雷神技術公司 (RTX) 2002 Q3 法說會逐字稿

Good morning, and welcome to the UTX third quarter conference call.

On today's call, Steve Page, Chief Financial Officer, Tom McEachin, Director of Investor Relations, and Jim Geisler, Director of Planning and Analysis.

This call is being carried live on the Internet and is available on UTC's home page at www.UTC.com.

The company reminds the listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risk and uncertainties.

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

Please go ahead, Mr. Page.

Thank you, Jennifer.

It's good to be back as the CFO of United Technologies after having spent a few years in Otis Elevator Company.

As I look around UTC, things really haven't changed.

The organization, a lot of the guys that sit around this table worked for me when I was CFO before.

I know obviously other CFO's of the divisions extremely well, obviously all the Presidents and I have worked together for the last few years.

It's a good team and I'm really happy to be back here.

And I am talking to George over the last few weeks, he is still focused, as we were for the last 10 years on the shareholder agenda, and hopefully you'll be convinced that we continue to have the shareholder agenda squarely in front of us every single day.

This is the first quarter that I've been CFO in five years, it's really a solid quarter.

As you saw from the press release, earnings were up $1.21, better than what we expected.

Available cash flow, 596 million, 50 percent higher than a year ago.

And year to date, that puts us at 1.6 billion while on our way to the $2 billion number we gave you earlier this year.

Our friends at Carrier continue to make great progress, top line up, 5 percent.

Margins improved just slightly under 12 percent.

And that's a half point improvement from last year.

That's really good performance by the team.

The team at Otis continues to improve margins and we expect that we'll continue for a long time to come.

Commercial Aerospace, it's in line with what we told you last year and obviously earlier this year, the good news of that sector is military, having looked at the military business over the last few weeks, it's up over 25 percent from where it was last year.

Of course that's good news in military, somewhat offset the slowdown in the commercial aerospace group.

I remember a few years ago we always talked about foreign exchange being a negative to us.

And now, as you see from the press release, it's 2 cents positive and hopefully foreign exchange will be helpful to us as we move forward through the next several quarters.

I've got a few things I'd like to talk to you about in the context of what we've been doing here for the last month or so, but I think what we want to do first is go through the quarter, cover those issues.

I'm going to ask Tom to take you through quarter three and ask Jim Geisler to talk a little bit about the fourth quarter.

I want to come back and talk to you about some things I had been working on and share some thoughts with you.

As is our practice, we'll open questions up for you.

So in summary, good performance in a fairly difficult environment, and will take you through more of the details.

Thank you, Steve.

Well, you have seen the press release, I'm going to go straight into some of the details of the quarter.

Starting with consolidated revenues, they were $7.3 billion, that's 5% above last year.

And we had increases at Sikorsky, Otis and Carrier.

In fact, Carrier had its first quarter year-over-year growth this year, that's good to see.

Our net income $612 million for the quarter, up over 8% from last year.

That income includes a gain of $43 million, that's from a one-time change to a benefits program.

This was more than offset by cost reduction actions amounting to $65 million in total cost reduction actions across the company.

As Steve said, available cash flow was $596 million, that's $209 million ahead of last year year.

And within that our cash flow from operations was $859 million.

That's also up $218 million from a year ago.

Capital expenditures in the quarter were lower than last year by 26%, and it was less than our depreciation so it was a source of cash for us.

Cash flow, I think, as you can see from our performance the quarter and year to date, is one of our strengthening and we have high confidence in our ability to continue with strong cash flow.

Now let's dive into the segments.

I'm going to adjust in this conversation for our restructuring actions in 2001 and the goodwill accounting change that you're all aware of.

Starting with Otis, Steve said very solid third quarter, revenues up 12 percent, and operating profit improvement up 17 percent.

If we put that on a constant currency basis, revenue is increased by 7 percent, and of that, three points of that were organic growth.

Operating profit if we adjust for currency, increased 11 percent and that reflected growth across all the geographic regions, as well as the benefit of acquisitions.

Asia has been a bright spot for Otis all year long.

For example, in the quarter Otis announced new equipment orders valued at $30 million from two major Korean retailers, and in China, Otis Elevators and escalators were selected for one of the initial infrastructure projects associated with the 2008 OLYMPICS.

Turning to Carrier now, it continued to make good progress, revenues up 5 percent this quarter with operating profit up 10 percent.

Carrier's margins increased to 11.8 percent, as Steve noted, that's a 50-basis point improvement despite competitive HVAC pricing pressure, but they benefited from the higher volume and cost reductions.

Volume growth at Carrier led by transport refrigeration, and North American residential benefited from a warm summer season.

However, North American commercial HVAC demand remains weak, and we are seeing some slowing signs in the European market for Carrier.

Some other good news for Carrier in the quarter, Sears Roebuck & Company signed an exclusive three-year agreement to sell Carrier residential HVAC systems and products, and that will be starting in 2003.

In addition, Carrier signed a contract to become the sole manufacturer of Kenmore, that's Sears' private label brand, residential heating and cooling systems.

At Pratt & Whitney, operating profits 7 percent below last year, revenues down 1 percent.

Lower commercial spares, power systems, were the principal drivers there.

Year to date Pratt's large commercial spare parts orders were down a mid teens percent, that's on a year to year basis, but they face an easier fourth quarter compare, given we saw the impacts of 9/11 last year.

We think they'll be on track.

Looking at the military business, up significantly in the quarter due to increased volume for the military business.

And commercial overhaul and repair revenues and profits were also up in the third quarter.

Pratt's third quarter includes a warranty charge offset by favorable engine contract adjustments, no net impact on Pratt & Whitney's numbers as a result of those two items.

The engine that powers the F 22 has received initial service release approval from the U. S. Air Force.

What that signifies is that the engine is ready for the transition to an operational environment.

This engine now has more than 4,000 flight test hours.

Without a single inflight shutdown or engine stall.

Now, moving to the Flight segment, operating profit for the segment was, in the third quarter, 4 percent lower than last year.

The revenues were up 19 percent.

The revenue increase was largely due to Sikorsky.

They shipped 27 helicopters in the quarter, an increase of 8 over last year.

Hamilton Sundstrand's military aftermarket was also up from last year.

These increases were more than offset by lower commercial aftermarket and industrial business at Hamilton Sundstrand.

Turning to eliminations and other income, you see favorable versus last year, because if you recall last year's results included the benefit from tax settlements.

Tax rate, 28.4 percent, and that's flat with last year if you adjust to the tax settlement impact in the third quarter of 2001.

On R&D spending, $48 million lower than a year ago.

That's primarily due to timing on the PW 6000 program.

Again, for 2001, we were going through the certification process on the PW 6000, so you would expect to have seen that come down for 2002.

For the full year, though, and this is for the corporation, we expect the R & D dollars spent to be about flat with last year.

So that's the highlights for the quarter, and Jim will now give you our earnings outline by unit and UTC in total.

Thanks, it's great to be back on the call today.

Starting at Otis, the business remains on track for revenue growth, we expect they will again deliver operating profit margin improvement of one percentage point this year.

I think as in the past, Otis' robust service business and geographic diversity has continued to help it provide consistent double digit earnings growth during these times.

Carrier continues to make good progress in a very tough environment.

For the year we anticipate revenues will be down about two or 3 percent while operating profit will be up mid single digits.

Now, I think that's a notable accomplishment to generate up profits with down revenues in light of absorbing period costs from the Lewisburg plant closure that we announced and shared with you in March and a very competitive pricing environment that's developed in certain regions around the world.

Although the housing has remained very firm recently, we expect many markets to remain very tough, including commercial HVAC and we don't see an immediate turnaround in some of those markets.

At Pratt Whitney the guidance is unchanged with operating profit about flat and revenues down around $300 million or so from last year.

Flight Systems operating profit should be about level with last year's.

Hamilton Sundstrand's revenues and operating profits are trending down as a result of weak industrial and commercial airline aftermarket orders, which is more than offsetting this year's positive military volume.

Sikorsky remains on track for 10 percent growth in both revenues and operating profit.

For 2003, in total, if you put it all together, UTC has the operating disciplines in place to make us comfortable with the quarter and year despite a difficult and sluggish economic environment.

If we turn away from the P & L and look at the cash flow, year to date performance has been about a billion six on available cash flow making us very confident of achieving our full--year target of $2 billion in available cash flow before pension contributions.

In terms of is spending the cash, acquisition spending should be around $400 million for the year, as for us in the areas in which we're looking to consolidate transaction multiples are still a little bit pricey, seem to be based on valuations 12 months ago, than they are, say, last week.

In light of our good cash and the weak equity markets, we have increased the projection for $700 million for the year. $300 million in the fourth quarter, more than twice our year to date run rate.

I guess we say we like the stock, with that I'll turn it back to Steve.

Jim, thank you.

Tom, thank you for the comments comments.

Let me go over a few items that I've been thinking about since I returned to CFO, just to chat with you about those, then again, ask you for questions.

The first area that we've been looking at is commercial aerospace.

Obviously it's changed dramatically in the last couple of years, and particularly in the U.S. airline part of our aerospace business.

The first thing that one concerns themselves about is the balance sheet exposure that we have to that business.

And let me just call your attention to a few numbers.

If you go back and look at last year's annual report, you'll see that we have a reserve or an allowance for doubtful accounts of $452 million at the end of 2001.

We have additional reserves, evaluation reserves for aircraft dispositions.

So if you take the aerospace component of a $452 million and you take these other valuation reserves, we have about $192 million of reserves set aside for our balance sheet exposures.

Let me tell you that I'm very comfortable with that level of reserves for these uncertainties that are certainly before us today.

If you look at the business today, compared to five years ago, our dependence is certainly less than five years ago.

In fact, only 25 percent of UTC's revenue is commercial aerospace.

And on Pratt's commercial spares, it's less than two-thirds, commercial spare revenue, less than two-thirds of what it was five years ago.

In fact, engine shipments is less than 5 percent of our total revenue for UTC.

So the dependence that we had before is no longer the same as it is today.

And as I mentioned, I do think whatever exposures we have are adequately reserved in almost a half a billion dollars on our balance sheet.

The second thing that certainly is on everybody's mind is pensions.

And the funding of pension plans.

Clearly, the stock market over the past year or two have created fairly poor results in pension plan performance.

And that of course is exacerbated by the fact that interest rates have fallen fairly dramatically.

You saw from our press release today, we put an additional $500 million of cash into the plan this week and that's on top of $500 million of stock that we put in over the past 12 month.

The total contribution over the 12 months is $1 billion in both cash and stock.

We are prepared to make a contribution next year if it's required.

I use the word "if it's required," in the context of the stock markets.

As you know, the stock markets moved fairly dramatically on the upside over the past few days, and it's actually improved the underfunding position by about 10 percent.

So these are, as I say, fairly dramatic numbers.

However, we are looking at an equity charge, I don't want to do a lot of the accounting, but that's talk about FAS 87.

As you know, you take the liabilities that you have under FAS 87, the ABO liabilities, which are the current liabilities in your pension plan and you subtract those from the assets that you have.

And our measurement date, as you know, is September 30th.

So you take the liabilities, subtract them from the assets and we have more liabilities than assets.

We'll probably be making a charge to the equity account of between one and a half and $2 billion for the balance of this year.

Now, you'll know, again, these are balance sheet items.

These are not P & L items.

We'll be making a charge between one half and $2 billion.

And again you know that under the literature that you tax effect the gross amount.

You take the gross amount, use your tax rate to tax effect that, and the net amount is your equity charge.

We looked at some pro forma numbers for the end of the year and our debt to capital rate will stay at about where it was last year.

Last year, again, being December 31st, 2001.

So we have these issues squarely in front of us.

These are point-in-time adjustments.

As I mentioned a minute ago, the market has moved in our favor over the last few days.

When we make the next adjustment 12 months from now, who knows where it's going to be.

But certainly not a big item for us given the fact that our debt to capital will be about where it was at the end of last year.

I'd like to spend some time on stock option accounting, a lot of questions about well, what are you guys going to do?

In looking around, I notice there are some companies who have decided to expense stock options.

There are a lot more who have decided or have not said whether they would or would not at this point, and we're in that latter category.

We're continuing to study it.

I've read the FAS B which gives you sort of a multiple choice on how to account for stock options.

I can't imagine it's going to give us three choices on how to account for stock options.

Certainly comparability is an issue, if you have three options, it doesn't help on comparability.

I think we'll see settling of the FAS B and we'll have some decisions to make that correspond with what the FAS B asks us to do.

Another area, if you look at what's happened in the accounting world over the past couple of years with this FAS 172, goodwill accounting, a new FAS on how to account for restructuring, and stock option accounting which is yet to be decided.

All of those accounting changes change the reported earnings per share of the company.

But it doesn't change the cash flow of the company one nickel.

And I think the common denominator, I know most of you use cash flow as the relative measurement of the company.

We think that's important because that's the only number that's really comparable to all the change in the FAS B's.

Over the next few days, I think you know George David will be on the road meeting with some of you.

Tom and I are going out to do that also tomorrow and next week.

And if there are others that have an interest in seeing us we certainly are available and are delighted to come out and spend some time to chat with you about this.

Okay.

The last point, we're about to start putting together our budgets for 2003.

That will be work over the next several weeks.

We fully expect to be finished by the end of November before we meet with you.

As you know, we have a scheduled meeting with you all on December12th where we'll spend a lot of time giving you guidance for 2003.

So today we'll focus on the things we've talked about, which is 2002 and some of the issues that I've raised to the extent you have an interest.

We can talk about those.

Okay.

These truly are exciting times that we find ourselves in and it's certainly an exciting time to be the CFO of one of the finest companies in corporate America.

I think you'll hear us always say that we will keep the shareholder agenda squarely in front of us every single day.

And that has been our theme for 10 years and we don't expect to change that.

Well, that's what I had to say and let's open up the call to see what you all have to say.

In order to ask a question, please press star then the Number 1 on your telephone key pad.

Your first question is from Don MacDougall of J.P. Morgan.

Good morning and welcome back to the call, Steve and Jim.

Thank you.

The question, I guess first question would be on Otis, I think you said the constant sales were 7 percent, 3 points of that, organic.

Could you give us a little more color on where the regions are in terms of the orders, and kind of what the outline is right now?

Sure, Don.

Let me take this, Don, let me take that.

First of all, total orders for Otis for the quarter this is inclusive of acquisitions but at a constant currency rate, just below 10 percent, a single digit number.

On the new equipment side, up single digit, low single digit number.

I want to point out however that in Q3 of 2001, Otis had a very big quarter in North America, actually took close to a hundred million dollars of new equipment orders in New York City.

So I'm going to adjust that if you will allow me, adjust for that a bit.

Originally, their growth was single digit, about what you would expect in line with their revenue assumption that they'll be up mid single digit this year.

And then the perennial follow on question to that: How are the numbers so big given what we all know is going on in commercial construction these days?

Well, I think a big piece of it, in answer to your question, a big piece is our position outside the U.S.

We've talked about Asia as a bright spot for the company, and it continues to be a bright spot for Otis this year.

Some examples that I quoted earlier.

Europe has also been good.

I think from the standpoint of executing the plan inside of the North American region, Otis is also doing a very good job.

Now a question on Carrier.

Now, we heard from American Standard yesterday, they had a pretty big showing on the residential side, I think they were up 27 percent.

And Carrier's actually more residential.

You guys are up, but I'm guessing the residential business is not up that much or your overall result would have been higher.

Could you give us what you saw in the residential market and perhaps what your expectations would be on an inventory rebuild?

All right, Don, this is Jim.

Let me take that question.

We didn't see residential sales up certainly in the 20 percent range.

And frankly, we might have lost a little bit of share on the residential side recently.

But as we talked about the beginning of the year, we've been very focussed on margin expansion and been trying to maintain price discipline in the marketplace.

I mentioned early in the comments that we have seen price pressure in a couple markets and we're certainly acute on the new equipment, on the residential new construction side in the quarter at Carrier.

So we're still looking to remain focussed on margin expansion and try to work with price.

But we didn't see the same revenue growth as a result that others may have seen.

On the flip side, I think on commercial, we've probably been gaining a little bit of share there, I think we've done that through focus and with additional market coverage and more feet on the street, as we say, people going out and pushing and marketing the product.

In terms of the channel, I think the industry right now, field and factory stocks are down from where they were last year, we're down below the industry's level, I think we feel pretty good about our position in the channel moving forward.

Thanks for the color.

The next question is from Sam Pearlstein of Wachovia.

You mentioned something about your reserves and receivables.

I guess I'm trying to understand, are you talking about direct sales to airlines or are you referring to some of the financing at Pratt & Whitney?

No, the reserves, I'm talking about balance sheet exposure.

Obviously we have open accounts with the airlines and we have reserves against those open accounts.

So if something should happen, you know, there should be a bankruptcy, we do think that our balance sheet is adequately protected against a bankruptcy.

And in terms of the engines that have, I guess, financed through Pratt & Whitney, have you seen any deterioration in the value that's caused you to change, I guess, or impair those assets?

Sam, this is Tom.

No, not at this point.

We feel like we've made the appropriate provisions for any valuation issues.

Okay.

A couple weeks ago, Boeing talked about holding their prices constant into next year for their spare parts.

What are your expectations as we look into next year for Hamilton Sundstrand spares and Pratt's spares in terms of pricing?

Just to update you, Sam, Hamilton did announce a price increase in July of this year.

Pratt & Whitney over the last couple of weeks has gone out to its customers with a price increase as well.

I have to remind you why did not, at Pratt, we did not raise prices coming into 2002.

So we held off for a year.

Okay.

And just in terms of the spare parts trends, what were the commercial spares, you know, in terms of order of magnitude decline at Pratt and Hamilton in the quarter?

Starting with Pratt & Whitney, Sam, spare parts for Pratt, orders were down in the mid teens.

Now, you may recall that in Q2 we said there was less than 10 percent.

So a little bit of sequential difference there.

But still in line with what Pratt had been expecting for the full year.

Hamilton Sundstrand, a little bit better.

They were actually not down quite as far as what we saw at Pratt.

I think part of that is explained by the 2001 results at Hamilton.

Q3, last year, they saw some early implications of 9/11 so it wasn't as tough for compare for them.

Sequentially, Hamilton Sundstrand's orders were down a bit from Q2.

Okay.

And then Steve or Tom, in terms of the pension that you were talking about, you're saying that at this point you see no contribution of cash or stock next year for the plan, and then I'm wondering in terms of the P & L, what kind of FAS 87 expense you might have to absorb?

Let me be clear on that, Sam.

What I meant to say, if I didn't say it, was that we're prepared to make another contribution to the plan next year.

We certainly have the cash flows, and the balance sheet to do that.

We haven't decided today, given the volatility of the stock market.

If we have another few days like we had in the past, you know, everything changes.

So we're prepared to make another contribution.

I don't think we'll make an additional contribution this year, having put the billion dollars in over the past 12 months.

So this year the billion dollars, next year we'll continue to evaluate.

We're certainly prepared to make a like amount contribution if necessary.

As far as the head wind on pension expense, certainly it's there.

We're in the process of evaluating all that.

We'd like to hold those conversations until we all get together in December.

Okay, thank you.

Your next question comes from Steve Binder with Bear Stearns.

a couple things.

First of all, was that gain you picked up in the quarter, the 43 million was the termination of a defined benefit plan.

Where was that gain from a business unit standpoint, and really where were the $60 million of restructuring charges kind of sprinkled about about?

Okay, Steve.

The gain, the $43 million gain that I referenced was from the curtailment of post retirement medical benefits.

That's the bridge to Medicare which most companies really don't have and we're sort of catching up to that.

The difference between the restructuring actions and the gain was $22 million.

It sprinkled across the different businesses. [inaudible] not big enough though move the margins, if you will, in any one segment so in fact, that's kind of how that is split.

And then the one-time items at Pratt with respect to the warranty charge related to the surge problem, you offset that with favorable contract adjustments, were they from deferrals or what happened during the quarter or is that previous to the quarter?

They were actually actions that were taken, the deferrals were during the quarter, which is the accounting of that which requires us to reverse those, which is a quarterly action.

Is there more to come, you know, given what's going on in the environment today?

I mean, should we expect to see some more of these contract adjustments in future quarters?

Steve, you know, when the airlines react in a certain way, there's a certain accounting of that to follow it.

It's hard for me to predict what they're going to do.

Clearly the accounting event is an action by an airline that has a contract with us.

To forecast that is not possible.

I guess my question is, if you have more of these favorable contract adjustments, are there basically more potentially one-time items outside of restructuring that could be, you know, offset against these adjustments?

Steve, you could answer that one.

Let me just try a different question, because I'm getting nowhere with these.

With respect to the order -- I think, Tom, you mentioned that Hamilton Sundstrand's orders declined a bit sequentially, and Pratt Whitney the same.

That was namely in North America.

Actually about evenly split by region.

So it's not like it was -- because it's not very much tied to North America.

That's why I was wondering if there was some weakness there.

If you look at the numbers, there's no tremendous difference between them.

And lastly, Jim, I think you talked originally back in February, the company talked about 10 percent profit growth out of Carrier and you trimmed it to mid single digit growth.

Maybe can you -- you talked about pry -- pricing weakness, but we are getting a revenue pickup compared to the original goal, a decline of 5 percent.

Can you tell us where's that mix geographically, line of business?

I think the two factors really driving us from 10 percent to more mid single digits are the Louis purge plant closures that was announced.

Had that -- that all came after we gave guidance.

That's a piece.

And the price pressure primarily in two areas, North American residential, and then in Asia as well.

China has been good for us, but some not great weather and not great demand in some other Asian countries have led to kind of weak price out there in Asia.

But I would say it's really back to Lewisburg and pricing that's worse than we thought.

We always expected a volume decline, thought we could hold price.

It's not the way the market has panned out this year.

Okay.

And last, Steve, since you're the CFO now, I'm just kind of curious, on a leverage balance sheet, equity prices have been moving you have steadily, the company has basically suggested there weren't great acquisition opportunities a few months ago, you do need some powder there for the tension contributions, I'm wondering, can we see the buy back stepped up even further in 2003?

I think what you heard from our conversation today, we have stepped it up fairly dramatically in Q4.

I kind of like our stock, we like it a lot.

And if valuations stay the way they are out there, it's not -- you know, the valuations, it's people selling things today that kind of remember where their values were two or three years ago.

That's the issue.

And you know, we're not going to overpay for these things.

We like the stock a lot.

We stepped it up, I think fairly dramatically at Q4.

You know, if things stay the way they were R they are, we'll continue at that level.

Thanks very much.

Your next question comes from Chris MecRay of Deutsche Banc.

Could you give us a little bit more of an update on the Carrier efforts to reduce cost?

There were half a dozen areas that you focussed on in your annual meeting that you were going to focus on, obviously you appear to be getting there, can you give us a sense for where you're achieving the best success and if you're falling short anywhere else?

I think our best success has been kind of in controlling discretionary spending.

We've seen, I think as Tom mentioned, we've seen a decline in R & D at Carrier.

We've held a hard, hard line on SG and A, although we have made selective investments in the commercial business.

Manufacturing, we have -- we took our largest plant that was not very efficient and closed it, I think the progress of that transition from Lewisburg, Tennessee to our other North American plants has gone very, very well, we've started moving some of the equipment and lines, that's been satisfactory.

That's not done lightly because of the disruption you cause to customers and your own cost.

But we're satisfied with the Lewisburg move at this point.

The other area of opportunity we touched on back in February was acquired companies, making some turn around and improvements in businesses that we have bought over the last five years.

Primarily in commercial refrigeration, we haven't seen a lot of help from the market in those areas, I would still represent that as kind of an area for improvement at Carrier going forward.

But in -- in total, if you grade it out, I think given the market and the focus of the enterprise, we're pretty pleased with this performance of up profit with down revenues.

Great.

Thanks.

Also, back to the commercial spare side, given the announcements this week with more deferrals on parks, what do you see as any potential fact in the fourth quarter, does that start to eat into the inability to grow the R side and do you feel good about that?

We feel pretty good, as we said in our opening remarks, we're on track.

Pratt & Whitney is on track for the year, very consistent with the expectations we have laid out before.

I mean, if you go back over time, we never really had high expectations for a turnaround in the financial situation of the airlines, so we knew there would be some additional shoes to drop.

Fortunately, we haven't seen the same level of capacity changes that we had comes out of 9/11.

In fact, they're pretty moderate.

We built those capacity changes into our outline.

So I think we're in good shape relative to what we're expecting for Q4.

Sounds good, all right.

Thanks.

Your next question comes from Michael Regan of CFSB.

Thanks, good morning.

Steve, the $500 million cash contribution, did that flow through the cash flow statement in the quarter, or sort of when was it?

And where was it?

I'm sorry, Michael, it was in the press release.

It should be clear, I'll go back and look.

We actually made that in October.

We made it this month.

So you obviously won't see it in the Q3 financial statements.

Your, then, guidance on available cash flow excludes this contribution to the pension plan?

That is correct.

Okay.

And your you're not going to give any confines on what to expect for cash and/or stock for the mention next year, other than to hope that the equity markets get better?

We are going to give guidance on December12th.

Thank you.

You're welcome.

Your next question from George Shapiro, at Salomon Smith Barney.

Good morning.

Can you give a little bit more detail, Tom, at Pratt, in terms of what Pratt Canada's revenue was, comparison was year over year?

Maybe the best way to do that, George, would be to give you the shipments for Pratt Canada, that way you can get a sense for what happened in the business versus last year.

Hold on a second.

Shipments for Pratt Canada, they shipped 360 total units in Q3, and that's versus 410 last year.

So that's about the direction of their revenues for the quarter.

Okay.

And then you had mentioned what happened with the spares orders orders, how about what spares sales were in the year versus the second quarter as well as last year?

That's in line with that.

Okay.

And then I think earlier, Jim, you mentioned in general terms about residential Carrier.

Can you be a little more specific in terms of how much residential revenues were up from the prior year?

Yeah, it was up about double digits.

And again, that was better growth than we anticipated, volume growth was good, but offset by pricing particularly in the area of residential new construction.

That seemed to have the most aggressive pricing in the market.

Then you alluded to the fact that you might have lost a little bit of share.

American standard claimed they gained a couple of percentage share, did it go to the other competitor?

I think we acknowledge we probably lost a little bit of share over the last six or nine months in the market, again, as we focused on cost and margin expansion.

But I kind of hesitate to, you know, if you add up everybody's shares, you usually get up to about 120 percent.

The share moves around a little bit.

We might have lost a little in residential, I think even in a tough market, we gained share in commercial, again, by focusing on the customer and our marketing efforts there.

So I think share moves around a bit from time to time and I think we're going to stick with our strategy of cost and margin expansion.

Okay.

And Tom, at Sundstrand where you said the spares were down and orders, the revenues are down about the same, so book to bill was somewhere around one in both Pratt and Sundstrand?

Yes, George.

And then one for Steve, a simple one, though.

The 9.6 percent growth assumption you've got for pensions is at the high end.

Are you thinking about having to change that or kind of, you know, give us your thinking on that.

Yes, that obviously is being reviewed along with the discount rate.

Both of these will be changed and it is highly likely it will be down.

Just to make sure, George, you realize it's not 9.6, we lowered it to 9.25, that was part of our guidance earlier this year.

That's for 2002.

And as Steve said -- Yeah, I was just going by what was in the annual, sorry about that.

Okay.

Thanks a lot.

Thanks, George.

Your next question comes from Martin [SANKY] from Goldman Sachs.

Hello, Steve.

Welcome back.

Hi, Martin.

Let's see, could we go back to the subject of Carrier and take a look at what's happening on the commercial and large systems side of the business.

Could you talk about what's happening to backlogs and order rates and pricing there?

I think, Martin, this is Jim Geisler again.

I think on the commercial side, we've seen double digit declines in sales actually relatively reminisce assistant of the kind of early '90s recession.

We've seen a really decline there.

We've seen our margins, I think, in that business hold up as a result of some SG & A and R & D reductions and again have not tried to compete as hard on price, but selectively invest, I said, as we have in terms of our marketing to get more customer contact.

But obviously that market is very, very sluggish and we don't really see any signs of recovery right now.

Do you have anything that would differentiate the commercial unitary products from the large building systems?

Yeah, I think maybe if we go through more of the detail off-line, I think the unitary has held up a little bit better.

I know that we certainly had a little bit better revenue performance there than we have in the very large part of the market.

Okay.

Lastly, do you have backlog handy and are customers delaying releases from backlog?

No, I want to take that off-line and we can go through some of the backlog and some of those type of, you know, more calendar line factors and indicators.

Thanks.

Your next question comes from Joseph Campbell of Lehman Brothers.

Good morning.

I wondered if you could talk a little bit about anything that's going on in the military front.

Commanche been in the news a lot, but almost all the military businesses in the industry are doing pretty well.

Anything to highlight, and any updates on Commanche is appreciated.

Thanks.

I'll make one statement about the bill the senate approved, is money for the Commanche.

There's discussions about the program in general, those will come out when they're ready to make statements.

We feel pretty good about it, given the development has been approved.

Steve noted when he opened the call, that our military business is up over 25 percent year-to-date.

That's been a real bright spot for us, Joe.

Thank you very much.

Okay, Jennifer, I think we need to wrap things up.

And I thank everybody for calling in today.

Of course the I.R. team will be available for the rest of the day to answer any other questions you might have.

Jennifer, could you please terminate the call?

At this time, I would like to thank everyone for joining today's conference, you may now all disconnect.