雷神技術公司 (RTX) 2002 Q2 法說會逐字稿

Good morning and welcome to the United Technologies second quarter conference call.

Speakers today are David FitzPatrick, Senior Vice President and Chief Financial Officer and Tom McEachin Director, Investor Relations.

This call is being carried on live, on the Internet and is available on UTC's homepage at www.utc.com.

Before we start, let me remind you that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subjected to risk and uncertainties.

UTC's SEC filings including their 10-Q and 10-K reports provide details on important factors that could cause actual results to differ materially, from that of anticipated in the forward-looking statements.

Please go ahead Mr. FitzPatrick.

Good morning.

I am pleased to report another quarter of solid financial performance for UTC.

Let us sum things up for the quarter.

Earning per share 1dollar and 23 cents better than our expectations.

Strong available cash flow, just over 600 million, 109 million dollars about the second quarter a year ago.

Year-to-date we are half way to our cash goal.

We are well on our way to achieve our plans for the year.

Most importantly an improvement in Carrier's operating margin and successful navigation through a difficult, commercial aerospace environment.

For the year, we see our away to an earnings outlook of 4 dollars and 40 cents per share.

That is up 8 cents from what we said in February and request better than expected performance to date coupled with our business outlook for the balance of the year.

Secondly, we remain comfortable with the 2 billion dollar available cash flow outlook for the year.

The bottomline a strong quarter, good shape for the year. (ph) Tom will now cover some specifics for the quarter and I will come back with some closing comments including guidance for UTC and our business units.

Tom

Thanks David.

Let me sum things up again our second quarter diluted earnings per share were 1 dollar and 23 cents second period was a 1.16 in the second quarter of last year.

If we put this on a comparable basis excluding the goodwill amortization second quarter of 2001earnings per share were 1dollar and 26 cents.

Foreign currency was net positive in the quarter contributing about a penny to the EPS less than 1 percentage point to revenue.

Switching to net income, net income for thequarter 624 million dollars that versus 588 million dollars reported last year.

Available cash flow at 603 million dollars as David mentioned, was a 109 million dollars more than last year.

Consolidated revenues for the quarter 7.3 billion dollars and that's about level with last year.

After we declined in the power systems business, revenues would have grown about 2.5 percent.

Now let's take a deeper look at the segment.

After this part of the discussion I would adjust 2001 for the goodwill accounting change.

Starting with Otis had a very solid second quarter.

Double digit operating profit improvement that's up 14 percent while revenues that increased by 9 percent.

About half of this revenue growth was due to acquisitions and all regions had strong profit growth except South America.

Otis new equipment orders were very strong versus by over 20 percent in the quarter, about half of this growth was organic with notable strength in Asia.

Update on Gen2, Gen2 continues to do well with orders approaching 11,500 since the introduction.

In Europe, Gen2 is helping Otis to make significant gains in the fast growing machine room less segment.

In China, Gen2 sales are revamping following last year's successful introduction.

Gen2 was also introduced in Korea in late 2001.

Sales release for North American, we anticipate later this year with first delivery in 2003.

I'll turn it to carrier now.

At Carrier operating profits in the quarter was level with last year, and that's on 3 percent lower revenues.

Most importantly the margin increased to 13.2 percent at Carrier, at the 30 basis point improvement.

A result of cost savings from previous restructuring and other spending reductions.

These offset the impact of lower volume and the absence of a purchasing related settlement in the prior year.

The quarter also included, cost associated with the relocation of Louis Borg (ph) Manufacturing and you recall we announced that last time.

Asia and transport refrigeration experienced growth and North American residential orders were stronger than last year.

However, North American commercially track, commercial refrigeration and Latin America volumes continued to be weaker than a year ago.

Today Carrier marks the 100th anniversary of Willis Carrier's invention modern air conditioning and it has been a quiet a century for Carrier, some statistics in 1902, Carrier delivered one unit.

Today Carrier delivers one unit every 4 seconds of every day.

Turning to Pratt & Whitney now, I recollect operating profit was 7 percent below last year and that is some 4 percent lower revenues.

Some of the factors are military volume, overhaul and repair profits, partially offset lower profit contribution from Pratt, Canada, power systems and commercial spare sales.

Now if you exclude the power systems in this business and look at Pratt's revenues, the revenues grew 6 percent in the quarter with that exclusion.

Power systems revenues were sharply lower compared with 200 million dollars of sales in the second quarter of 2001 and that in fact was the strongest period for aerodynamics sales last year.

Although the airlines continue to be challenged, Pratt's large commercial spares orders were down less than 10 percent year-over-year.

Military revenues dropped significantly due to the JFF program and the doublings of military engine shipments.

In the Flight segment, operating profit for the second quarter was 6 percent lower than last year, revenues 3 percent higher.

Hamilton Sundstrand reduced demand for commercial spares than ATU's, partially offset by productivity improvement, Higher engine control shipments and military volume.

At half of orders for commercial spares were down almost 20 percent from the second quarter of last year consistent, well with internal expectations and we did see sequential improvement, that is second quarter versus first quarter of this year.

Military spares orders have experienced strong growth, up almost 25 percent year to date.

Sikorsky operating profits level with last year. 15 helicopters shipped in the quarter, that is nine below last year.

Offset, this is offset by solid growth in the after-market business.

Just an update on the Turkish Naval Hawks, Sikorsky shipped 3 helicopters under the Turkish Naval Hawk program and anticipates the remaining deliveries in the third quarter.

Although the segment operating profit line interest expense was lower, minority interest expense was higher, primarily as a result of improved performance in orders and Pratt & Whitney joint ventures.

As I mentioned earlier, available cash flow 603 million dollars in the quarter.

That brings us to 961 million dollars year to date.

Looking at some of the key elements of this available cash flow, working capital, a source of cash 66 million dollar source of cash, due to good inventory performance at scratch, so did Hamilton, higher payables, these partially offset by the seasonal growth in Carrier's accounts receivables.

Capital Expenditures were 119 million dollars, that is 43 percent below last year and well below depreciation expense.

Acquisition spending totals 195 million dollars that brings us to 333 million dollars year to date.

The quarter's activity is principally Sikorsky's purchase of Durkhov and aerospace and repair services business, patent with [Inaudible] .

We repurchased 1.8 million shares of common stock for 126 million dollars in the quarter, year-to-date that brings up to 3.2 million shares at 226 million dollars.

Customer financing in the quarter was 96 million dollars consisting primarily away police pool of engines, to support our customers.

Through mid-year, customer financing is under 100 million dollars, less than half of what we have conservatively projected for the full year.

Debt-to-capital, at the end of the quarter was 35 percent, that is 2 points lower than year-end.

Net debt- to- capital was 25 percent, 8 points lower than a year ago.

Our capital structure, balance sheet remains sources of considerable strength and opportunity.

Dave, Thank you.

Let me conclude by giving you some segment in our overall UTC guidance.

We know the commercial airline continues to struggle financially and industrial markets are somewhat sluggish.

We have performed quite well , given these difficult market conditions .

Hats off to Otis for a very good second quarter and first half .

We are all well positioned to achieve the plan [Inaudible] late of February, namely with signal digit revenue growth ,and an operating margin improvement which is just over 16 percent for the year.

And Carrier, they continue of 8 progress realigning, manufacturing, engineering and product development including the consolidation of Louis Berg Carrier’s largest factory into other US factories.

Toward the reason of team remaining probably focused on margin improvement.

Evidence by this and last quarter’s performance infact well the jobs been the last year’s courtesy related settlement and the trailing expenses of Carrier Corps associated with restruction.

Margin improvement of the quarter by over 1 percentage watt.

I'm encouraged by the progress Carrier has made.

Look forward and expect continued progress even all the North American commercial HVAC industry ,I am talking about the commercial side , would likely to remain weak in the second half.

For the year Carrier continues to expect operating profit improvement resulting in margins of about 10 percent and full year revenues may be a cad better than the 5 percent decline Gerald communicated previously.

Talking about overall commercial aerospace, Pratt and Hamilton have both performed well, in this post 9/11 environment.

At Pratt, Louis Chenevert remains confident that operating profit will be at level with last year, with revenues down 250 to 300 million entirely due to the power system's markets.

In flight systems we continue to anticipate operating profit to be flat to somewhat higher than 2001.

Hamilton continues to execute very well , and expect operating profit and revenue to be about flat with last year, not withstanding from the commercial spares declines (ph) Borg talked about.

Sirkosky remains commited to increasing revenues and operating profit by 10 percent, in 2002.

Our output for available cash flow remains 2 billion dollars , we are half way there.

Based on our cash-flow as well as our balance sheet strength and recent share price market-related weakness, we have raised our share repurchase target to 600 million dollars, a 200 million dollar increase from our earlier guidance of 400 million dollars.

Turning to acquisitions we will remain opportunistic and prudent during the balance of the year.

Looking forward , still lot of hope of overall economic improvement, total sectors we participated in continue to be top and as you know we plan conservatively in these environments.

Our attempt to global diversity in the unique benefit in these times, good news the year was no longer headwin and a brief hold , we backed it by a part of nickel of EPS in the second half.

Moving back to our focus, however, of operational excellence, this is our focus which gives us confidence in being able to perform consistently in our global markets.

George David has observed our performance this quarter confirmed our long-time commitment and record performing and challenging economies and market conditions, navigating through adversity, disciplined operating performance and focus, hallmarks of our company.

Going forward, we remain focused on these fundamentals, we look at our customers, quality, time and services, dedicated workforce and integrity and pride on how we run our businesses around the world.

Shiaz (ph) now I would like to open up the call for questions.

If you'd like to ask a question at this time please press star then the number 1 on your telephone keypad.

We'll pause for just a moment for Q&A roster.Your question comes from Micheal Regan , with Credit Suisse First Boston.

Good morning.

Dave, I was wondering if you could dig into Otis a little bit more, you know, first quarter was disappointing and the second quarter is equally surprising on the up side.

Can you just talk about some additional details there in terms of what's happening?

Well, as we look at Otis might right characterize, Otis first quarter performance as good solid double digit operating profit improvement .Yes we did see, I guess lack of organic growth in the revenue side in first quarter, although we did see pretty good order activity in a number of markets.

I'd say in the second quarter if I would highlight differences, which may have led to the organic revenue growth.

We saw better order activity in Europe, along with a continued strength in Asia, so I think the new order activity, coupled with strong focus priority in the team, on the service portfolio, we saw quite good performance in the second quarter over all on revenues and consistent continued good performance on the margin line.

So guidance is somewhere mid single digit revenue growth for the year, so we were down a bit at first up 9 in the second and kind of set a lot of mid single digits right now...

I think that's a fair view for the second half.

Got you and Tom, what was the actual operating cash flow number for the second quarter or the six months to date?

Michael, I'll give it to you for the second quarter, it was 819 million dollars.

Eight nineteen?

Thats correct.

Terms the cash flow from operations as 95 basis

So that's 1billion 392 , for the six months?

I'm just going to confirm that for you Michael.

Yes.

Okay, and then Dave how about on R&D, pretty big drop sequentially in the quarter, could you give us some sense of where the biggest fall-off were by business?

Sure.

I mean as we look at R&D first I would like to state, if the spend level was consistent with our plans.

Number 1, in terms of the declines on a year-over-year basis, two most notable businesses, Pratt and Carrier recalled a peak spend of 6000, has incurred in the past, also as you know Gerald has been focusing Carrier's on the efforts on larger programs that we have seen some declines, not only in the second quarter but also in the first quarter, in terms of Carrier R&D.

Okay. [Inaudible]

Pratt and Carrier are the two businesses.

Perfect, thanks.

Thanks ,Micheal.

Your next question comes from Howard Rubel, with Goldman Sachs.

Good morning, gentlemen.

Dave I want to ask a high level question, you talked about the Euro being helping the results by a nickel and you being content by about 3 cents in a quarter so we are at the 4.32 we get the 4.40 without really breathing very hard, yet it seems to me that you've talked about Otis being a little bit better in terms of internal growth and Carrier's top line also being a little better.

So, I don't understand why you didn't show us a little bit more.

Well, I think, first I mean, we look at 8 cents is being a good improvement against our prior expectations, to your point, in terms of currency, the good news is, the currency situation you've highlighted builds traditional contingency for the year I would remind all of us that the contingency was a little bit back and loaded with the fourth quarter with last year's pulse 9/11 being our easiest compare you know 2002 versus 2001, so we feel well positioned, Howard, at this level you know in terms of the 4.40 and to your point by no means is that a ceiling .

And then, thank you, and then just one follow up on Pratt, could you explain a little bit of the market dynamics as you see them one, in terms of Pratt Canada, and two, in terms of what you're seeing in mix with spares business.

It looks like with the joint ventures are being stronger than overseas activities outperforming the United States.

Okay, Howard, let me talk about some of those dynamics for Pratt.

I'd like to start with spares if I could.

The numbers that we saw for the second quarter were less than 10 percent.

But if you look at the older products, the 80 and the 90 those are still declining year-over-year, we actually saw some growth in the orders for the PW4000 series products.

Not so much in the B2500 but in the PW4000 's.

In terms of Pratt Canada, Pratt Canada shipments were down in the 20 to 25 percent range for the second quarter, pretty much as we saw in the first quarter.

I think that's a reasonable expectation for Pratt Canada going forth for the year.

Thank you very much, Tom.

Your next question comes from Joseph Camel with Lehman Brothers

Good Morning.

I just wanted to go back to Mike's question about the R&D for a moment.

It looked like expressed as a percentage of sales, it was nowhere below than the guidance was.

Do you think it is going to back up in the second half?

Always look , Joe, in the R& D ...

Can we say about 305 million for the rest of the year?

I think that the 305 maybe , you know a little bit like, but I look at 4.5 percent of sales is being, it will be reasonable [Inaudible]

And then, thank you.

On the power business could you just , I know you made a comment , I don't know if I have heard all the numbers there, just update , since the power was so weak at Pratt, sort of remind us of the importance of power and sort of sales and profits in terms of watts, what had happened, I guess you said that Pratt would have been up 6 percent, had they not had the, was it important drag on profits as well ?

Not so much of profits .The revenue implications for the power systems, they were down, from 200 million dollars and

They were down from 200 to , what?

To just over 13 million dollars.

So it was down to 190 million dollars, Joe

Oh, wow.

It's just about disappearing.

Well, we talked about.

From the revenue perspective, from a profit perspective, we found much of an impact on profit, but we do make profit on those products however, not much of an impact for Pratt.

And then I thought I heard you mention, that the transport products in Carrier are worth little better, as I recall the refrigerator truck trailer business, was something that we talked about for several quarters being weak and I guess in the other market would be the refrigerated containers.

Can you give us some little color on how, where and what's going on there?

Yea, for second quarter , transport refrigeration products work better.

We actually saw pretty strong orders in the quarter and that's all for the weak first quarter.

But strong orders for the quarter, up close to 30 , 40 percent

What about the shipments themselves?

Yeah, that's the shipment number.

The shipment in the transport

[Inaudible] transport that's what the truck trailer piece.

Was that 40 percent?

Yes, that may separate that from containers.

That was truck trailer piece.

If you look at the container business on that sales basis, it was relatively flat with the second quarter of last year.

So we are seeing some signs of the turn around in the transport refrigeration product.

And then lastly, if you just look in general about your military business across the corporation, can you characterize about how you see this business you know cross all the stuff going up, is it, you know, well double digits, we are talking about that Sikorsky being up 10, is that the kind of reasonable number if you look it Hamilton Standard, Pratt and so on, in the other pieces around the corporation, is it possible to characterize how the military business is going?

What we are seeing Joe on the military side, it is consistent on what we said earlier.

We said we expected revenues to be up 20, as you look at our portfolio of military businesses and we're seeing atleast that, year to date across the board and that is one of the strengths that counter to the early 90's, when we saw military going the same bad direction as commercial, I mean the military sides providing a nice buffer through the declines we're seeing in commercial aerospace.

And then, just lastly, on the finance thing where you are running well below, you know the level you set aside for yourself and I wondered if does you look after the second half, you would see some, I don't know, threat to opportunities to use the customer financing or does it look like the number to come in a little lower at the end of the year.

Well, I think we have the 250, which we used for planning purposes is conservative at this stage, well, there is not a lot in the pipeline in terms of campaigns, but you know we feel quite good about the overall balance sheet and we looked to support our customers, as we look at various campaigns.

Thanks very much .

I'll let somebody else ask some questions

Okay Joe.

Your next question comes from Donald MacDougall, with J P Morgan

Hi, its Donald MacDougall with J.P. Morgan.

Good-looking quarter here, question I guess first on aerospace and the after-market comments you made.

You had noted that the spare sales at Pratt were down by less than 10 percent.

Hamilton Sundstrand was down by 20 percent.

Could you talk about why you are seeing the difference or why you think you are seeing the difference in the spare sales for those two businesses?

Now I think, one of the reasons is, we look at run rate down, Pratt & Hamilton both had very good first halves a year ago, but Hamilton was particularly strong so I think in the terms of the overall market environments we are not seeing a big big difference but Hamilton saw very very strong orders and spares sales in first quarter and second quarter while in Pratt's things may be taper off a little bit more than Hamilton in Q2 a year ago.

Aside from the comparison issue, is there any possibility to different levels of inventories for say, engine components and systems?

I don't see anything meaningful in that regard.

Okay.

Turning to Otis, could we get a break down of the revenues on a core basis by original equipments, service and modernization?

Yes, It was data.

Let me start from just the top level for Otis.

Otis had reported revenue at 9 percent and we said that was about half organic about 4 points of organic growth.

Looking at it from a new equipment perspective, the sales growth for Otis was 9 percent new equipment, 8 percent for service.

Organically by area, I will take it for Europe first, exclude acquisitions, Europe was down about 3 percent, that was principally the central European area which includes Germany, the Northern Europe area and Southern Europe all through in the quarter.

Asia was the strongest by far;

Asia was up 36 percent and North America pretty flat relative to last year.

That is new equipment orders.

Okay.

Now I will get back to you on the modernization details.

One point I would like to add on, in fact Asia overall, if you look at the diversity, now our sales growth organically in Asia was solid double digits, which we think again speaks well of our geographic diversity, now as a true strength of the company.

Okay, and then just on you had mentioned for Carrier period costs, were there other period costs in the different segments and could you may be give us an update on what expectations for period costs would be for the full year, for the corporation?

One of the things we have done this quarter, Donald, is we have absorbed some restructuring, some new actions as well as the trailing expenses for the period costs across the distances where these are terribly significant so we are not necessarily looking at striking these out as we expect our businesses to cover these impacts in our operational results.

As we look at activity in the quarter you look at Otis margins for one, Otis probably incurred up and overall reasonably small numbers at the greatest percentage, you know Hub restructuring and period expenses, may be followed up by little bit at Pratt and Carrier.

You know, Louis per closure will indeed impact Carrier in the second half of the year, but that is fully reflected in the guidance that we provided on Carrier.

Thank you.

Okay, thanks Don, thanks for the comments on the good quarter.

Your next question comes from Steven Binder, with Bears Stearns.

Okay, good quarter guys.

Couple of things, just a follow up on you know Josephs question about currency and the benefit you're getting if it holds at current levels and you kind of touched on with respect to new actions you absorbed in the second quarter, but is it fair to say that, do you expect new actions, actions that you absorbed from a restructuring stand point even if you don't highlight it will pretty much neutralize the benefit you're getting on the currency side down for the year.

Maybe a piece of it, but possibly not all of it.

So you're not expecting any big restructuring actions in second half of the year.

Big no, but continued costs and at productivity improvements absolutely.

And how much was the cash restructuring cost included up in the 819 million cash flow...

That will be a little over 50 million dollars of cash spent for restructuring in quarter two.

Okay, and then if you look at the R&D in the quarter you know back in April talked about funding being 5 percent of sales, David touch on 4 and half percent, so, let me touch on couple of reasons why R&D came a little wider in quarter two, but you know if you look at the full year 2002, you know half a point of pick up alters the plan you know what's happened would you think in last 3 months that is really given company more encouragement about the full year.

I think couple of things, we saw number one, Pratt hit the key milestones with respect to some of the program issues that we discussed with you Steve and maybe even more importantly we have seen, executed well some of the increased focus that we're always leading at Carrier and I would say that the combination of those two factors give us, give us confidence and this is under any cut below plan, what we're executing is consistent with our plans for 2002.

Okay, and if you look at the, you talked about the point of improvement when you back out last year's benefit at Carrier.

How much of that improving your views really on the commercial refrigeration side, you know Tyler, Ardco, Electrolux, you know the problems you have over the past year and half.

[Inaudible] we're seeing improvements that we're coming off in a very certainly small base in that regard, so my view we still have a lot of runway in terms of margins in those businesses.

So would you say that improvement you at saw Carrier was really primarily restructuring actions across the [Inaudible] overhead costs in all lines of businesses supposed to you know the problems year ago getting better.

Yeah, I would say short answer your question Steve, is yes.

Alright and lastly on the acquisition front, I mean there is not too many companies out there that have pretty good balance sheet's you have you know essential 3 billion dollars in net debt, you know technically you could be out of debt here within two years, you know just wondering evaluations have come down reason the public markets, you might have sensed there might be step up acquisition activity from the company here in the next six months or do you not see they're kind of attractive evaluations you're hoping to get.

Steve, more of the latter.

I mean as we look more into small cap, anything that has defense associated with it, evaluations remain in our view a difficult hurdle.

Okay, thanks very much.

Your next question comes from George Shaprio with Salomon Smith Barney.

Good morning, good numbers.

I wanted to follow a little bit more on Steve's question at Carrier.

I mean with the truck travel business better commercial worse than residential, better, I mean effectively you are getting some benefit from margin mix at Carrier.

So could you split it out, how much was mix benefit at Carrier's margin versus how much was the restructuring that you talked with Steve?

I wouldn't say there is much of a mix benefit in there George.

The Residential obviously is one of our better margins.

We can get pretty good margins on the transport area.

I think George, I mean Tom didn't mention less orders were up.

We didn't really see any improvement on less sales, you know, for the period.

So I would characterize Carrier's margin improvement as cost based.

Restructuring focused G&A cuts beyond restructuring and continued focus in terms of the R&D development programmes.

Okay and in at Pratt, you mentioned the orders were down less than 10 percent.

Can you tell us either how much the spares were down or what the book-to-bill, won't you to give some guidance there.

Book-to-bill was 1, George.

Okay and in terms of the drop in R&D, Dave could you just roughly split it to $33 million between Pratt and Carrier?

50-50.

Okay and now I would let somebody else continue.

I can't find any more questions right now.

Thanks.

Okay, George.

Your next question comes from Cai von Rumhor with SG Cowen.

Yes, we mean a little bit late with any abnormal items in these results, either restructuring period expense, and of so how they can wear and you know kind of any positive reversal of reserves, anything about Elk?

No Cai, and I think to win you look at the UM's and (ph) and other line, you know more heads than when we have seen, in recent quarters

I think I'm hearing you know little improvement in tone of business and in some of your markets.Could you comment a little bit of the track commercial spares order down less than expected.

Give us some geography color on that?

And secondly talk a little bit about the Sundstrand Industrial business of what we have seen there?

First in terms of the track spares geography.

We have seen improvement in Asia .Oh!

That's a positive trend for Pratt and UTC.

Looking at the Hamilton Industrial Businesses, we did have top confirmed as, see a bit lower sales as well as profits in those businesses, so, Ron McKenna and the Hamilton team continues to see challenges there, but are executing quite well in the aerospace markets.

My question was more just sort of business kind a future orders , you know we are seeing any improvement ?

Partly slight improvement in terms of the words, but nothing that I declared turn around at this stage Cai.

I mean, may be we got a doubt in those businesses.

Okay, and lastly, I think your meeting of Pratt Canada; you talked of weakness in Pratt Canada's actual markets.

Give us any kind of color there about how much was the after mark at the Pratt Canada down in sales, you know orders so to build and any sort of sequential, then where we might be going?

Sure Cai, we can talk about the trend in the year-over year spares of Pratt Canada.We are down to that 20 plus percent range as well, not 21 percent.

Okay.Okay, and book to bill or is that more or less the same?

It was pretty close, if you take a look at the shipment change that was about the same.

Alright, Thank you, very much.

Thanks Cai

Your next question comes form Chris McLaine with [Inaudible] Bank

Hi, I was wondering if you could just comment if you view the current environment as the reasonably attractive one for M&A in the aerospace side, you made the comment on the military but you know, does that apply kind of across the board given uncertainty on the other side as well?

I'd say Chris, we'd all see a lot of opportunity on the commercial, we keep, I mean as we keep for some time, we like you know full ball after market opportunities but we dont see a lot, on the commercial side as well as anything in the defence these daysl.

Okay , fair enough.

And one other thing, would it be possible to review a couple of what as regard as key new products initiatives that will truly drive growth over the one or three years , given that there is a bigger picture here.You know kind of low R&D although you're gaining in the after-market in some areas , it seems like a limited amount of re-investment in some of the businesses here.

Well, I mean, I guess I take a different view as we look at the way we're positioned in terms of our overall military programs starting with Pratt , you know I go back to C17, JSF, F-22 continued investment as well as opportunities in those businesses.We look at Sikorsky with Comanche, S-92, Hamilton Sunstrand we'll look at those same programs, I mentioned large development efforts on those programs .We continue to invest in fuel cells and we're looking at a replacement for the Fox PC25 next year, so I characterize those programs as considerable investments with very good revenue opportunities.Gen2 remains a geographically rollout, we will make a lighter progress there.Carrier is introducing later this year a new 80 percent furnace in North America , we have great expectations for that product so I would not interpret any reduction in R&D'scutbacks and new programs.

Okay thanks very much.

Okay.

Your next question comes from David Bleustien from UBS Warburg.

I know you've done it at Otis but could please walk through the contribution to segment revenues from acquired companies in the quarter and year to date if you have it?

Let me go down the list, Carrier not much from an acquisition stand point, their revenues down 3 percent as you saw reported and that potentially their organic change as well.

Similar to Pratt, 4 percent down and that's centrally all organic change.

Flight segments different here we have from the acquistion of Sikorsky, so if you look inside the Flight segment the Derco acqusition has been helping Their reporting 3 percent up, in organic that's ONE percent.

All right terrific, thanks.

That is it.

Yes, that's it.

Okay

Your next question comes from Sam Pearlstein with Wachovia Securities.

Good morning.

I wanted to ask you a question about the spares you know that the PW-4000 was relatively strong in terms of the spare parts.

I wonder is there any way to segregate that add and look at the whole surge issue and how much that is driving force for the PW-4000 strength.

Same.

Just to characterize I wouldn't say that it is relatively strong.

I did say it grew on a year-over-year basis and I'm not sure we can attribute that to these products has reached the point in their life cycle where they need spares new overhauls.

Okay, and can you give us the shipments for Pratt Canada military and commercial.

Yes.

I'll start with military, very strong military shipments in the quarter, 51 units and that's versus 25 last years.

Pratt Canada was 401 that versus 527 last year.

Industrial products zero, that's against 22 shipments last year.

The commercial engine, large commercial engine 88 shipments this quarter that compares to 116 last year and at lastly helicopters, 15 helicops we said in the conference call discussion period. 24 last year.

Okay, and on the helicopters, some of the trade press is been talking about Ireland and some of the other countries is really not being able to buy some of the helicopters they had planned and does that impact this year or next year deliveries.

Now that was the S92, which really wasn't scheduled to ship this year, so no impact for 2002, probably pushed it out to beyond 2003 as well.

Okay and is there any benefit in terms of the P&L from those industrial turbine cancellations or just no deliveries.

No impact.No Sam.

Okay, and then lastly, it sounds like the acquistion pipeline is relatively staying in and should we assume if we don't actually spend a billion dollars that more might get shipped into a chevy purchase.

That's something in the gap of 600 million is not a ceiling.

So possibly.

Okay.

Thank you.

Teena (ph) , we have time for just one more question.

Your next question comes from Caroline Price with UBS Warburg.

Good morning.

I was wondering if you could on Otis give some background on the exception that you noted to the strong profit growth in the, in South America, and particularly if you could talk about that in light of the general market conditions and then, if there have been any significant competitive developments which also might have affected performance there?

Well not, I just make two comments on that.

I think we know that the economy in South America, the economy for South America had been weak.

That is not reflected in Otis's sales for this period.

It is a small part of Otis's business so not really a significant impact on the company but it is mainly economic weakness in those markets.

Okay, and you did give already some indications for the organic growth OEM business in Otis.

Would you be willing to state what it was for South America?

[Gap In Audio]

For South America the reduction for Otis, let me see take a look on the fall-on in the second quarter, let me just a second. (Background noise).

That about 6 percent, if you look at the combination of new equipment and services.

Okay.

Okay.

And then also on Otis in, you..., I was just wondering if, you know, when you said roughly, roughly 4 percent organic growth, this is exclusive of currency impact or inclusive of it?

Exclusive of currency.

Okay.

Thank you very much.

[Inaudible] and Gina, thank you very much.

I want to remind everybody that myself, Rick Beryl and Myra Lee will be available after the call to answer any other question you might have.

Thanks and please conclude the call.