雷神技術公司 (RTX) 2003 Q1 法說會逐字稿

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

On the call today are Steve Page, Chief Financial Officer, Tom McEachin, director of investor relations, Aquelle Chari Chari [ph], incoming director of investor relations, and Jim Geisler, director of printing and analysis.

This call is being carried live on the internet.

There is a presentation available for download from the UTC's home page at www.UTC.com.

The company reminds listeners that their cash flow expectations and any other forward looking statements provided in this call are subject to risks and uncertainties.

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

Please go ahead, Mr. Page.

Thank you, Lisa.

Good morning, everyone.

You might recall that I started the last conference call in January with a personal note and let me start this one also with a personal note.

UTC has about 50 of their employees on active duty in the Middle East at this time.

And we have far more than that as technical support for the equipment that we have there.

As you know, we have our black hawk helicopters, our CH53's, there are C-17’s, F-15’s, F16’s and the folks that support those are also there.

We all have very hopeful that the action there ends quickly.

We want all of those folks back here where they belong with their families, and we wish them a speedy and a safe return.

Let me call your attention to the press release, if you haven't caught up with it yet, please take a look at it and you will notice it is different than UTC has had before.

The SEC has come out with a regulation G, which was published a couple weeks ago which emphasizes that the numbers in the press release should be in accordance with GAAP.

You will see a press release that follows the new regulation G. I have read a few other press releases over the past couple days and maybe regulation G just applies to UTC.

I'm not sure.

We have a compliant press release and therefore it is different than what you have seen before.

As the operator said, we have a presentation on the website and occasionally we will be referring to a slide or reference a slide to let you keep track of where we are in our presentation.

Let me start by hopefully putting you all at ease by reaffirming our 2003 earnings per share guidance in the range of $4.55 to $4.80 per share.

As you know, that is the range we gave you in December of last year, and we have consistently repeated that for the last four months.

As we told you before, there are several factors that could change the range.

One was war in Iraq.

One is significant weakness in the commercial aviation business, and another one is global recession.

We continue to closely watch these events, but right now we see no change to the range of $4.55 to 4.80.

I'm going to walk you through the first quarter, some comments, and then Tom will take you through some details for the first quarter and Jim Geisler will give you an outlook for the rest of the year.

Q1 we reported one dollar per share, which is 9% above last year.

Our free cash flow, which we defined as cash flow from operations less capital spending, was $165 million.

If you add back to that the $500 million of pension contribution that we made in January, the free cash flow for the first quarter would be $665 million, and we think that compares very favorably with the $445 million of free cash flow for the first quarter of last year.

We repurchased about $200 million dollars worth of share in the quarter.

That is up 100% from the first quarter purchase of last year.

The stock, as you know, traded in the 50's for a while, and it was extremely attractive to us.

We finished the quarter at the 36% debt to capital.

That is a little bit lower than at the end of the year, but we have continued to have a very strong balance sheet.

Carrier corporation, their turn around is really on track.

This is the fourth consecutive quarter of margin expansion.

We do think this is a trend that will continue.

I think everybody needs to recognize this team for putting this company back where it belongs, which is a double digit ROS company.

Otis had another solid quarter.

Strong revenue growth and a full point of operating margin improvement.

Again, that is Ari Bousbi and his team.

Excellent start for 2003.

Commercial aviation results were down.

That is consistent with what we have told you before and what obviously you have seen from the airline industry with reductions in RPM's, and also we have the SARS issue, which we will talk about later.

On off set to the commercial aerospace downtown is military revenues.

They continue strong.

They are not a complete offset but they certainly offset the weakness in the commercial aerospace business.

It is because we have some very key programs, some wins that we have had over the years, and Tom will talk you to about that a little later.

And we have had the wind at our back, finally at foreign exchange.

We had about a nickel in the quarter on foreign exchange, half of which we told you about when we gave you your guidance because the EURO was stronger at that time.

The other half which is good news for us, we did some additional restructuring in the aerospace groups in the first quarter.

You'll notice the R&D for the quarter was down as a percentage to revenue, down to 3.5%.

I just wanted to remind you that during the year 2002, we completed several major programs.

One was a certification of the S92.

One was a rework on the Pratt & Whitney 6,000 engine.

So the 35 albeit lower than the first quarter is only slighter than the 3.9%, 3.9 percent R and D to revenue that we had in the first quarter of last year.

The trend will be down as we are wrapping up these programs.

As we look to the full year, we expect R and D will be in the low four percent range.

We think that is what it looks like as we now look through the next three quarters.

The engineers that were working on some of these commercial programs have been moved over to the military programs that we have.

And the customer funded basically military funded R and D has moved up $100 million dollars in the quarter.

It’s moved up from about 250,000 in the first quarter, to about 350 million dollars in the first quarter of this year.

So because of our very strong position with the government, this increase is appropriate.

Okay.

I'm on slide five for those that are following.

This is a business environment review.

There are some good news, points on that slide.

Obviously housing starts continue to be up.

You may have seen a release yesterday showing the march housing starts to be up 8%, year over year, which is encouraging to us.

The military remains strong, continuing the trend we saw last year.

Asia continues to be very good.

GDP growth, 7-8%.

Foreign exchange, we continue to be surprised at the strength of the EURO, but that continues to be part of what we see.

The negative side, commercial construction on a global basis continues weak.

The war certainly good news and bad news, the war is certainly the bad news, the brevity of the war is the good news.

We certainly need some more time to decide whether or not this is going to end completely in the next few weeks.

It looks very encouraging now, but it is still obviously a negative to the global economy.

In the airline schedules because of not only war but because SARS problem has been troublesome and it is uncertain as to where we are going to see that reverse.

Given the current environment, we are fairly satisfied with our performance in the first quarter, and we certainly base this on the balance in our portfolio, the business balance and obviously the geographic balance.

So let's spend a few more minutes talking about the first quarter then Tom will continue.

Thanks, Steve.

If you are following along, turn to slide six in the web cast, consolidated revenues for the company were $6.7 billion in the quarter.

That is 5% above last year.

About 1% at constant currency.

All of the segments saw an increase in revenues with the exception of Pratt and Whitney.

Net income was $502 million.

That is up 7%.

Foreign currency translated contributed about $.05, as Steve indicated, to earnings per share in the quarter.

About half of that was in our guidance to you.

The remainder offset some restructuring actions, primarily at Pratt and Whitney.

Free cash flow, including the pension contribution that we made in January was $165 million, that is after $87 million of capital expenditure.

Cap X was lower year over year primarily due to Pratt winding down some programs in 2002: That they had in 2002.

But we expect the full year of 2003 capital expenditure to proximate depreciation.

I'm on slide 8 now if you are following owe long.

At Otis, adjusted for restructuring, operating profits up 26%.

Revenues up 18%.

If we exclude the foreign currency translation profits up 13%, but 8% revenue growth and about 6% or organic revenue growth in the quarter.

Revenues and margins were up in all regions.

Led by Asia and Europe.

New equipment orders were up 20%.

About half of that due to foreign currency, but with continued strong growth in Asia, particularly in Korea.

In February Otis introduced its next step escalator, a significant advance in escalator technology and safety.

We received our first orders for next step and expect shipments to start in June.

Also in the quarter, Otis was awarded their first orders for the Jen 2 elevator in North America.

World wide, Otis has over 16,500 orders for this product since its introduction.

Turning to carrier, 3% revenue growth from foreign currency translation.

Operating profit improved by 12%.

When adjusted for prior year restructuring.

About a third of the operating profit improvement is from the foreign currency.

During the quarter carrier exited manufacturing in three additional facilities in a continuation of their consolidation strategy.

Operating margin at carrier was 7.7%.

That is up 60 basis points, that is again versus last year's restructuring margin.

This reflects the benefit of cost reduction actions and growth in high margin businesses.

North American residential H vac and transport refrigeration were both up in the quarter.

Commercial H vac markets continue to be weak, except in Asia, when revenues from china up about 10%.

In the quarter, a top North American trucking company ordered 160 of Carrier Transit new X series trailer refrigeration units.

This product was selected by heavy duty trucking magazines as one of the top fifty items introduced to the trucking industry in 2002.

Efficiency improvements in this unit allow it to run 23% lower RPM's, saving energy and increasing engine and compressor life.

Another important item, Carrier manufactured residential products under both the Carrier and the Kenmore brands actively being sold by over 550 Sears associates across North America.

If you turn to slide ten, Pratt & Whitney, lower commercial aerospace sales were partially off set by increased government engine revenues, as shipments of F100's were up and military development revenues increased largely from the joint strike fighter program.

Pratt also experienced lower shipments of power systems and small engines.

Operating profit was down because of lower spares.

Large commercial engines spare parts order were down around 20% in the quarter, however, it is notable that the decline in spares was higher than the reduction in underlying flight hours for Pratt's engines in the quarter.

Operating profit was also down on account of the absence of some favorable commercial contract changes that were recorded in 2002.

These unfavorable items were partially off set by the impact of higher military revenue and lower R and D reflecting a couple things, the finalization of a technology funding agreement at Pratt & Whitney in Canada and lower PW6000 aircraft certification costs.

During the quarter, Pratt and whit knee Canada had some significant wins.

They are selected by CESNA [ph] to power the citation Mustang.

This aircraft has received approximately 300 advance orders since it was unveiled last September.

Pratt Canada was also selected to power the twin-engine eclipse-500 jet.

The Eclipse is expected to sell for around $1 million, which would stash a new price in this market.

Good wins for them.

Some F-22 achievements in the first quarter, Pratt and Whitney received a contract to provide 40 engines, spares and support services for the F22, extending production through 2004.

The contract is valued at over $600 million.

The F22 program has also received support system release or SSR approval from the U.S. air fore, signifying the engines’ fuel support program is ready for operational service.

In the flight segment, on slide 11, we shipped 60 new and remanufactured helicopters, versus 13 last year.

And it had higher after market.

In parts from the Durco [ph] acquisition.

Since receiving FAA type certification in December, and also winning the prestigious Collier trophy, Sikorsky have received several commitments for F92 helicopters with applications in offshore oil services and VIP transport.

Also in Q1, Sikorsky announced a large contract with offshore logistics for 15 S76 helicopters and operations for an additional 24 over the next five years.

Hamilton Sun Strand military sales were up.

These were partially off set by lower after market sales.

Hamilton Sun Strand’s commercial market orders were up year over year in the quarter.

In February Boeing selected Hamilton to design the next generation OBID [ph], that is the product that is designed to inhibit sparks from igniting engine fuel.

It has a contract in excess of $40 million with future applications for commercial and military aircraft.

Hamilton formed two new businesses, Homeland Security Systems, and Land Systems, these businesses are intended to addressee merging market needs in infrastructure -- protection for outfitting soldiers of the future.

Lastly, UTC power in the quarter announced an agreement to license Proton Exchange Membrane fuel cell or PEM fuel cell technology to Nissan, and to continue to work with Nissan to develop the technology further.

Our joint research with Nissan can be used in non-automotive applications including commercial stationary power plants.

We are very happy with this arrangement.

Our collaboration has already produced the X trail SBD hydro-vehicle which draws its primary power from a 75 kilowatt fuel cell power plant.

On slide 13, some corporate items, elimination and other, were unfavorable in the quarter, but you'll recall that the 2002 results included the benefit of an environmental settlement, approximately $100 billion dollars, which was offset by restructuring and related costs in the segment.

Tax rate, 28%, right around last year's run rate.

I will turn it over to Jim for guidance.

Thanks, Tom.

As Steve affirmed earlier in the call today, we continue to see ourselves in the earnings per share range of $4.55 to $4.80 for the year, consistent with your estimates at the start of the year.

Now as always, there are puts and takes to this outlook over time.

In the case of Otis, we forecasted mid single digit growth with operating margins expanding by more than a point, exclusive of last year's restructuring.

If the U.S. dollar remains at its current leveling primarily against the EURO we would expect to see their margins expand, but on a 10% revenue growth versus mid single digits three months ago.

As well, Carrier’s performance is on track and we expect margin improvement of a little bit less than a point assuming low single digit revenue growth.

In sum, our commercial businesses are performing well and they are receiving some foreign exchange translation benefit at the moment.

At the beginning of the year, we also said and targeted our operations to report flat revenues and up to 100 basis points of margin expansion.

I think, however, though by reading the Wall Street journal in any other publication, it is obvious to tell that the immediate outlook in the commercial aerospace business has deteriorated substantially since we met in December and then again in February.

The outbreak of war and SARS has resulted in declining revenue passenger miles, with global revenue passenger miles in march estimated to be mid single digits below the previous year.

This is versus an expectation of growth just a couple months ago.

As well, additional airlines have filed for bankruptcy.

There have been some positive recent developments for the airlines obviously, with congressional support, cooperative unions, and some improved bookings, however, the airlines may remain in a tentative position for some time.

So instead of up to 100 basis points margin improvements in the first quarter, margins in our aerospace operations actually declined 100 points, reflecting this commercial aerospace weakness, despite good military growth and performance, as Steve and Tom referenced.

As we discussed, the factors deriving the aerospace decline, the war and its aftermath, significant airline distress and an uncertain U.S. economy are well beyond our control, and they continue into the second quarter which will make the second quarter one of the more challenging of the year.

It is tough out there right now.

Although these factors are not in our control, we continue to execute on the factors that are in our control.

We have good operating systems in place at UTC, like ACE, focused on providing superior customer service and lower costs.

And also as you would expect in these difficult times, we are scrubbing discretionary spending and costs very hard.

Shifting cash in 2003, we began the year on a strong note with $165 million in free cash flow after making a $500 million pension contribution in January, that is Al versus net income of $502 million dollars.

For the year, we continue to target pre-cash flow equal to net income before the pension contribution.

As we have discussed in the past, we hope to cover this pension contribution for the year with strong cash flow, continuing in the following quarters but clearly there will be a high hurdle.

With that, I think it will turn it back to Steve for some final comments.

Thanks, Jim.

I have had several questions from some of you over the past few weeks about, again, SARS, and how this affected our operations.

We are pleased to report today that no UTC plant or any UTC office around the world, especially in Asia, has been closed because of this.

We certainly have seen some of our trips to the -- to Asia cancelled over the past few weeks, but again there has been no disruption on the commercial side of our business.

And we are going to certainly stay tuned with that as we move ahead, but right now, we see no Otis or carrier impact on this.

I was interested in reading yesterday in the Wall Street journal that you may have seen this in the front page, if you haven't, I recommend you read it, they have identified the virus associated with SARS now.

But as the article quickly says, they don't have the cure, but they were very pleased to be able to identify the virus strand as early as they are.

So this is some possible good news.

Talking about publications, Fortune Magazine, most admired company a few weeks ago, again, named UTC as the most admired American company in the aerospace and defense industry.

And this is the third year in a row that we have been so recognized.

Congratulations to all the UTC folks that have been able to deliver this kind of performance, which gives us this kind of recognition.

As Jim said, the road is going to be bumpy as with head off into the quarter here, but I want to remind you that we are talking primarily about 20% of our business that is commercial aerospace.

If you notice on that slide 16, we show the balance of our portfolio, not only the geographic, but also the mix of our portfolio.

Talking ant the 22% of our business that is a little tough.

We did finish the third -- the first quarter with a very strong balance sheet, which is similar to the way we have finished the fourth quarter of last year.

We do believe, as Jim mentioned, that we have cost controls in place to get through this period.

Again, as we mentioned, we reconfirmed the $4.55 to $4.80.

On cash flow, you will notice that we spent only $18 million dollars for acquisitions in the first quarter.

We still confirm our guidance of $1.5 billion for the year.

We still believe that is out in front of us.

But as always, as you have seen for the last several years, including the first quarter, unless these acquisitions create shareholder value, we will not do that.

We will not.

As a use of our cash, you see a $200 million dollar share repurchase in the first quarter, which is on track with what we told you about before.

Okay.

A final note, this is Mr. McEachin last, but he will not depart for his next assignment, until he answers every single one, look at me, every single one of your questions.

He will be here for the duration in answering your questions.

Then he is going to go off and become the Chief Financial Officer of UT power.

This is our division that reports to Jan Van Docum [ph].

I think a lot of you met Jan at our meeting in February.

Tom will now be his Chief Financial Officer in our UTC power group.

Just a word of thanks to Tom.

As you know, I have been CFO now for 7-8 months and I had to do a lot to get reacquainted with all of you on the phone.

Tom, you have done a terrific job for bringing me up to speed.

A Heartfelt thanks from me to you for doing that and allowing me to get back to this world I have been away from.

Thank you Steve.

With Tom's departure, we welcome Aquelle Chari Chari.

I think you met him in January at the analyst session.

He comes from the Carrier Corporation.

He spent 16 years at Carrier Corporation.

More than half of that time in Asia.

Aquelle Chari?

More than half of that time in Asia.

I know more and more have questions about what is going on at Carrier.

I think he is uniquely situationed to handle those questions.

We welcome you to the post of director of investor relations.

Okay

That is all that we had to say.

Now your questions?

Lisa?

Yes, sir.

At this time I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone key pad.

Pose a moment to compose a roster.

Our first question comes from Joe Campbell of Lehman Brothers.

Good morning.

I just wanted to add my thanks to Tom McEachin for doing a great job.

Maybe you could shed more light on what is going on at Pratt and Whitney.

We had R and D go down and obviously some weakness in the spares and some strength in the military.

Maybe you could just give you a little more granularity at this on what is cooking there.

A bit of color on Pratt and Whitney.

Obviously the key element in their quarter results year over year is the reduction in large commercial engine spares.

That was also impacted by Pratt and Whitney Canada.

They did ship less of their small engines.

An in the power systems business, we shipped substantially less units in the first quarter than we did a year ago.

But on the profitability side, the flow through of the margin impact of the commercial spares was a big driver.

R and D was favorable, most of the R and D that you see for the consolidated UTC is at Pratt.

We did have some extraordinary items in 2002.

We mentioned the fact that there were some PW6000 related costs in 2002 that drove that number higher.

But that was one of the reasons why R and D every year was lower for Whitney.

Those are kind of the big elements on the revenue side and on the profitability side.

Will the R and D stay down or does it come back up, or what is -- you know --

My view.

It is a timing element.

As Steve said, we expect to be around four percent for the full year, which would imply that there would be some additions at Pratt.

If you think about some of the programs, the PW6000 is going to be going back through a certification process.

That is later in the cycle.

But that is one element.

And the GP7000 spending will start to ramp up as we get closer to the introduction of the 8380.

We still probably think it will be about four percent for UTC.

There are some timing issues that you saw.

We do believe it will north of four percent.

Primarily Pratt will be the driver for those programs that he has mentioned.

Can you be, as you pointed out the weakness that you have suggested is primarily here for Q2 where we feel whatever the strongest impacts of war and SARS and so on, which we have heard about, but not yet seen the financials.

Normally Q2 is a really strong quarter as the air conditioner sales kick in.

Do we think that overall the weakness in Pratt will be sufficient to offset the normal seasonal strengths that we see in Carrier?

Well, we still believe, Joe, that we are tracking for the $4.55 to $4.80 for the year

You have hinted that the second quarter will be weaker than usual.

I'm trying to get a sense of what you're trying to tell us here.

You summarized it.

SARS, the war, commercial travel certainly down.

We see that, we do believe it is a second quarter phenomena--

You think second quarter would be sequentially weaker than the first?

I don't think so, Joe.

But we are trying to stay away from the second quarter, given the fact there is a lot of uncertainty right in front of us now.

You know, again, we are fairly comfortable with the $4.55 to $4.80.

Okay.

Lastly, given the summary balance sheet that you provided for us, it wasn't clear to me where all -- we're all looking around.

It was hard to tell.

Where did all the cash flow come from?

Were there any highlights in the strong cash flow for the quarter?

Let me talk about a few of them.

Actually, if you look at the press release, there is a reconciliation statement in the back.

The key driver was the working capital was lower by about $100 million or so, so lower working capital.

The other element is inventories were better relative to last year.

So those are big ones.

Working capital was a pick up for us.

Where does it come from?

Pratt had less revenue, as we indicated, so their receivables did not build up as much as you would have seen last year.

That was one of the positives.

Those were the big ones.

Thank you very much.

Your next question comes from Heidi Wood with Morgan Stanley.

Hi, good morning, nice quarter guys.

You talked about a restructuring you took.

Can you break out how much that was?

It was small, Heidi.

Again, half of the currency benefit.

A couple per share.

Okay.

And you know that $4.55 to $4.80 you are giving us, that assumed four cents foreign currency effect, and we have already seen five cents in the first quarter.

You talked about Otis being better and Pratt down a little bit.

Do you have a revised foreign outlook currency for the year?

This a great state about where they are today.

Probably just from translation will probably pick up a little bit more than a dime.

Probably in the neighborhood of around 12-cents or so.

We had a nickel this quarter.

Kind of an easy EURO to compare in the second quarter.

Then the benefit would tail off.

But I kind of caution on that that of all things that I try to forecast at UTC, I haven't exactly been able to nail currency yet.

So we’re are going to have to see how that evolves over time.

This has been good news from a guidance point of view as we talked earlier, commercial aerospace has been much worse than we would have anticipated four months ago even.

Certainly.

Can you touch on, Steve, what you are seeing happening at Otis?

What is driving this 8% revenues?

What is happening geographically?

The geography is Asia.

The Asian growth rate is phenomenal.

Otis has positioned themselves.

The LG acquisition was incredible, given the position they have in Korea and China, which the team has been able to leverage.

Their share in China is over 30 percent.

We are seeing phenomenal growth coming out of that area.

I’m going to be specific, China and Korea;

Japan continues to be sluggish.

But those are huge drivers for Otis right now.

Okay.

That is -- as it pertains to SARS, I guess I know this is very preliminary, but one of the benefits of you are urbanization has had a great impact on Otis, but obviously you are urbanization has impacts on how disease spreads.

Do you think there is potential for slow down in construction activity?

If so, have you put that into the number you are giving us?

As Steve said, we have really seen no facilities shut down.

Not any supply problems from SARS.

Yet obviously you know the Asian airlines have been impacted.

I think we may see it over time in economic growth outside the airlines.

Both Hong Kong and Singapore have revised down their GDP estimates for 2003, as a result of this.

So I think although SARS has begun its flow through in terms of the airlines and consumer spending or even general economic activity, I don't think we still have a very good feel.

The Singapore government has said that indeed they expect lower growth, but they have not provided a new level of growth

the Otis 2003 year basically is in bareback log.

As you know --

Yeah, I know that.

But I just was wondering if on the margin you were seeing anything -- any kind of a low down or just hesitation.

It sounds like you are not.

Not at this time.

No.

Thanks very much.

Your next question comes from Sam Pearlstein from Wachovia Securities.

Good morning.

I had thought that when you talked about the pension contribution of 500 million dollars it was actually more on the order of 320 million dollars after taxes.

So is the tax benefit coming later?

It is.

Yeah.

The tax benefit actually is coming at the back end of the year because of the way our U.S. taxable income comes through.

So the first quarter effectively has almost all of the 500 million dollars of a cash outflow.

I think there is a minor ten million dollars or something that the cash tax benefit.

You are right, Sam, it is later in the year.

When I look at the actual changes on the balance sheets, it looks like 300 million dollars use of cash, between receivables and inventory.

Can you talk about that?

Let me just clarify my response to Joe Campbell.

I was looking at the difference between this quarter's working capital build up and last year's first quarter.

And my comment was that the receivables did not build as much and the inventories did not build as much.

That is why the cash flow was better.

Go to the last page, you will see that the working capital is a use of cash, but it is 100 million dollars better than it was last year.

Okay.

And can you discuss what is in that 154 million dollars that you list there in terms of another net source?

if you look at that again, year over year, it is about the same number.

That includes deferred taxes.

Minority interest and some other miscellaneous items.

Okay.

And I know Joe tried to take us through this before.

But in terms of the quarterly EPS, typically the second quarter is the peak for you during the course of the year.

Does it appear that this year second quarter may not be the biggest earnings quarter?

Third quarter or the fourth quarter could be better?

Is that what you are suggesting?

I'm suggesting if I look at the last couple years, Q2 is usually one of the strongest quarter or the strongest quarter of the year.

We certainly think Q2 will be better than Q is.

As we mentioned before, the strength of the quarter, it is hard to tell, given all these things we have talked about in the last few minutes.

We remain comfortable with the year.

Okay.

In terms of the Pratt spares demand.

You mentioned it was down 20% large commercial engines.

I would have expected you had a much bigger rate of fall in the margin into the April period.

I guess can you just talk about how that has played out over the first four months of the year in terms of demand?

I think that is true given the proximity of the war, and primarily the war, I think that is correct.

It is generally poor in March and into April so far.

I want to see again now that the war seems to have come to a relatively successful conclusion, what is the recovery, absence of a recovery?

How does the SARS impact in Asia hold back through the airlines there.

That 20% does reflect the price increase that you put in place last year, correct?

Yes.

Okay.

Thank you.

Your next question comes from Don MacDougall with JP Morgan

Good morning, everyone.

Just to follow on Sam's question on the price increase, should we assume you got the full 8% at Pratt and therefore the actual volume decline was 28%?

Yes.

Okay.

Could you update us on the balance sheet exposure to commercial aerospace at this point and where the reserves stand?

It actually hasn't changed substantially since we published our annual report.

I think if you look at our balance sheet, you will see we have about 800 million dollars of customer financing, 700, 800 million dollars of customer financing on the balance sheet.

Against that, the reserve level is in the 240 million dollar range.

This is adequate, relative to the exposures that we see then.

Just a little more color on R and D. I know it is the one of the points that people who have skeptical on your stock like to point to.

I just wanted to get a sense for how this compared to your plan at the end of last year, what we saw in the quarter, how easy is it for you to move the R and D number around and maybe a little more color on why it ramps so quickly from here.

Don, several things: R and D can be rather lumpy as you are finishing programs.

Let's use the S92, we can certainly use the 6,000.

Once you have certified an aircraft, basically the majority of the R and D is behind you.

That is one of the reasons UTC's R and D was higher last year, we were preparing the S92 for certification it was certified in the fourth quarter.

So it was reduced.

PW6000 the same thing.

It gets a little lumpy.

The good news is what we have here is we have very good military programs.

So when the lumpiness in the commercial R and D is in front of us, Louis Chenevere will take the programs across to do work on the military programs.

You see that in the first quarter.

I think I mentioned that we had a very significant increase in customer funded R and D in the first quarter.

This was one hundred million dollar increase.

It is hard to do that unless have you the resources in house to slide across.

There are other activities included besides head count, but head count is an important part of this.

The other issue, just to remind us all, our R and D is basically dollar denominated R and D. Which says as most of our R and D is in the United States.

The revenue number that you are looking at is influenced by foreign exchange, as Jim said.

There are a couple points there associated with the strong EURO compared to the dollar.

What you are seeing is revenue increase because of the EURO and no cost increase commensurate with that.

So I think you need to think about how we organize R and D which is domestic, you are putting it on top of a global revenue base to get these percentages.

Okay.

Thanks, Steve.

The final question would be, I guess a characterization of where you think the cushion on earnings stands right now relative to where you thought it might have been back in early February.

Otis is doing better than planned.

Aerospace is doing below plan.

I know it is difficult to say nar row space given the visibility issues in the second quarter.

But you do have still a full year view.

Has the good news at Otis been enough to offset most of aerospace and roughly keep the cushion where it was?

Don, this is Jim.

The short answer to that is no.

The effects of the translation, the effects translation has not been nearly enough to off set the badness.

He is talking about the cushion.

George, to those of you that have a question on the call is George David talks about a cushion that we go into the year with because bad things happen.

I think, Don, your question is, well, bad things have happened.

You still have cushion left.

To walk through that math a little bit, the cushion, when George David gave guidance at the begin or the end of last year, we talked about a 200 million dollar cushion for the year. 150 million of that was being to be generated by aero being up 150.

Most of that was up from aero.

As opposed to any growth in aero, we saw a decline in that industry in the first quarter.

This tough aerospace decline is acting like a call right now on most of that contingency.

So obviously as Steve said, we feel pretty good about $4.55 to $4.80, but given the close proximity to the war, we have more of a challenge there with the contingency and the effects.

great.

That is helpful.

Your next question comes from Howard Rubelle [ph] from Sound View.

First, did you receive any licensing fees from the Nissan arrangement?

We did record some in the quarter.

A few pennies per share, Tom?

It was very small.

Much smaller than that, Howard.

This is actually something that we will be receiving over the life of the program so it spreads out.

It is almost a ten year amortization of those fees, Howard.

In the quarter, I think the EURO is maybe a penny.

For the whole year.

You talked about Pratt have some benefits from settlement of R and D. Was that a credit to the R and D in the quarter?

This was some funding that Pratt had for their programs.

That was a positive element for the quarter.

In the ten to 20 million dollar range?

in that range, yes.

Okay.

The third thing is that.

Have you had any warranty expense associated with the next Jen elevator?

You have now 16,000 or so of them on order and a number of them installed?

I figure it must be a good time to talk about the success of it and what you're seeing in terms of the experience with it.

Two things, Howard.

The next step is the escalator that we are in the process of selling.

We haven't sold any of those yet.

You are referring to Jen two?

Yes.

Excuse me.

Jen two.

I apologize.

the next step is -- the elevator is the Jen two.

I don't have any information that the warranty on Jen two is worse than any other warranty provision that we have.

I'm looking at Jim and Tom here.

Do you have any data on that?

No.

None.

I think I have seen nothing unusual on that.

Howard

That is encouraging.

Finally, if it wouldn't mind giving us some of the aerospace engine shipment numbers, that would be helpful, please.

Hold on just a second, Howard.

Let me start with Pratt and Whitney, on the commercial side, there were 91 shipments.

The industrial turbines were small.

Only two.

Military was 38.

Pratt Canada 295.

And as I mentioned in the remarks, sikhorsky shipped 16 new and remanufactured helicopters.

Given what has happened with everybody in general in aviation, we would expect this to be a peak quarter for shipments for sometime?

They came into the year with an expectation that we would be down about 20 plus percent.

Maybe incrementally worse than that, but I think they took a very conservative view of shipments for planning for 2003.

Probably more than half of their business is after market and --

There has actually been a positive so far.

After market has been a positive, correct?

Right.

Thank you very much.

Okay.

Howard.

Your next question comes from Steve Binder with Bear Stearns

Good morning.

I just wanted to explore Pratt for a second.

Did I hear you correctly, Tom, when you look at last year influence and this year's influence, did you say all of the R and D declines in the corporation year over year is coming from Pratt.

No.

A large amount of it was Pratt.

We had lower spending.

As this program worked through certification.

if you look year after year, your profits are down 42 million dollar restructuring in last year's, and your revenue is down 190 million.

And RDD looks like it is down 75 million.

You had those favorable contract adjustments last year, which I’m guessing is like 25 million.

It looks like that margin is quite high year after year.

I understand spares are down year after year, but it is reminding me a little bit of what we saw in the early 90's.

I’m wondering if you could provide more color on that decremental margin.

I think it is an important comment that we made earlier that slide hours that we saw for the first quarter were down in the single dig it area.

Low single dig it.

Relative to these orders being down about 20%.

It doesn't feel like that run rate is sustainable, at least given the experience that we have seen so far.

But as Steve says, will is a lot of uncertainty.

Will the spare parts down more than orders every year?

Yes.

Our book to bill was actually above one.

All right.

And secondly, with respect to carrier, I mean, do you have a sense of what your pre-R and D , pre-SG&A margin did every year?

It looks like, you know, you guys have taken 285 million dollars restructuring charges in the last couple of years.

You have some benefits effects from the quarter.

I imagine there is some improvement you are seeing in the commercial refrigeration area.

Did you have an improvement in mix year over year, but margins is only up a little bit.

Can you provide a little color what is happening at that gross margin level?

Let me take that.

The margin, the gross margin level is up year over year in the first quarter.

Keep in mind that carrier is still closing, is in the process of closing and wrapping up the production from the facility and that creates restructuring costs in the first quarter.

Take that into account, their margin rate is probably higher than the sixty basis points that you see at the recorded basis.

How much are the period costs, the trailing costs?

About 15 to 20 million.

Okay.

Steve, can you maybe just touch on acquisition opportunities?

You have touched on the path about potential diversification moves.

Maybe you can give color on where we stand on that as far as opportunities today.

Steve, I do think that we are seeing better opportunities in 2003 than we saw in 2002 and 2001.

I think I told you and told most of you that we have seen an awful lot of transactions in '01 and '02 that were very pricey.

We stood down.

Saw that from the numbers.

I'm more encouraged now.

The opportunities we are seeing today are more encouraging.

The valuations are more realistic today.

We are still -- we have a plateful of opportunities in front of us.

We are looking at them.

We still think that maybe 1.5 billion will be the number.

Do you think it is giving more than you move outside of the core?

I think so.

Okay.

Can you touch on customer financing, what it was in the quarter, also cash restructuring costs in the quarter?

Yeah.

Just on -- Tom will grab the customer financing, that was approximately 40 million dollars for all our programs over the last couple years.

Not a meaningful job in the quarter because last year's first quarter was around 30 million dollars.

So restructuring spending goes on, but not much performance.

This year it was $9 million.

Yeah. 9 million dollar use.

Thanks very much.

Guys.

Your next question comes from Cai Von Rumohr of SG Cowen.

Yes.

Thanks.

I note in your release you talk of military aerospace revenues being up 30%.

That is a pretty spectacular number.

Could you give a little bit of color in terms of where the key strength is coming?

And in light of it, I know military deliveries were week in last year.

Are you looking for the volume to be up only three to four percent for the year?

Let me take that.

As you point out, the first quarter of '02 was not a huge quarter so relative to Pratt and Whitney, also the helicopter shipments at Sikhorsky were higher in 2003.

Those have been two drivers of the military increase for this year.

It was Pratt and Sikorsky.

We also just to couch on for the quarter, we have talked on the R and D, we have seen a big improvement in customer funded R and D. And that drove a fair portion of the military growth in the quarter as we looked at R and D programs as Steve mentioned and prioritized some of the JSF work and put people to work on that.

I think that was a factor in terms of military growth in the quarter.

To the second question, which was, are you still looking at three to four percent for the year, because your military shipments clearly look like they will build for the rest of the year.

Have you seen any kind of additional business resulting from Iraq conflict, given you mentioned you have 50 people over there?

The military business could be a little bit stronger over the course of the year.

Talked about developmental impacts in the first quarter.

We have seen a little activity in after market.

But you don't see much of that show up in the first or second quarter in businesses like Hamilton and Pratt.

We could see military move up as our government engages in various operations and activity.

A quick question for Steve: You gave a little bit of a cryptic answer to Steve binder.

Are you putting more and more emphasis on looking at things outside the core of your business in acquisitions?

We always look for things outside the core.

But let me not mislead you with my answer to Steve.

Whatever we do, it is going to be a business that you all say that is really -- it is not directly core, which means Otis does an elevator company acquisition.

It is going to be so close to the core you're going to understand it to be part of what we do best.

We don't see something that is in the -- we are not going to be in the toothpaste business.

You are going to see things again, this all assumes valuation, appropriate valuation, obviously the return is in front of us every single day.

You're going to see things that if we decide to do some of these because the pricing is right.

It is shareholder freedom.

They are going to be alongside the core.

But we will never wander too far from it, even though it may not be in the core.

You mention that the book to bill was over one for commercial spares at Pratt.

Could you give us a little color, what was it at Hamilton Sun Strand and did we see any progress as we moved through the quarter where the numbers started to go off the cliff in march, so we should be more concerned about the second quarter than otherwise?

First of all, on the back to bill, Hamilton was about one for the quarter.

And I will let Jim address the last couple weeks.

It flowed a little bit with the airlines financial help, generally spares generally deteriorated with financial airline help.

Airlines are in a very tentative position today so we continue to see fairly poor aerospace after market performance.

Okay.

And so we should assume that, you know, kind of March -- was March a lot below January so we should look for a very weak April?

We don't know about May and June?

Can you give us some color as to that, those patterns?

This short cycle.

You get daily orders and weekly orders.

I don't want to compare too much on a particular week or days of activity.

The war begun in mid March.

That seemed to trigger a step down in spares at that time.

The war is coming it appears to a successful conclusion.

The question is what kind of recovery is there as we move through the second quarter.

When the airlines have been trying to con serve cash as best they can.

We have seen some actions on their part.

Okay.

Thank you.

I think, you know, in commercial large engines we have been looking for like a 20% decline.

You had some pretty good shipments, actually surprisingly good shipments in the first quarter.

Are we still looking for 20% decline in 2003, could it be bigger?

If so, how does that pattern out by quarter?

I won't attempt to give you the quarters, but I would say your number is not that far-off relative to the full year.

As I said, Pratt Canada is looking at something a bit deeper than that.

Excellent.

Thanks a lot.

Your next question comes from Byron Callen of Merrill Lynch.

I have a question too.

Gentleman, nice quarter.

I want to follow up a lot has been asked, on the issue of Iraq and this follow on, is there any way you guys have any sense at this point what might be in the supplemental that would benefit?

Specifically Pratt because I imagine there is a need for spare parts, refurbishment of helicopters used in the campaign.

The performance of our equipment over in the was exceptional.

We flew very very hard.

We have about 200 black hawk helicopters in the region.

Medical evacuations, search and rescue, all the things the Blackhawk was designed to do.

Doing it in a harsh desert environment.

We have gotten good feedback.

We will have to see as the branches of the service debrief on what went well in the war, what didn't, I think in terms of our equipment performance, we couldn't be happier, we hope that will yield something for us.

I agree with the performance of the equipment.

I was thinking really of the money that will be spent to, you know, maintain that equipment or, you know, fix whatever may have broken in the environment that the equipment operated in over the last couple months.

I guess maybe more specifically, you know, when do you think you might have some visibility on that?

That is something that is going to be a swing factor in expectations for this year.

I think we have the visibility to see now there will be supplemental spending associated with that.

Is it going to be a factor in the year?

A lot of this is long lead time.

It takes time to get to the shop and to refurbish.

I hedged earlier, is the military going to go up in the year?

Based on the first quarter, we say it may.

I think we need better visibility and the timing of any funding to make a more defensive spending on spending for the year.

I have a quick question.

Carrier had a great quarter.

I mean, you guys talked ant it a little bit.

Give us some more color on what Carrier is doing right.

What is that team doing that is making Carrier do as well as it is.

There are lots of things that we have talked about.

Basically the manufacturing consolidation strategy, the reduction in the employment that took place after some very, very tough actions in late 2000.

The focus in operating margin.

It is a combination of a lot of tough things that the team is doing there in a very, very difficult market condition.

I would say the team is focused, they realize what needs to be done.

And they are doing it.

Are you still seeing a lot of pricing pressure?

Pricing pressure is tough, continues to be tough, particularly in the commercial HVAC business.

As you know, the market in North America has been down significantly, double dig its and high single digits this year.

In that segment, pricing is tough.

In the residential side, pricing is a little better than it was last year, pricing is tough.

Continues to be tough.

Yes.

We only have time for two more.

Your next question comes from Chris Mecray of Deutsche Banc.

I feel like one of the last carcasses here.

It has been picked clean.

Can you parcel out the military business?

How much of that business growth came from the after market versus OE and what implications might that have on margins if a good portion of that was related to JSF22?

Is there any margin shift there?

Chris, I honestly don't have the split between after market and OEM.

But Sikorsky had increases from their helicopter, and the acquisitions, which is primarily military.

So there was a good mix there.

I guess the same for Pratt and Whitney and Hamilton.

OEM shipments were up.

Development also increased and military spares were up.

I gather though from Byron's question there hasn't been any discernible increase in after market with helicopters associated with the high operating [inaudible]?

There is a lag between those type of operations.

Obviously you can't refurb a helicopter until after it stops flying around.

Okay.

Thanks.

Your last question comes from George Shapiro of Salomon Smith Barney.

Good morning.

You mentioned this Sundstrand book to bill was about one there.

Were the overall spares at Sundstrand down the same 20 to 25% at Pratt or down somewhat less?

As I indicated, they had an increase in spares year after year.

Okay.

And the industrial business that Sundstrand, how did that perform?

It is still pretty flat relative to last year's performance.

I want to follow up a little bit with a comment you made that orders were down 20%, but the traffic was down a lot less.

This was a similar phenomena, I think Steve binder eluded to earlier that occurred the 1990's in hindsight there was a lot more inventory in the system than everybody thought.

Is that possible it is happening this time or are you seeing cannibalization from these parts that are out there?

What are you attribute it to?

We attribute part of it to, we think, timing.

The airlines don't hold the levels of inventory that they did back in the early 90's.

Clearly, they are trying to con serve cash, so they are probably going through their inventory piles.

As we disclosed and talked about in business, 8D and 9D spare parts aren't as big a piece as they have been in the past so you don’t see as much cannibalization there.

But clearly the airlines are out trying to defer cash and maintenance and pick through their inventory to fully utilize it.

We will have to see over time where the flight hours are better than the sales and order rates.

We would like to think the indicator is in relatively good shape.

if you wanted to try and extrapolate at this point, what would you place the odds that Pratt's Q2 profit level is above Q1?

We will not speculate, George.

Good try.

Okay.

Thanks.

Tom.

Everyone, we thank you for being on the call today.

Of course, the IR group will be around for the rest of the day to answer any other calls you may have.

Lisa, please disconnect the call.

Thank you for participating in today's teleconference.

You may now disconnect.

The transcript is complete.