and that's what we experienced.

We also said we expected transformation initiatives to take hold, and that they would contribute to improved results.

Obviously, we had a few bumps in the road at Fastening Systems with commodity prices and the operational strain of our aggressive restructuring program.

Look, we're disappointed with our operational performance at Fasteners.

We expect the steel impact will be with us for at least another quarter, and we still have a lot of to accomplish to improve manufacturing productivity.

But looking ahead, we still believe we have the effective strategy we need, and that we'll be able to improve performance as we move through the year.

Now at our Industrial segment, the impact of transformation activities during the year was clearly apparent.

This segment posted significant margin improvements.

And finally at Textron Financial we told you that credit indicators would improve during the year leading to higher profits.

That's exactly what happened.

In summary, 2004 was a very good year for Textron in terms of operating performance and the rebound in most of our markets.

But perhaps more importantly, 2004 was a good year because of the progress we made with our transformation strategy.

Further strengthening our platform for future growth.

As you know, one over our major transformation efforts has been the Company's multi-year restructuring program.

Thinking about that for a minute, it was a pretty massive undertaking, but the restructuring was absolutely necessary, and it has dramatically and permanently improved our cost structure. 2004 marked the successful completion of our program, although there is some minor activities that spill over into 2005.

Since this program began, we have reduced headcount by over 10,000, we closed over 100 facilities, including over 50 manufacturing plants, and that took offline about 5.5 million square feet.

Currently the streamlined cost structure that we established with the restructuring program, obviously positions us to be more competitive and will allow us to leverage earnings and cash flow as we grow the business.

A critical element of our transformation strategy is focused in the area of portfolio management.

Early on we developed an analytical framework and determined which businesses were strategic, and which were non-core.

Here is our report card on this one.

Since then, we've been diligently pruning out the non-core, divesting and liquidating $2.4 billion of manufacturing revenues, and 1.3 billion of non-core financial assets.

This in turn allows us to focus our talent and our capital on a leaner and stronger mix of businesses.

More recently, we've begun to make acquisitions and invest in areas that are complimentary with our strategic business direction.

Acquisitions such as last year's purchase of an additional 25 percent stake in Citation shares, which expands our participation in the growing fractional jet market.

The acquisition of Acadian Composites, which builds upon our helicopter after-market growth strategy.

The formation of a joint venture to operate a roter blade repair center in Dubai to service blades on Bell, as well as non-Bell helicopters.

And just last week the announcement of our joint venture with Rothenberger, which advances our professional tool growth strategy.

Going forward, we will continue to make acquisitions that help us to execute our business unit growth strategies.

Furthermore, we're also -- we've also increased this year's Research and Development budget significantly in order to support and further accelerate organic growth.

The other critical element of our transformation strategy is our Enterprise Management focus.

It allows us to put a great deal of emphasis on making customers successful, attracting and developing talented people, and deploying world-class enterprise common processes.

Enterprise Management entails many different initiatives, too long to mention all, obviously, but I'll mention a few.

Textron Six Sigma, integrated supply chain.

Consolidating and more recently outsourcing our IT infrastructure, and establishing a human resource and finance shared service centers.

Of these, Textron Six Sigma has become a prominent driving element of our culture.

We've now trained more than 750 black belts, and 2,000 green belts.

Recently, we've begun to place a special emphasis on the lean portion of our Textron Six Sigma program.

Lean projects are focused on streamlining processes by eliminating waste and non-value-added steps.

And through our integrated supply chain initiative, we're sourcing strategically from low-cost countries and applying proven methods across the enterprise to efficiently link customer requirements at manufacturing and distribution.

We made excellent progress consolidating our numerous IT infrastructure organizations last year.

We actually moved to a single-shared service center.

This in turn enabled us to take the next step of outsourcing this function which began late last year.

In addition to the cost advantage, the consolidation and outsourcing allows our businesses to have even more time to focus on high value-added activities.

These initiatives and many others have substantially improved, but more importantly, will continue to improve the critical aspects of our business like customer satisfaction, cycle times, productivity, procurement costs, and internal controls.

I want to be clear that these efforts are ongoing.

In fact, we've decided to make additional investments to further our progress with Enterprise Management during 2005.

These investments are being made to accelerate the lean portion of Textron Six Sigma to advance the development of key IT systems, to expand Textron's employee training and development program, and to increase our focus on customer facing capabilities.

So looking ahead, 2005 is shaping up to be a year of even stronger revenue growth, further margin expansion, which combined will drive significant earnings growth.

And now looking beyond 2005, we believe Textron will deliver strong organic revenue growth based on the continued recovery in our commercial and Industrial markets, the ramp up of our military programs, and our considerable ongoing investment in new products.

As just one point of reference, including CitationShares, backlog in our aircraft businesses alone ended the year over 8.5 billion.

That's our highest ever.

And with a more efficient operating structure, our ability to augment organic growth with strategic acquisitions, makes our prospects even brighter.

Bottom line, the future benefits of our transformation strategy combined with strong revenue growth will generate increasingly improved profitability and cash flow.

Ted?

Thank you, Lewis.

Good morning, everyone.

We've got an awful lot to cover this morning, so let me just dive right into our fourth quarter analysis.

Earnings of $1.10 were higher than a year ago by $0.19.

Contributing to that increase was $0.58 in cost reduction, that includes $0.07 from restructuring.

Volume mix and foreign exchange helped by $0.19, and we generated about $0.16 from favorable pricing, which was about a 1.1 percent increase.

Partially offsetting these positives was a negative $0.48 from inflation, heavily impacted by steel costs, and that represents about a 3.6 percent cost increase.

Pension expense was a negative $0.05.

Textron's financials earnings were lower by $0.04.

A higher quarterly tax rate as a result of a tax settlement during last year's fourth quarter yielded a negative $0.09.

By the way, there were a number of other tax elements in the quarter that substantially netted out a 0 impact, and I'll talk about those a little bit later.

And finally, corporate interest expense and miscellaneous items netted a negative $0.08.

So recapping the positives, $0.58 cost reduction, $0.19 volume mix and exchange, and $0.16 pricing.

On the negative side, $0.48 inflation, $0.05 from pension, $0.04 from Textron Financial, $0.09 from taxes, and finally, $0.08 corporate and interest.

Now let's go through the quarterly results for each of our businesses, and I'll start off with Bell.

Bell segment revenues were down 85 million, while profit was only down 1 million.

U.S.

Government revenues were down due to lower revenue on the V-22 program, and lower sales related to a contract for training aircraft that we completed in '03, partially offset by higher revenue on the H-1 program.

Commercial revenues were up primarily related to the Pakistani 412 program.

The reduction in Bell's profits reflected lower profits on the Government business, partially offset by higher profits at commercial.

U.S.

Government profit was down solely as a result of the lower volumes, commercial profit was up, primarily driven by the impact of higher commercial spares profit, higher foreign military sales volumes, and improved commercial sales mix.

These increases were partially offset by higher engineering cost, and higher SG&A expenses, primarily the result of higher commissions and increased pension expense.

Backlog at Bell Helicopter ended the year at 2.8 billion.

That's double where we were at the end of last year.

At Cessna, revenues were up 236 million, profit was up 76.

The increase in revenues was the result of higher volumes across the board, really on all products, and modestly higher pricing.

Additionally, the consolidation of CitationShares contributed 38 million.

During the quarter we delivered 63 revenue jets, compared to 48 last year.

And we also delivered one XLS model to CitationShares for their vector JetCard program, and as a reminder, we recognize rental revenue as vector cards are used, not as vector jets are delivered.

Profit at Cessna increased primarily due to the higher volumes, improved cost performance, and a contribution from higher pricing, partially offset by inflation.

With the strong order activity that Lewis mentioned earlier, backlog at Cessna increased again, up 1.5 billion from a year ago, ending at 5.4 billion to unaffiliated customers, and in addition, we have backlog of 497 million from CitationShares.

Next is Fastening Systems.

Fastening Systems segment revenues were up 22 million, and profit was down 9.

Revenues were up primarily due to foreign exchange, a little bit of higher pricing, partially offset by slightly lower sales volumes.

Profit decreased due to inflation, new plant launch costs, and lower volumes, partially offset by improving cost performance, higher pricing, and favorable impact of exchange.

Inflation, including higher steel costs, were only partially offset by pricing actions during this quarter.

And again, as Lewis mentioned, we still have a couple of more quarters to catch up with the steel cost issue, and to determine what impact our pricing actions are going to have on our customers and volumes, as well as a couple of more quarters of new plant launch headwinds to endure.

Moving to Industrial.

Revenues are down 10 million, profit it is up 3.

The decrease in revenues is primarily due to lower revenues at Caltex resulting from some customer model changeovers and the divestiture of a non-core product line in the second quarter, partially offset by the favorable impact of foreign exchange.

The increase in profit was largely due to improved cost performance, improved credit performance, particularly in our golf and turf businesses, and the favorable impact of higher warranty expense in '03, partially offset by inflation and the impact of the lower volume.

Finally, Finance segment revenues were down 9, and profits were down 8.

The lower revenue was primarily due to lower securitization and syndication gains compared to what were very strong results last year.

The decrease in profit reflected the lower securitization syndication gains, and a $6 million asset impairment in one of our liquidating portfolios, partially offset by a decrease in provision for loan losses reflecting an improvement in portfolio quality.

During the year, we made good progress, growing our core assets and continuing to reshape this portfolio.

In fact, we added $1 billion to our core receivables, while liquidating another 300 million of non-core, and that leaves us about 450 of the non-core left to go.

We ended the year with outstanding credit statistics.

Non-performing assets were down to 2.18 percent, compared to 2.8 at the end of last year, 60-day-plus delinquencies were at 1.47, down from 2.39 a year ago, and charge-offs for the year came in at 1.48 percent, down from 2.08 last year.

Now I want to talk about a number of other items before we move on to our outlook.

First, cash flow.

Manufacturing cash flow from operations was 973 million.

That resulted in free cash flow before restructuring for the year of 752 million, compared to 494 last year.

Our cash performance in '04 reflected our improved operating performance, and Enterprise Management initiatives.

In addition, we benefited from significantly increased customer deposits in our aircraft business, as well as below normal levels of cash taxes, as a result of, among other things, the impact of bonus depreciation.

Next let's turn to taxes.

During the quarter there were several one-time items that offset each other.

The positive items, which were worth about $0.08 a share, related to a number of special non-U.S. tax matters.

Offsetting that benefit was an additional $0.08 in tax expense that we booked during the quarter to reflect anticipated taxes related to planned repatriation of foreign cash in 2005.

This was provided in the fourth quarter when we made the judgment to bring $200 million of cash back into the United States.

The tax expense reflects the reduced cost to repatriate foreign cash passed under the American Jobs Creation Act.

Lastly, as we look ahead, 29 percent continues to be our best estimate for the 2005 tax rate.

We also want to give you a quick update on our share repurchase activity during the quarter.

Since our October Board authorization and through the end of the calendar year, we have repurchased about 300 million shares at a gross cost of about $215 million.

During that time, we also issued about 725,000 shares for option expenses and savings plan matches, which yielded just under 35 million in proceeds.

So during the net quarter, cash -- during the quarter, cash used for share repurchases netted about $180 million.

We will continue to execute the balance of that 12 million share authorization opportunistically.

Turning to next year's pension impact.

We're now expecting greater headwinds than we previously anticipated.

That's primarily the result of reducing the discount rate from 6.25 percent down to 5.75 percent, and slightly reducing our long-terms earnings assumption from 8.9 to 8.75.

With these parameters and our other inputs, we're looking now at an '05 pension headwind of about $0.40 a share.

And while we're talking about '05, let's move to the outlook.

Let me start by reminding everyone that with the effective completion of our restructuring program, going forward we will no longer be reporting as adjusted results.

As Lewis mentioned, there will be a small amount of restructuring expense that spills over into '05, and those costs will appear on the special charges line.

We expect that amount to be in the range of 20 to 25 million.

However, we will be reporting results, and I'll be giving you guidance on a GAAP basis.

So on that basis, we expect that '05 GAAP earnings per share will be between $3.85 and $4.05, and we're projecting the first quarter will be between $0.70 and $0.80.

Before I run through an analysis of the year-over-year drivers, let me provide you more detail on the 2005 investments in growth and capabilities that Lewis mentioned earlier.

First, we're adding additional engineering R&D expenditures of about $0.22 a share.

We're investing in additional incremental Enterprise Management initiatives at a cost of about $0.10 a share, and we're also investing an additional $0.05 a share to ramp up our Amarillo facility for higher production levels of V-22.

So the total incremental investment in growth and capabilities building is about $0.37 for '05.

Now we can go through the year-over-year analysis.

I'll start with last year's adjusted EPS of $3.36 a share, and will causal that to the mid-point of our '05 target range, which would be $3.95 a share, so we're going to talk through an improvement of $0.59 a share.

Cost performance is expected to contribute about $1.33, that includes $0.27 of carry-over ran future restructuring benefits, so $0.27 total restructuring.

Price increases of about 2.5 percent will yield $1.21 a share.

Volume and mix, higher volume mix, will contribute $0.84 a share.

And Textron Financial is expected to improve by about $0.10 a share.

These positive factors more than offset the following negative items. $1.80 in inflation impacts, includes a lot of carry-over steel; $0.40 in pension headwinds we talked about; $0.37 in growth and capabilities investments; $0.11 in restructuring costs that will be in our earnings next year, won't be adjusted out; another $0.11 for option expensing, which was not in our previous guidance; and $0.10 for corporate expense, interest, and other.

Another way to think about this is that in addition to normal cost increases, we're going to absorb $0.40 in pension headwinds, make incremental investments for future growth and capabilities of $0.37, and call $0.11 in spill-over restructuring costs, and absorb $0.11 for expensing options, and after all that, we're going to still grow earnings by 15 to 21 percent.

Moving to next year's cash, we're expecting free cash flow between $500 and $600 million.

The mid-point of this range is approximately equal to the mid-point of our earnings range.

And included in that is estimated capital spending of about 355 million.

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

Thank you, Ted.

Let me start with full-year guidance items.

With increased to 235 jets at Cessna, revenues are expected to be up more than 20 percent, reaching just over 3 billion this year, with a margin in the range of 12.5 to 13.5 percent.

At the Bell segment, we're looking for revenues to increase nearly 7 percent to about 2.4 billion.

Margins at Bell are expected to be in the 10 to 11 percent range, reflecting in part the V-22 ramp-up cost that Ted just mentioned.

Fastener revenues are a little bit more difficult to call with uncertainty around customer pricing reaction to our pricing actions, but we're targeting about 1.9 billion, approximately flat with last year.

Margins are expected to improve slightly to about 3.5 percent for the year.

At Industrial, we're looking for revenues of about 3 billion.

Within Industrial, Caltex is expected to be flat to down slightly as a result of model changeovers.

While growth at Greenlee is expected to be up about 10 percent, while the other 3 Industrial businesses are expected to experience growth in the 6 to 9 percent range.

In spite of flat overall revenues, margins at Industrial will improve to the 6.5 to 7.5 percent range.

At Finance, we're looking for revenue to approach 600 million with operating profit of about 160 million.

We're planning for about 165 million on the corporate expense line, partially due to the additional transformation initiatives that Lewis and Ted both spoke about, and interest expense will come in around $105 million.

Now moving to the first quarter.

Cessna revenues are expected to be about 700 million with a margin of about 12 percent, while revenues are expected to be just over 500 million, and margins there of about 9.5 percent.

Fasteners is expecting revenues of about 475 million with margins in the low single digits as we work our way through pricing and new plan issues.

Industrial revenues are expected to be about 790 million, at margins of just under 7 percent.

And finally, we're planning for flattish revenues in up [ph] at Finance in the first quarter.

That concludes our prepared remarks.

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

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

Operator, we're now ready for questions.

(Operator Instructions).

And first we'll go to Jack Kelly with Goldman Sachs.

Please go ahead.

Good morning.

Hi, Jack.

Lew, just wanted to check on Cessna.

You had mentioned increasing production to 235 this year, based on availability of suppliers, et cetera.

Yes.

In the past, you had mentioned that you had the ability, if you wanted to with proper notice, to flex up production by 10 percent, maybe given 9 months to a year lead time.

Given the fact that you have 225 orders for '05, it seems like only flexing up 10 is being conservative, and that's fine if that's the case, but maybe if you could just give us a little color on that decision.

Well, of course, the year is not over yet, and we would love to produce a few more jets in '05.

When I gave you the 10 percent, I think it was over, like a 225 number, so that technically would be up another 20 or 22, and if we could find a way to produce a few more, we would.

We haven't given up on that yet.

We do know we're pretty much home free on the 235.

It was kind of surprising to me, but our supply base is a little slower coming back than we might have thought, because one time we were over 300 jets delivered back the year 2000, I think it was.

So stay tuned.

If we can get a little more out of the production line, we will.

We really feel good about the order rate, though, I'll tell you that, '06 feels about as good as '05 does.

You had mentioned that.

What do you have on order now for '06 in terms of -- in the backlog, Lew?

Almost 190, not quite.

And just finally on Cessna with regard to margins, you were at 13.5 percent in the fourth quarter, that was 63 jets delivered, 12.5 to 13.5 is your forecast for the year.

Any upside to that margin, kind of given how you exited the year, versus what your projection is for '05?

I'll take that one, Jack .

Obviously, we had a very strong fourth quarter, and I think the underlying fundamentals are there to be at the high end of the range at Cessna, but we have made the decision to make some pretty significant incremental investments in Cessna at keeping this product pipeline running.

And so we're taking R&D spending up quite a bit there for the year, and they are also absorbing some of the pension increase and their share of option expensing, and so there are some other things that are running through Cessna.

But we think they'll have a very, very strong performance, but we're going to spend some of that incremental upside on continuing the product -- pipeline, because it has really been the winner at Cessna.

It's why the orders are rolling in the way they're rolling in, and we are just going to continue to invest in organic growth there with some of the upside.

And then just secondly, on Fasteners.

Your comment about the pressure from steel costs that you've been making that for a couple of quarters, but you made a comment that we'll have to see what price increases do with regard to market share and customers.

I guess I'm thinking back to the middle of last year when you raised prices to GM.

I mean, are you kind of maybe setting us up that you're going to have to eat more of these cost increases?

It sounds like --

No, we were trying to set you up that we may have lower volume.

We're going for the price.

Yes.

And we -- yes, we need to clear one thing up there.

We mentioned last -- in the third quarter, I think it was, about price increases to our big OEM customers, and we don't like that, but we don't like the rising steel prices, and not to get into negotiations, but we haven't closed out the discussions with GM yet, and it's basically -- we have to have those price increases, or we can't ship product, and that's the tact we're taking.

And I think we'll come to a mutual understanding of what has to be done.

I don't think we'll lose too much business.

But we're going to walk away from the business if we don't get the price increase.

There's no doubt in my mind about it.

We're not being unreasonable, but we have to reflect the realities of the marketplace, and the reality is that we absorbed over $81 million in price increases in 2004 across all of Textron for steel, and in '04, we were only able to get 43 million back in pricing from our customers, as we've always been in a lag, and it's normal that would be in a lag in that regard, but we've got to make that difference back up.

Yes, and we will.

So if we look at the Fastener forecast you gave us for the year, we should probably feel a little more confident on the margin number than maybe on the volume number, in the sense that you might give some volume, but you're going to --

Yes, that's right.

Sure.

And we've put some windage on the volume, but frankly, it's hard to know.

Okay.

Thanks.

Yes.

Our next question is from the line of Tony Boase with A.G. Edwards.

Please go ahead.

Thanks.

Could you be a little more specific on the Fastener headwinds for, I guess the -- for this quarter, and then what that looks like for the first quarter?

I'm trying to get a handle on the plant closure impact, and also the gap between pricing and raw materials, if you've got an absolute number there.

Yes.

On the plant closure impact, that cost us about $13 million in the third quarter, cost us about 10 million in the fourth quarter, we're hoping it's going to only be 5 or 6 or 7 or so in Q1, and then we're hoping that it's going to be a very small number by the time we get to Q2.

That's kind of the planning, if you look at it.

On the steel, it's fairly variable in Q1, unfortunately.

We've got some big contracts with customers that are due to price on January the 1st that, frankly, are going to retroactively price to January the 1st, but they are not signed and sealed right now, they're still in negotiations.

And then we had one very large customer agreement that we don't have a target date of.

The contract turnover date is in early March, by about the end of the first or second week of March, and that's still in negotiations.

So the intention is that we come out of the first quarter and into the second quarter largely caught up with the steel pricing issue, but there's still a lot of dollars under negotiations, so it could move around a bit.

When do the vector card sales begin to actually contribute revenue?

And do you have an expectation for what that revenue contribution is in '05?

I don't know if I -- I mean, maybe I can do that off the back of my head.

We sold in '04, well over 100 vector cards.

Our expectation in '05 is that we will do 3 times that many in '05.

Those that were sold in the fourth quarter, in particular, didn't generate a lot of revenue in the Q4 timeframe, but are expected to start generating revenue into '05, and then that's going to ramp up so by the end of '05, we expect to be at pretty much the steady state rate.

Which is we're only planning to have at any one time, about 360 vector cards outstanding, so we'll kind of get to a steady state somewhere later in '05.

Doug, do you have a vector number?

No, but if you go say with an average of $100,000 per card, maybe 30 million, something in that range.

Yes, at normalized.

So we hit a 30 million annualized rate probably in the third quarter of next year.

Maybe half of that.

Okay.

And just a question on the V-22.

Today -- I think today was supposed to be the day when they decided whether to go ahead with OPEVAL; is that correct?

No, OPEVAL is still scheduled, and that could move around a little bit.

I don't think it will.

The customer really wants to go forward with it.

So I think OPEVAL should happen as planned this quarter and into the next.

Tony, are you reacting to the aerospace defense news item that came out today?

Not specifically, but if you want to add some color to that, I would be happy to listen to it.

Well, the upside on this gear issue is that -- or bearing issue in the gear is that we do have a flaking situation with chrome plating on some bearings, and the root cause is well understood, and it's and just a matter of getting the maintenance cycles through to get the good bearings in the jets.

The customer and ourselves are very committed to keeping everything on track, and there's really no significant risk to OPEVAL at this point related to this issue.

And as far as we're concerned, all lights are green.

I would say one more thing about this flaking gear issue.

It takes a 500-power microscope to see the cracks in the bearings, I should say, the coated bearings, so the vendors, there were 3 of them, had change their process.

Second, the V-22 has such a sophisticated sensitive metal sensing system.

See, what it does, it senses little flakes of metal in the oil, and it then says you have a flaking problem.

We are not in any danger of flight or grounding situation, anything like that.

It is so sensitive, it picked up these minute particles early, which is the way it should.

By the way, there are many other helicopters that don't have this system in place who have the same problem and didn't know it, and have been flying for years, so we're going to fix the problem, it just needs to be fixed.

And I wouldn't worry about this one.

Great, thanks a lot.

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

Please go ahead.

Hi, Dan.

Yes, good morning.

Just a quick question going back to Cessna.

I think it was about a year ago at an analysts day meeting, you talked about kind of long-term margin goals of like 11 to 13 percent in '06, obviously, you're margins are doing very well.

Can you talk about, perhaps, longer-term potential again, maybe an update on that?

Well, I guess I would start by saying what has been a -- really a pleasant surprise to us, which we began to see as Cessna took their volume down, and then began to ramp back up, is Jack Pelton and his team are doing a tremendous job of leaning out the factory, and leveraging up the volume as it comes back.

So they've kind of pleasantly surprised me, for one, and I think they're going to keep that progress going.

So that 11 to 13 is probably off, I don't know, 1 or 2 percentage points at least, so I would be disappointed if we're not looking now 13 to 15 over the next 2 or 3 years myself.

We'll give you an official view of that at our meeting on the 9th when you're having your interaction with Ted on our long-range outlook.

Sounds good.

Also, you talked about the strong order trends during the quarter.

Could you provide a little bit of color in terms of the mix, the customer mix around the orders received, and in terms of your current backlog, perhaps the non-CitationShare impacted backlog, how does that look, what percentage from the fractional customers.

We could probably find a fractional number, but the rest of it is all over the map, it's not in any particular in-customer segment.

Do you know, Doug, what the fractional component of -- you're asking what of the total backlog is fractional?

Well, we took in 34 orders from NetJets, that's fractional.

And those orders -- so about 10 percent.

Yes.

Those orders would count in '04, so 34 would be about 10 percent.

We don't count the backlog of CitationShares, because it's to us.

We gave you the CitationShares number, and our other fractional backlog is about 20 percent or so.

Yes.

And make sure you always put that in perspective, the longest order leads are from the fractional guys, so while 20 percent of the backlog may be in fractionals, the annual shipments are a smaller percentage than that.

Yes.

For example, the NetJets' order in '04, I think I remember had 33 XLS.

We won't ship 33, we'll ship that over a period of probably 3 years or so, so it kind of stretches out.

Kind of interesting if you said, I would like to order one of your jets, how long do I have to wait?

You have to wait until Q2 '09 for a Mustang;

Q4 '06 for CJ1;

Q2 '07 for CJ2;

Q2 '07 for CJ3;

Q4 '06 for XLS.

So we're trying to turn up the heat as much as we can on the production rate to get some of these volumes increased.

So good problem to have.

To add some color on Ted's point, is about 40 percent of that backlog for other fractional customers is for '07 and beyond.

Yes.

Okay.

Not what you expect.

Yeah.

Sounds good.

Just moving over to Bell.

I guess tomorrow with the announcement about the decision on Marine One, and I guess I won't ask you to speculate on that, but assuming that the decision is a positive, what's the potential benefit from that program?

Well, the Marine -- the presidential helicopter program is an important program because it's kind of the flagship helicopter that then will be sold around the world to support the President when he moves into other parts of the world, and then, also, it then kind of signals a special unit that other services might purchase.

It's pretty far out there, as far as helping us any.

I don't recall when revenues would hit us, but it must be, what, '08 or '09, pretty far out.

And I don't know who is going to win that.

We have so many nifty programs up in the air right now that I would say I'm not indifferent to who wins this one.

I would love to have it, but with the armed reconnaissance helicopter, the light utility helicopter, those 2 are huge programs.

Some of the Pakistani Army program, a continuation of that, so we've got a lot of interesting programs that we're all bidding for and hopefully we will hit 1 or 2 of them.

If we do, that would make quite a difference.

And finally, on acquisition pipeline.

You've mentioned the number of the smaller sort of complementary add-on acquisitions.

You talked about maybe you'll have continued activity around that area.

Could you comment on the potential for just ongoing add-ons, or could you make, perhaps larger acquisitions?

Well, our plan is no different than we began to talk about last year.

For a couple of years, we really had a moratorium on adding anything because, I mean, we wouldn't have said no to a good deal, but we really were not actively searching for it, because we wanted to build the foundation using our transformation initiatives, and we did just that.

Now we're not finished with that.

We're going to drive a lot more costs out of this company, we're going to become a much stronger company year after year after year.

You can count on that.

But we have now encouraged our divisions to kind of open their eyes up a little further and to go out and try to find really good fits for the businesses, which was all of those were.

Would we do larger?

Yes, we would.

We're not looking to do anything outlandishly large.

We're looking at 300, 400 million would be a great add to make.

But we're not in any hurry to do that.

I don't think there are that many good deals out there right now that fit what we want to buy, so that's kind of where we are.

We consciously have to make the decisions between dividends and share repurchase and asset -- and buying companies, and we'll continue to do that.

Ted, do you want to add anything

We're looking very hard, and we're looking harder and harder, but we're only going to buy smart.

Yes.

The great thing about it is we don't have to, we've been saying that for 2 years, and we're driving earnings through just natural market lift, and getting the double benefit of improved margins and market lift, and that's about as good as it's going to get.

So, we don't do anything and we would be just fine.

But it always helps when you can add to a business if it's right down their strategic pipeline.

Okay.

Well thank you very much for all of that info, and I guess I'll see you in Miami?

Yes.

Great.

Our next question is from the line of Vinesh McLaney with CSFB.

Please go ahead.

Hi, guys.

How are you, Vinesh?

Just want to go into Bell a little bit further.

Your revenues came in a little bit below the guidance you provided in Q3.

Can you maybe elaborate on that -- ?

Yes.

Vinesh, this is Ted.

It's all timing.

We had on our commercial helicopters, I won't name the specific customers for you, but there were 4 specific commercial helicopters we thought we were going to ship in the fourth quarter, they moved to the first quarter.

They're worth about 30 million in revenues.

And we had some of our armored personnel carriers that we thought were going to go to Iraq in the fourth quarter, now are delivering in the first quarter, and a couple of things like that, offset by the fact that our spares volume was stronger than we expected, but nothing fundamental in there.

I can almost -- I literally have a list unit by unit of what moved from one quarter to the other, and it's all just timing of deliveries.

Thanks.

And also regarding a question in Cessna.

If you could talk a little bit about used aircraft pricing, how that was in the fourth quarter?

Well, market is pretty good for used.

We are -- we had a small gain on our used aircraft sales in the quarter, versus some fairly significant hits, as you know, over the last couple, 3 years, so certainly pricing has turned around, and it has been much more favorable for us.

We're down to a total used aircraft inventory of Cessna at the end of '04 of only $8 million, which is just tremendous, versus what it had been.

It's 3 or 4 ships.

We're also seeing the overall market get a little bet better.

The total number of Citation jets as a percent of the fleet for sale has fallen a little more, it's at about 13 percent, but I think the really interesting statistic is of that 13 percent of the fleet that is for sale, over 80 percent of those for sale are older than 15 years, and almost 60 percent of those on the market are older than 20 years old.

There's actually only a little -- about 60 jets that are on the used market right now that are jets that are currently in production.

So you have an interesting phenomena where you've got the -- those that cause some pressure on our new sales are down very low and turning very well, selling very well in the market, and you've got some older jets that are still out there that are sitting on the market a long time.

But overall, the used market is doing real well, and it's obviously not having any issue on new sales at this point in time.

Venish, I would say we probably have to recalibrate our benchmark number, because for -- gosh, since I've been at Textron over 10 years, we've always shot for around 10 percent as being the kind of used market we would like to see out there to support pricing, but it looks to me now like it's probably going to be 13 percent for a long time to come, and that's going to be a good number because of that aging factor.

You figure, as Ted said, over half the ships are over 20 years old.

There's just not many people that are going to be buying those, so at some point they're going to be taken offline and cannibalized and just sold for parts and that will be the end of that ship.

So that's kind of happening the way we predicted it would.

Could I have one final question?

Regarding the budget cuts announced by the Defense Department, can you help us on that outlook?

Sure.

First of all, it's a proposal.

So, we haven't -- that hadn't been put in stone yet.

Obviously, the cuts affected other companies a lot more severely than our company, if it all comes to be.

Obviously, those could be changed, as the government processes that decision through the Congress and the White House.

Keep in mind that we didn't have any V-22s cancelled, we really -- this proposal proposes a delay, which really moves ships to the right.

It does not eliminate ships, because the government customer and the war fighter, they really need the V-22.

It is the ship of choice if they could have it right now in the conflict areas that we're having our soldiers go into, they would love to have this.

So we don't take this as a heavy hit to the program.

It's just one of those things that happens when you spend a lot of money on the war efforts, you have to find the money somewhere, and V-22 had to contribute a little bit, but really I don't think it's going to affect too much.

Even with that -- I'll say, if the delay goes through, we still expect to double revenues for the segment by 2010.

And again, nothing is final yet here and we'll see what happens as we go through OPEVAL, but even what is proposed just for all of your perspective, has no impact until 2008.

Yes.

I think the way to think about Bell and the V-22 is, we said double revenues by 2010, and that's just a good long-term story, but then there are programs out there, like the armed reconnaissance helicopter, the light utility helicopter, the personal recovery vehicle, just those alone, some border protection stuff, that adds up to business that is being bid that would account for $5 billion of total program sales.

So what happens when you win those?

That's all plus to us.

So we're bidding pretty heavily on some of those programs, and that would change that number even higher, so we're in a pretty strong position right now.

We've got a lot of oars in the water with foreign military opportunities as well.

Yes we do.

So the outlook at Bell stands, as we said last February, that it will double by the end of the decade.

All right.

Thanks, guys.

Our next question from the line of Rob Spingarn with Wachovia Securities.

Please go ahead.

Given what you're talking about in terms of just very strong order flow in 2004, what would you expect used aircraft sales, I assume you're going to have a higher commitment ratio there and what your outlook is for that in '05?

I can't give you a number off the top of my head.

We have -- we have really dialed back on our commitment to how many used aircraft we're going to take, and the way we structure pricing arrangements on those used aircraft, so our level of commitment to take trade-ins relative to sales is lower than in the past, but I don't have a number off the top of my head.

I don't know if, Doug, can --

I don't think that it's a material item in our guidance.

It's -- it's plus or minus a couple of million, so it really wouldn't make a difference.

I mean, for perspective, we ended up with a contribution, total contribution this year from used of 7 million, but we don't count on that when we do our planning.

I think a good way to think about it, just to make sure that is not even an issue in anybody's models is just exactly what Doug said.

The used market is where we want it to be, and we have, since the 2001, 2002 timeframe, we've become more conservative on giving the potential customer the right to trade an aircraft in for a fixed price.

So when we take one in, we have a little more control over what kind of price we have to pay, and so we're going to have less jets coming in, and the used market is pretty darn tight, so I would just predict just plus or minus zero almost impact on that --.

Yes, it really does -- the overall size of used, because it is revenues with no profits, does have a minor impact on Cessna's margin.

So if the used were to grow disproportionately, it would have an impact, but I don't think we expect anything that would change the mix between non-profitable used sales and profitable business jet sales in '05 versus '04.

That's an interesting perspective, because the reason I asked the question is yesterday Gulf Stream commented that it, too, had a very strong order flow, particularly in the fourth quarter, and would expect it's used quantities to go up next year, but they also suggested that they would be more profitable on those at the same time.

Yes, remember 2 years ago we had $64 million in losses on used overtrades, and we pretty well put that problem behind us.

We don't have the same issue they do.

I read their release.

It turns out our pickup in the value of the order book we picked up is about the same, interestingly, same dollar amount, close, but we don't have that used issue that -- that's just not an issue for us this year.

And just moving slightly away from that, but keeping on Cessna, was bonus depreciation a factor in the very large book-to-bill in the fourth quarter, and does that also play some role in your interest in increasing deliveries in '05?

I think the answer is it may have had -- on the margin, may have have had some positive benefit.

Obviously, you had guys that were thinking about buying, gave our sales guys a great argument to say why in the world would you wait until Q1, when you could place the order in Q4, so, possibly we pulled some orders from Q1 into Q4 as a result.

But I don't think it was a major driving factor.

And do you think you have to find slots in '05 to accommodate that thinking, or will -- would there be another extension.

Well, we're done now, I mean, plenty of people bought aircraft in the fourth that knew they weren't going to get their aircraft in '05.

We only had a bit of sales available left if '05, so many of those orders that came the quarter, we were only short a few aircrafts, so of that 120 orders, there was only -- I don't know what the number was -- 20 or 30 max that went into '05 anyway.

Right.

But I guess what I'm thinking is, is there a general maybe not spoken understanding that we'll get another extension, giving people more comfort?

No.

I'm sure there will be an effort underway.

There always is, but I wouldn't bet the ranch on that one.

We're not counting on it.

It's not even in any of our modeling.

I wouldn't say we wouldn't try again, but we're not assuming that we'll win again.

Remember, its ordered by the end of '04, and then take delivery by the end of '05, and that take delivery by the end of '05 was the extension we got, so we're out of gas there.

And the great thing about it is there's people are speculating and holding off until later in the year to order hoping they can get a ship delivered this year, well our production is pretty much sold out, so it's not going to affect us any.

So people are going to order for long-term ship sales is the bottom line, for '06 and '07.

I had a question on Fasteners, just switching over to that for a moment, but I think it's understood generally in the fastener business, particularly with automotive exposure, I don't think anyone is expecting to get back to the 10 percent margins of yesteryear, but with all of the pricing and cost issues you've talked about, what is a normalized target margin in this business?

Where do you want to get this with thing?

I would say maybe 6, 7, maybe 8, but you won't get more than that.

But if you take a look at Caltex, which is really on its game, they really struggled.

You can make the profit but you end up having to give it back on cost give backs, so I would say 7 plus or minus 1 probably.

Caltex gets to 10, but Caltex is much more uniquely positioned from a technology and competition standpoint than fasteners is.

Right, and as a commodity item, I guess, at least while this transition is taking place throughout the world?

Correct.

There's an advantage there that, the stronger certainly at Caltex.

And that brings up a strategic question, then.

Long term, does Caltex retain margins, or does it then become more of a commodity business?

Well, I personally think Caltex will be in the game and have strong margins for about as far out as we can see, because that plastic fuel tank, if you want to just use that phrase, is really a system, and that system is becoming -- still becoming more and more sophisticated as the world moves, not only from metal to plastic, that's still occurring, but now the world is moving from plastic to more sophisticated materials that we produce in order to get to practically zero evaporative emissions.

And that started in California and we were the only company that could quote successfully because we were the only one that had the system that would meet those stringent requirements, and so now you've got that conversion going on.

So it's going to -- I mean, just think about 5 to 10 years out is the area where you're going to be thinking about it.

I don't think there's going to be anything startling in the next 5.

That's for sure.

We have good business growth there.

And then as a final question, sort of switching back, really actually to the Army side, given this Army modularity program, and I suppose we don't really have good detail on that yet, other than to know plus up of 25 billion perhaps from fiscal-year '07 to '11.

Yes.

From an M&A standpoint, does this perhaps make you interested in building your land systems business?

Have been.

We are ramping up right now at systems big time under direction from the military to support 2 vehicles.

One is the armored security vehicle, which is sold to the Armed Forces and used in Iraq right now, and they're ramping that up to a very high rate relatively speaking to some 36 a month, and that's happening down at -- in New Orleans, and we're on schedule to do just that.

And then instead of just the armored security vehicle, there's also an armored personnel carrier, APC, and that also is getting attention, and I think we have about $50 million of sales this year for that, and that will ramp up.

So that could be a very long-term business for us.

It's a little too early to tell, but it turns out to be an extremely strong safe vehicle to transport troops in, and it's pretty tough to knock that guy off the road, so I expect that will be a pretty good growth for us for years.

On the organic basis, do you want to use your balance sheet and maybe bring some other platforms on-line?

Absolutely.

We have been looking in the intelligent battlefield area, and situation analysis, and a number of the things that would support better and stronger end-to-end capability at Textron Systems at opportunities for acquisitions.

There are a number of them out there.

We've had a lot of activity.

Frankly, we have -- we found some of the prices to be unacceptable to date, so we haven't done anything, but I would say there's a very strong pipeline of potential acquisitions in that area, and we're working very hard on it.

We need some specific capabilities in order to really strengthen the very strong niche we already have in that area, and we're working hard to try to acquire them.

Thank you very much, gentlemen.

Okay.

Operator, we typically like to try to truncate this by an hour, in deference to everybody's schedules, but I know we have a lot of folks still in queue, so what we'll do is we'll take 2 more calls quickly, and then conclude.

One question a piece, please.

Next we go to Quinten Nufer with Susquehanna.

Please go ahead.

Hey, guys.

I just wanted to get some clarity on the lower than expected guidance for the first quarter.

Is there something to do with Cessna shipments?

What do you mean lower than expected guidance for the efficient?

Well, your guidance is $0.70 to $0.80, correct?

And mean was at $0.85, so I think that is --.

That's your estimate.

We never gave you a guidance for the first quarter.

I said the mean.

The mean is not my estimate.

But my point is -- go ahead.

Walk me through expectations for -- I would have thought that earnings would have been higher than that in the first quarter.

You were wrong.

It's a very typical further.

It's going to be up dramatically year-over-year.

It's consistent with our internal plan.

We can't help what people put out on first call for the first quarter before we've given them any insight.

So there's absolutely nothing going on or changing or off our plan in any way.

I suspect that people were not able to completely understand that pension expense was going to up $0.05 to $0.10 from what we had previously said that we're going to do, additional corporate expense and the investment in R&D, and the like, so that probably explains it, but --

Okay.

And is 51 shipments for Cessna in the first quarter reasonable, or is that high?

I don't have that number.

Do you?

Yes, hold on.

Hey, Quinn, I would say third quarter is obviously our slowest quarter of the year.

Oh, I understand the seasonality.

That's several high, 1, 2, 3 high maybe.

It will approach 50.

Okay.

Thanks, guys

All right.

Our final question is from the line of Brian Lingenberg with Lingenberg & Company.

Please go ahead.

Just a short question.

Could you tell us what your total customer deposits received on the Cessna side were, say, in '04, versus '03 for the full year, and what you're thinking for '05?

Yes, absolutely can do that, because that's a good question, and a huge swing on our cash flow.

Let me premise by saying our operating philosophy is we're trying to generate free cash flow at least a little bit higher than our net income, on a average basis going forward, and obviously we blew through that in '04, and we're kind of closer to 100 percent conversion in '05.

And the single biggest driver of that is Cessna customer deposits.

The impact of the very high book-to-bill rate on deposits at Cessna in '04 was a plus up of 170 million of cash, and right now, our expectation is that book-to-bill will go the other direction in 2005 to the tune of a reduction of 110 million.

So follow that -- so if you just take everything else out of cash flow, we had ability of 170 million in '04, and we'll have a negative of 110 -- that's based on an assumption of what order intake is going to be, that orders will be less than deliveries in '05, which, of course, is predicated on the fact that we're already sold out for '05, and hugely down the path for '06, so there are not a lot of near-term slots left to sell.

Understood.

Thank you very much.

All right.

Ladies and gentlemen, that concludes our call for today.

Thank you very much for joining us, and we'll talk to you soon.

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