雷神技術公司 (RTX) 2003 Q2 法說會逐字稿

Please stand by for realtime transcript.

The captioning will begin momentarily of the United Technologies Corporation call.

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

On the call today are Stephen Page, Chief Financial Officer, Akhil Johri, Director of Investor Relations, and Jim Geisler, Director of Planning and Analysis.

This call is being carried live from the Internet.

You can find that at UTC's home page at www.utc.com.

The company reminds listeners that the earnings ant cash flow expectations, comments concerning the benefits of acquisitions and any other forward-looking statements provided in this call are subject to risks and uncertainties.

UTC's SEC filings including its 10K and 10Q report 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, Leslie.

Good morning.

Welcome.

If you are following us on the Internet with our slide presentation, I'm going to be looking at and talking to slide three and -- will follow with the quarterly numbers and then Jim will give you some guidance.

Okay.

I'm going to talk about the first six months of the year.

And I'm going to talk about commercial aviation to start with.

As you know, we expected commercial aviation to recover as we moved into 2003, and in fact, as we gathered six months ago, we told you we saw about a 5% improvement in commercial aviation this year.

I think you all know that did not happen.

In fact, commercial aviation continues to be down.

We have seen it in North America recently to be down mid to single digits for the first half of the year.

Asia, which we thought would be up as we look at the first two months of the year.

Then as you all know, in April, Asia was down 37%.

We have also seen additional capacity reduction in the second quarter of this year, so commercial aviation has been very disappointing.

Not only that, we had the war situation and of course SARS, which has been troublesome and has taken RPM's down about 3.6% as recently as June over last year.

The good news is that we have seen some restoration of capacity for the summer months, and we have seen some improvement in the orders, the bookings for the summer months.

And right now, I think we sort of feel that we might be off the bottom.

We do see a slight uptick as we leave the second quarter and as we move into the third quarter.

But commercial aviation has been a disappointment.

Secondly, we talked about the economy.

The last time we were together, we thought the economy, this is the global GDP would be up about 3 1/2%.

As you probably know from looking at the June data, the global GDP is now running up about only 2.2%.

Of course, that has been impacted by the Iraqi situation and also by SARS.

So that's been a little bit of a disappointment to us, too.

About the weather, we of course didn't give you a forecast of weather when we talked to you six months ago, but we were hoping for a little better spring than we had and certainly a little better summer than we've had so far.

I think you've seen the data points on that.

The cooling days have been down fairly significantly from a year ago this time.

So that's been the wind in our face.

We have gotten through the first six months, I think, quite nicely because of some of the good news we've had in the portfolio.

Let me start off by Otis.

You saw the numbers in the press release this morning.

For the first six months, Otis' revenue was up 17% and their profit was up 27%.

Now, they've had some very favorable foreign exchange impact, but certainly on the organic side of those improvements have been very substantial and the strength has come basically from Asia, North Asia and primarily in China.

It's been a very strong first six months for Otis in China.

And you could have good economies like you do in China, but you always have to execute.

And Ari Bousbib and his team have done a terrific job taking advantage of these opportunities throughout Asia, particularly in China.

Carrier has been a surprised, the weather has been a little colder than we wanted it to be, but we were pleasantly surprised by the housing starts that continue to be strong and really better than what we expected for the first six months of this year.

And you've Geraud Darnis and his team.

The second quarter of this year was the fifth consecutive quarter of margin expansion.

A nice job bit entire Carrier organization.

The other good news is the military business.

We had a good year last year in military as we discussed before.

But for the first six months of this year, military has been up 20%.

And that is great news but even better is we've sen the house and the U.S.

Senate appropriation committees recently passing the 2004 defense spending bill, and we see again where the Blackhawk, the Comanche, Joint Strike Fighter, F-22 and C-17 all have very appropriate and strong funding for the years to come.

So military good and we expect it to continue to be that way.

I mentioned earlier the Euro was helpful to Otis, and it's also been helpful to the corporation.

The Euro did peak, we believe it was the peak of about 119 about a month ago.

Today it's about 112, 113, which has been very strong in relationship to where it was a year ago.

A year ago today it was about 101.

So the strength of the Euro has given us 12 cents tale wind.

We have used that.

Four cents of that was in the guidance because we knew the your re was stronger.

We used five cents of that 12 cents which we discussed with you.

So the Euro has been helpful to us.

We're not sure where it's going from here, although it does look like it's softening, and that may, in fact, continue.

Okay.

So the balance of the portfolio, the pluses and minuses that you see in slide three has gotten us through the first six months quite nicely.

We still feel very comfortable with that guidance range that we gave new December of last year of $4.55 to $4.80.

So we're still comfortable that we will be within that range.

A couple of more things before Aklilu takes you through the second quarter.

I'd like to talk to you about the pension plan.

You may have noticed we have added another $100 million to the pension plan in the second quarter.

This is after a $500 million contribution in the first quarter.

We expect to make similar contributions to the pension plan in the next two quarters.

Similar to the second quarter contribution.

So another 100 million or so in Q3 and then also again in Q4.

And this is because of our continued strong cash flow.

And we expect to be able to cover that within that cash flow.

And again to remind you of over the last 19 months, we have put about $1.6 billion into our pension plan.

Just another point on Chubb.

We had our conference call on June 12th.

Many of you were on that call.

I just want to report today that we have accumulated or have received tenders of over 50% of the Chubb shares, and we also have received clearance from the U.S. anti-trust authorities for this transaction.

This transaction -- we've yet to receive E.U. clearance.

It's expected within the next week or so.

Given the track that we might be on here this transaction could close as early as this month, this month being July.

Once that is closed, we will as we announced before, have a conference call and bring you all up to date with management.

As we said, we want to close that before we have any other in detailed discussion about Chubb.

You may have also seen another acquisition that we announced a couple weeks ago called Amtech.

That is a subsidiary of ABM Industries.

It is an elevator after market company.

It has about $110 million in revenue.

And that also is moving ahead.

We also expect regulatory approvals for that over the next month or so.

And we would expect to close that in the third quarter.

Okay.

Two other items.

You probably noticed an announcement we made a week or two ago that Steve Finger, who has been the President of Pratt and Whitney's military business for the past four years.

Steve is now the -- has now been named the President of Sikorsky.

He will take over for Dean Borgman as President of Sikorsky.

Dean will stay on as Chairman, so there's going to be a very smooth and long transition there.

Steve comes out of the military business and he seemly has been the leader in our F-22 and Joint Strike Fighter program.

And the terrific success we've had in that program we certainly attribute to Steve and his fine team.

He knows these military customers extremely well and we're excited about having him join the Sikorsky aircraft company as its President.

As I mentioned, Dean will stay on as Chairman, and Dean has had a great run there.

He's led the development of the S-92 helicopter, and as you know, we've talked about that before.

That won the Collier trophy last year, which is the National Aeronautic Association highest award.

We've won it five times in 90 years so it's a terrific, tremendous achievement pore not only Mr. Borgman but the entire team and crew at Sikorsky.

He was instrument and significantly drawing the after market which has changed the character of Sikorsky from what it was before he arrived.

A terrific job by Mr. Borgman.

He's not going anywhere.

He's staying on as Chairman.

One other announcement is I think you've all been following the Sarbanes Oxley rules.

We certainly have been on top of this.

We are not concerned about it at all.

However, there are new rules we have to follow.

We believe we have been following these all along.

There are new precise changes that have been made that we're going to have to deal with.

And we all like to be out in front of this.

So we have named Jay Haberland as Vice President of controls.

He is uniquely qualified for this job.

He most recently was the CFO and prayer to that was the Corporate Controller at UTC.

Before that, he was head of our internal audit here.

So he has a terrific control background.

Knows the entire business from top to bottom, been with us for ten years and is uniquely qualified to lead the Sarbanes Oxley process.

We're excited to have him on board.

He reports to me.

And I think we'll have no problem with this at all, although there's been an awful lot written about this.

We feel we have it well in hand.

Okay, that's what I had to discuss with you.

I'm going to turn it over and then I'll come back and make a comment or two.

Thanks, Steve.

For those of you following the slides on Webcast, we are on slide four.

Consolidated remember knew for UTC were up 7.8 billion in the quarter, 6% above last year.

Brother in all segments led by Otis about two-thirds of the revenue growth was due to UTC.

Earnings per share were $1.26.

Three cents higher than last year.

Foreign translated into two of it was in our original guidance.

And approximately three cents were used for restructuring actions.

Free cash flow at $694 million exceeded net income by 10% and our debt to capital ratio was 34% down three points from the end of last year.

Our balance sheet remains strong.

On slide five, you see elements of cash flow at 109 million Cap Ex in the second quarter was slightly below last year, and for the full year, it's expected to be about 10% lower than last year.

Working capital was the use of cash primarily from the seasonal buildup of receivables at Carrier.

Inventory reduction was a source of cash this quarter in excess of $100 million, more than twice the level of last year.

Evidence that UTC's focus on inventory is bearing fruit.

Other net numbers include part of the full-year attack benefit from the pension contribution made in Q1.

And the impact of balance sheet reclassification changes from working capital.

All of these changes are within the cash flow number.

In the segments on slide six, at Otis, operating profit up 28% on 16% revenue growth, a combination of solid organic growth, profit incompetently improvement and sales from the favorable Euro resulting in a point and a half of operating margin improvement.

Foreign exchange contributed about 60% of revenue growth here.

Remaining growth was mostly organic and in all regions.

Operating profit also grew in all regions.

Led by margin expansion in Europe.

Assets contributed about half of the profit growth.

New equipment orders grew 5% at constant currency led by orders in North Asia.

In this quarter, Otis won a contract to install 111 elevators and escalators for the largest shopping mall in Asia now being built in [INAUDIBLE] China.

When completed, they project this mall to seat up to 800,000 people going through its doors daily.

Otis was also awarded a contract to install 22 elevators in Seven World Trade Center, the first building to be constructed as part of the redevelopment of ground zero in lower Manhattan.

This project calls for a 52 story tower with 1.6 million square feet of office space.

On slide seven, Carrier revenues increased 4% in the quarter. 1% organic at constant currency.

Revenues were up double digits in transport refrigeration and up mid single digits in North America residential despite the unseasonably cool spring in the U.S.

Global commercial SB&C remains weak and Carrier's sales in Asia were down in the quarter largely do you to a weak presidential market in South Korea.

Operating profit improved by 8%, with margins climbing to 13.8%, 60 basis points higher than last year.

As Steve said, this quarter is the fifth consecutive quarter of margin expansion at Carrier.

Reflecting the strategy to consolidate better leverage sale.

Strong performance at [INAUDIBLE] and favorable more than offset pricing in Asia.

In the quarter, Carrier won a contract to the controls for the new AOL-Time Warner building in New York City.

You may recall that Otis is also uninstalling equipment in that building.

Also, Carrier won a contract to provide 288 [INAUDIBLE] coolers for plans to be built between Seoul station in South Korea and the airport.

These are two examples of many contract wins at Carrier this quarter.

For Pratt and Whitney, significantly higher military revenues.

More than offset lowered commercial aerospace sales.

Military sales were up on development revenue, largely the Joint Strike Fighter program as well as increased spares and higher engine shipments.

Particularly for the F-22 [INAUDIBLE] .

Consistent with the first quarter, Pratt also shipped fewer small engines.

Operating profit was impacted by lower commercial spares with orders down approximately 30%.

Both to build for commercial spares was about one.

Compared to the first quarter, Pratt's operating profit was 3% lower on 13% higher revenues.

Again, revenues were higher largely on account of the military business.

Operating profit from these revenue increases were not enough to offset higher R&D expenses and [INAUDIBLE] commercial aerospace.

You saw the announcement of C-17 aircraft orders last December.

In May, Pratt received a contract from the U.S.

Air Force valued at more than $1.4 billion for 240 S-117 engines to be delivered in 2004 to 2007.

On the large commercial engine front, Jet Blue placed an order [INAUDIBLE] up to 115 Airbus AC-20 aircraft with D-25 engines. 65 [INAUDIBLE] and 50 options.

Pratt and Whitney's share of this order will be more than 500 million.

Also in May, Pratt successfully conducted a critical design review for the joint strike fighter demonstrating that the F-135 engine is meeting or exceeding specified requirements.

This gap in intensive seven month process including over 100 level reviews and 28 functional aerial reviews.

Hamilton and Sundstrand also successfully completed this review on their GSF systems.

On the flight segment, on slide 11, in the quarter, Sundstrand saw lower commercial after market sales down over 20%, higher military and industrial revenues offset lower commercial aerospace sales but not the profit decline.

Sikorsky shipped 18 new and remanufactured helicopters versus 16 last year.

Helicopter revenues, however, were lower due to high value international labor hops delivered in 2002 second quarter.

Sikorsky after market revenues had strong operating performance with revenues up more than 20%.

Largely due to the military's strength.

At [INAUDIBLE] Air Show, Sikorsky unveiled its newest military helicopter.

The S-92 Superhawk, which has an estimated market size to 300 to 400 aircraft.

Based on the S-92 which is passed has already past the worlds most stringent safety certification standards, the S-92 will be at the center of Sikorsky's upcoming presidential campaign.

Also, funding is being considered to repair equipment used in Iraq.

Addressing the impact of a harsh operating environment on that equipment.

More than 300 black Blackhawk helicopters served on the war.

And Hamilton and Sundstrand signed a contract last valued at approximately 100 million to supply over the next four years the U.S.

Navy with ground carts used to start aircraft on board ships and at land bases worldwide.

Lastly in the segments, for UTC Power, late in the quarter, [INAUDIBLE] and UTC fuel cells signed an agreement to jointly develop a new automotive fuel cell power plant capable of operating in freezing conditions.

One of the remaining hurdles in the development of fuel cells for automobiles.

In their plans to make fuel cell vehicles available for lease by fleet operators by the end of 2004.

You'll recall in the first quarter we announced an agreement with Nissan.

These two agreements further demonstrate the interest automobile manufacturers have in our fuel cell technology.

Just a few words on two corporate items before I turn it over to Jim.

In the quarter, company funded R&D was 281 million. $24 million lower than prior year.

On account of completion of major programs and again reprioritization of engineering efforts to government programs, particularly the joint strike fighter.

Year-to-date, company funded R&D was $516 million, 3.6% of sales.

We expect second half spending to be approximately equal to first half spending.

You'll notice on slide 11 customer funded R&D of 384 million in the quarter is substantially higher year-over-year.

On a total basis, R&D spending including the company funded investments is up 16% year-over-year in the quarter, and up 7% on a year-to-date basis.

Second point, corporate expenses were slightly higher in the quarter, largely reflecting the impact of the stock price on equity based incentive compensation.

Now Jim will take you through the outlook of the remainder 2003.

Thanks, Aklilu.

As Steve commented earlier, we continue to see ourselves in the earnings per share range of as $4.55 to $4.80 for the year.

That's consistent with your estimates of the start of the year in that range.

As always, there are puts or takes within this outlook over time.

In the case of Otis, we forecasted mid single digit revenue growth with operating margins expanding by at least a point, exclusive of last year's first and fourth quarter restructuring.

We now expect Otis' revenues to be up double digits and margins to expand by more than a point for the year.

Now as well, Carrier's performance in terms of revenues and margins has been near our guidance despite some pricing pressure, particularly with the commercial HVAC market and in Asia.

The unseasonably cool spring in the U.S. may impact the need for dealers and distributors to replenish inventory and may dampen margin improvement in the third quarter.

However, we expect second half revenues and margins to grow at similar rates as the first half.

In sum, I think our commercial businesses are performing very well and growing in emerging markets while receiving some foreign exchange translation benefit.

Now, at the beginning of the year, we indicated that our aerospace operating profits may be up $150 million on flat revenues.

However, the outbreak of war and SARS in the second quarter led to sizable reductions in the commercial spare parts sales.

Particularly for wide-bodied aircraft for we are the strongest.

Although low-margin military revenues were a partial offset to this decline, operating profits have actually fallen by $100 million in the first half of the year.

Now, as we have all read and followed in the press, the more active phase of the war appears behind us now, and SARS looks in control for the moment.

And I think as a result, we've seen the rates of decline for both revenue passenger miles and available seats miles slowing in June as compared to April and May.

So I think some incentive kind of recovery for stabilization signs for the airlines.

Hence, we believe the spare parts decline has bottomed.

However, the timing, the rate and size of the spare parts recovering is difficult to call given the operating losses that many airlines are still generating today.

Accordingly, an unsure recovery by the airlines and cool weather in the spring will make achieving the high end of our $4.55 to $4.80 EPS range difficult to achieve.

Now, although there are many factors that we've covered here not in our control, we continue to execute on many factors in our control.

We've had good operating systems in place at UTC like Ace focused on improving our costs and providing superior customer service.

And we continue to look for good opportunities in the acquisition arena around our core businesses with properties such as Chubb and Amtech Elevator.

And as you would expect in these difficult times, we're subscribing our costs and spending very hard.

Regarding cash in 2003, we believe free cash flow will equal net income excluding the pension contributions as stated at the beginning of the year.

Now in this quarter we generated free cash flow in excess of net income including a voluntary $100 million pension contribution.

I think that's a clear testament to our strong cash flow generation in the quarter.

Now, as Steve said earlier, we expect to make similarly sized contributions in the next two quarters.

And we hope to cover the pension contributions for the year with some of that free cash flow.

Clearly, this will be a high hurdle to cover the pension contributions within our free cash flow and achieve net income.

With that, I'd like to turn it back over to Steve for some final comments.

Thanks, Jim.

As Jim said, the cash flow has been very good for the year, and also you saw in the press release for the second quarter.

And we finished the second quarter with a debt to capital about 34% and very strong liquidity.

Let me give you a couple changes in our guidance that we gave you six months ago.

Assuming both Chubb and Amtech closed and obviously primarily Chubb, we expect to have our share repurchase program for the balance of the year equal to the share repurchase program for the first six months of the year.

Let me just give you some numbers on that.

We told you at the start of the year, $700 million of share repurchase.

We did $250 million in the first half, and expect us to spend about $250 million in the second half.

So the $700 million guidance for share repurchase, now $500 million.

Our acquisitions, we gave you guidance of $1.5 billion.

That was the guidance we gave new 2002 and 2001.

We spent less than $500 million in those past two years.

Clearly, again, if we close Chubb and Amtech, our spending to date, including those two, would be over $2 billion.

Therefore, our guidance for 2003 with the closure of those two transactions will move from $1.5 billion to approximately $3 billion.

So a change in guidance there.

Notwithstanding that change in guidance, we still expect our debt to capital to end the full year at approximately the same level as last year.

So the same strong level cash flow Jim talked about will play through.

We don't expect any deterioration for our debt to capital for the end of the year.

I have a last light for those of you following us.

We've taken the 2002 reported numbers for UTC and took the Chubb nets as reported for last year.

We added those together.

What you see now is our balance changing.

We talk about balance all the time.

And this change is, it takes the commercial revenue from 57% of the -- UTC portfolio.

It takes that to now 61%.

So with Chubb included on a full-year basis, 61% of our the commercial revenue from 57% of the UTC portfolio.

It takes that to now 61%.

So with Chubb included on a growing segments because of that sector on a global basis.

And our international business will now move from 56% where it is today to 59% which you see on the slide.

So our balance is shifting.

We like this shift a lot.

We really like this direction a lot.

And as George said in the press release, balance works and I believe we demonstrated that in the first six months of this year and expect to demonstrate that through the balance of the year.

With that, that finishes our comments.

We're now prepared to take questions.

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

We will pause for one moment to compile the Q-And-A roster.

Your first question comes from Heidi Wood with Morgan Stanley.

Good morning.

Just a quick question on the charge you took.

Can you give us the split on that 22 million between Pratt and the commercial businesses?

Heidi, it's across all of the segments and small enough that you are not disclosing by segment but across the businesses.

So it didn't materially contribute to the reason why the Pratt and Whitney margins were at 13.8?

No.

Okay, can you give us the Pratt engine delivery and talk about with these military spares, can you talk about why they were so strong?

Let me answer the engine shipments first.

The commercial engine shipments were 80 in this quarter.

Industrial shipments was two.

Military shipments were 54.

Pratt and Whitney Canada was 281.

With regards to the spares growth, I think it's a combination of the things, but I would say a lot of it is a function of what we saw, you know, a little bit from the war.

A little bit just for the regular repositioning and stocking one that military customers.

Okay.

Steve, can you talk a little bit, give us a little more color on the performance we saw at carrier.

You really did terrific performance given the cool spring and a tough comparison versus last year's warm spring.

Can you give us by group kind of what drove the sales and margin given the circumstances?

I mean, was it product related or were the benefits and prior restructuring action?

Let me make a comment on that and let me ask Aklilu to make specifics by product line.

What you are seeing are benefit restructuring that Carrier has taken in 2001, 2002 that is now playing through.

You'll recall playing closures last year. [INAUDIBLE] announced 20 plants that were closed.

You are seeing the benefits of that and now they -- numbers.

We're also seeing a nice sell-in, to distribution in Q2 and as Jim said, the weather issue and the sell-through is going to be, you know, right in front of us.

As we talked about, and I know you and I talked about that before.

So we've got issues in front of us, but I think to date it's been a nice job really by the -- at Carrier implementing the reinstruct chore that we've seen come through on the P&L.

Now Aklilu will take you through.

There was the transportation business that grew nicely double digits continuing on the backup strong growth in first quarter.

We also so he good growth, you know, in the North America residential business.

As Steve said, I think what we saw was, it as a two-step distribution in that channel as we talked about before.

That that essentially means is that Carrier and areas end up selling early in the season as they get ready for the summer season.

If the summer didn't happen, you see it translate into higher field inventory.

We saw more of that in May and June.

They don't order enough in the third quarter.

So there is a play here in the underlying movement is not as strong as the shipment date of the manufacturers which suggest in the Carrier segment.

In our sales, we are seeing a slowdown in the decline rates.

So some sign of getting a little better, still down year-over-year.

Asia, as I said earlier, South Korea was down.

China was up, so SARS had some in fact in Asia on carrier in April and may, but then we saw good recovery in June.

That was the part of it.

Latin America grew and commercial industrialization was flattish.

Okay, great.

One last question.

Steve, you talked about doing two billion in deals to date given Chubb better and you've upped the guidance for the year.

Can you talk about what this really says.

I mean, are you seeing better pricing environment therefore you think you are going to be more active?

Well, you saw the Amtech transaction, I did I, I believe that was a press release a week or so ago.

We do see the Chubb transaction which we think pricing wise is an appropriate return.

There are other properties out there today that are attractive.

Yeah.

I think things are better than they were in the last two careers as far as expectations of sellers today.

And so you might see a little more, but don't be disappointed if we don't get to three billion, Heidi.

That's okay.

I was just interested as to why you were opening up the range.

There are things out there.

We want to tell that you we're not going to stop at 2.3, we're sort of there now.

We have things in front of us.

You would expect to us do more elevator-related acquisitions.

We're just going to give you some guidance that it could be as much as three.

We're not trying to fill a $3 million bucket.

Don't misread that.

No, I was more vested in seeing if you saw a change in the pricing environment.

The answer's yes.

Okay.

More in the commercial arena than the aerospace area?

Yes.

Okay, great.

Thanks very much.

Your next question comes from Don MacDougall with J.P. Morgan.

Good morning, everyone.

Question on aerospace and the margins Heidi touched on this but at 13.8, that's the low test's been in quite sometime.

Obviously, a very difficult environment.

But with defense becoming a bigger part of the mix here at Pratt, should we think about a change in the longer term margin targets for the business?

Don this is Jim.

No, I don't think we should think about a change in the kind of business model or the margins.

I think that the situation here as you pointed out, the margins were the lowest they've been in some time.

That reflects the fact that the spares were the lowest in recent memory.

We've talked a little bit earlier about how we think this is kind of bottoms in terms of the spare parts decline.

We look at ultimate demand indicators like engine flight hours and available set miles.

They are not down nearly as much as spare parts have been.

So I think we're going to see at some point, it's hard to call when the rebound will be, but we'll see some [INAUDIBLE] and when you do, I think you'll see a recovery in profit margins.

So they come back quickly.

With regard to your conservatism on the full-year range and suggesting that the high end is a little more difficult given what you've seen, what is your assumption on spare's implicit in that expectation?

I think our expectation, we're still calling the range $4.55-4.80, I think, to stay in the range, we are not anticipating much of a spare parts recovery.

Look for it to be in kind of the, you know, above the minimum.

Maybe there's improvement there.

I think to be out of the range would probably require some combination of no arrow recovery, probably some strength in the Euro conspiracy and very poor summer and Carrier throughout the remainder of their.

So I think some bad combination of those, but I think spare as lone --

We think it's highly unlikely given where we are through six and a half months, seven months effectively that we'd be outside the bottom end of the range.

I mean, it would have to be a disaster and we don't really see that.

You know, Jim did raise some good points, which is there could be a snap back here.

Who knows?

I mean, I never saw spares going as low as they went in the last three months.

And I never saw commercial aviation being as bad as it was in the last six months.

Just didn't see it.

But bottom line,you haven't -- a snapback into your guidance range?

Have not, no.

Turning over to defense in the spares strength there, what's your sense of the persistence?

How long can that last?

Military spares, I think, you know, we as Aklilu mentioned on that side of the business, we've seen good kind of summary stock -- sow some restocking and fleet readiness.

These tend to be longer term trends.

The military is budget driven and doesn't move as quickly down or up as the commercial business.

I think we're on a nice trajectory for the military.

I think for the year we've got tougher compares in the second half in the military business.

I think that business is still doing well.

Okay.

Jumping over to Carrier.

We get the industry data.

We know April and may were terrible.

Our sense is that June was better.

We're relying on your competitor's comments yesterday.

But if June was better and their estimate was that the industry was up 8%, is it necessarily true that there's a lot of excess inventory out in the field?

Don, my sense is, I think the 8% number is what we would call a preliminary estimate.

And those numbers can change, but that's correct.

That's the number we have seen as well.

My sense would be you would see an increase in the field inventories.

It was 5% up in may, if I remember.

My sense, it will probably be double digits at the end of June.

There is certainly the weather has had an impact.

Cooling degrees are low and that does have an impact on the final movement.

Certainly, we won't be surprised if the field industry -- field inventory is up double digit or so.

Thanks for your help.

Good quarter.

Thanks, Don.

Your next question comes from Steve Binder of Bear Stearns please.

Good morning.

Good quarter.

You took down, if I'm not mistaken, you talked about Cap Ex lower than a year ago and R&D you've been talking in your -- about 4%.

Steve, can you maybe just touch on, you know, system-wide, you know, Cap Ex was originally going to proximate depreciation out.

Now it's going to be below that.

What have you been able to, you know, if you look at each lines of business, what are you seeing out there?

Is it broad based as far as efficiency and rationalization as far as capital?

We've got a couple of things on Cap Ex.

Let me give you a story.

I was with -- and we were talking about capital spending.

Every capital spend in Carrier and it has his signature on it.

He continues to do that.

It is really well scrutinized now.

And of course we're closing plants.

We've closed a lot of plants over the past two years.

We are also doing an awful lot in the way of outsourcing.

So you would expect the Cap Ex to come down.

You would expect us to outsource the capital intensive products that we do, you know?

For to us buy a 50 or 100 ton press is extraordinary.

We would probably never do that.

That's what the other guys should be doing.

We used to do a lot of that, walk through the factories and see the presses just pounding away.

So I think there's been a change there.

On the R&D, I don't know if you saw it, but a lot of the R&D has moved from company-funded to customer funded.

In fact, for the full year, Steve, the R&D spent for the corporation is up 7%.

We spent over 1.2 billion in R&D this year up from 1.1 a year ago for the first six months.

Because of the government programs that we have, very intense work being done there we're really moving engineering resources so the total spent by the corporation is what I look at.

The context of that is development that's used and of course government funded development does spill over to our side of it.

So there is a play.

So I think you want to continue to watch total spend for r and d for the corporation.

That's the engineering spent for the corporation.

I don't think I -- be too concerned about the split.

Jim, you want to add to that?

I want it add I guess one other anecdote out of Canada where we've seen good R&D expense for the year.

We've been working more with suppliers in exchange for getting funding on more of the R&D and providing test hardware which would be our R&D expense.

I think w're working very hard to scrub costs and is up -- our customers like the government at the same time.

You know, actually, I was leading not so much as a concern, Steve, but whether that levels the spend both R&D and Cap Ex can be suspended for quite sometime as a percentage of sales?

I think on the Cap Ex side there's a greater possibility.

As you do now, you talk to the leaders and outsourcing is the first words that come out of their mouth.

You know what this says is capital spending is to be done by the other guy now.

So I think you're on the right track there.

R&D, I think we're going to be around 4%.

I think we're 4% spent of our fund company.

I also think when you look the -- look at our spend, we will always be north of $2 billion.

I don't see that changing over the next few years.

If you were to win the 77 sole source of the 77, do you have a sense of what would happen of the R&D spend going forward?

Probably goes higher.

I don't really have that in front of me.

I don't have a number on that.

That's for later this year.

I think we would need to sit and chat about that some.

We're working that program closely with our customer Boeing.

That is in front of us.

As far as I know, the Boeing board has yet to approve the airline.

And that's a question question for later this year.

Two last things, Hamilton and margins, I know there were structurings in the quarter but they were down sequentially.

Historically, you see typically sequentially improvement.

Is that just minimum, weakness on the spare side or maybe you can touch on whaup saw there.

It's largely the mix as you eluded.

Increases were -- military was up again the same kind that makes impact.

Industrial businesses were up slightly in case of Ampleton, and again that was driven more by -- and a small acquisition.

But it's essentially the mix which drove the margin down, much like what you saw in Pratt.

Lastly, Aklilu, was it one time in the quarter?

Yes, about one.

Did you see sequentially improvement during the June period from April, may?

And lastly, can you touch on Chubb, what are you seeing out of the principal customers worldwide as far as shops compared to what you saw in Q2.

We saw in terms of [intra period] again, we saw the -- because I think of the war at the beginning of the quarter and SARS scare that that's what spared us the weak of the.

It didn't did improve as we moved through the quarter and in June.

In terms of the reductions, they are down as the lower problems.

And the airlines were doing lighter overhaul rather than heavier overhauls.

So we just say real conservatism.

It's tough to forecast the overhauls going forward but again I would say in terms of the ultimate demand in indicators, available seat miles and flight hours for our engines, the spares orders were well below that.

So we expect recovery at some point.

Thanks very much.

Your next question comes from Howard Rubel with Soundview Technology.

Usually it's my last name they get wrong, I know.

Howard, good morning.

Good morning.

Just a couple things.

One, tell us about the Otis market in the U.S. and what you're doing to sort of combat the weakness?

And at least on the new construction side and also talk a little bit more about new products at Otis.

Howard, Otis particularly North America again, as you know, first of all North America is a small piece of the Otis business.

That's point number one.

Secondly, even within North America, the service operation is a large component.

While new equipment is always important, service is what drives most of the profitability for that operation.

And we had good growth in the service side for orders this quarter.

On the new equipment side, we did see some pressure.

The new equipment orders were down this quarter in North America were down this quarter as would you expect in in environment but overall, North America grew on the strength of its service operation, which grew nicely.

In terms of the new products, we launched the next step escalator as you know.

We have a little over 30 units right now running primarily in Europe.

The launch in Asia got impacted because of the SARS issue.

We had training sections which couldn't be held so now we have it a little out toward the third quarter.

So we see some movement there.

That certainly a big market, important market for fallouts.

So good progress there and Jim, too, has really a very strong product.

As you know, we have orders for over 18,000 [INAUDIBLE] overall to date now and we're happy, very very happy with the progress that can be made there.

Just one more question overall on new products, could you talk about where you are with Carrier off sell and some of the other things you are thinking about doing?

With regard to Carrier, we introduced the new furnace we talked about in the recent past.

There is obviously what's been done in several other product lines.

In the commercial side, we have induced a new stock unit and new air hand unit in the recent past.

On the commercial refrigeration side, we have got some new exciting products, which will actually bring together the benefit of having got into the commercial refrigeration segment and use up United Technologies capabilities into the commercial refrigeration area.

This is in the form of a TC coil and some new display case units which will be coming out soon.

We've also had a new trailer unit come out this year, which is a lot more efficient and has a good capability to bring down the temperatures quickly.

The drawdown capability in the multi temp situation.

So a lot of exciting new product worth being done at Carrier.

All I can say is stay tuned.

Finally, if you sort of want to temper expectations at the high end, why didn't you at least narrow the range and sort of say 455 at the low end equally isn't unlikely?

Howard, I think we've said consistently that we're comfortable with the 4.55 to 4.80 range.

Things can happen.

Things happened to us the first six months, things can happen in then next six months.

It's just so hard to forecast what is out there right now.

We have not seen this uncertainty in two of our big seg segments, which are aerospace and certainly Carrier given the weather situation.

So again, we are extremely comfortable with the range we've given you and we'll be within it.

Thank you, Steve.

Thank you, Howard.

Leslie?

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

Yes.

Thank you.

You gave us the book to bill at Pratt as one.

How much, for the spares, how much were the spares' shipments down in the quarter?

You gave us the spares' shipments decline at 20% of Hamilton Standard.

What was the book to bill there in the second quarter?

The book to bill for Hamilton Sundstrand was also about one.

With regard to shipments, I mean, we said the orders were down 30% and book to bill was about one.

So that's probably all I would say.

Okay.

And, you know, your volume was just terrific at Pratt.

Obviously, your shipments both commercial and military are stronger than expected.

I think you went into the year kind of guiding for modest military gain.

You've taken the cover after the ball here in the first and second quarter.

What should we be thinking in terms of military volume growth for the corporation for the year and how does that sort out for the three businesses?

Based on what we have seen in the first half and clearly as Steve said in his first slide, military has been a positive story for us.

We now expect overall military for the corporation to be up double digits for the year.

You will recall it's a lot tougher compared to the second half because of the strength we saw in that segment last year.

So it's tougher comparison but still up double digits overall for the corporation.

With regard to segments, I think the strongest improvement in that area would be Pratt, you know, with the joint strike fighter development moving along nicely and getting us good development revenues there, that's strong.

With Sikorsky, which is largely in the military area, keep in mind we had a very significant aircraft shipments last year. 31 in the third quarter of last year.

That wasn't, again a very very high year.

So we may have more difficult compares there with regard to the military business.

Hamilton would be somewhere in between the two.

How concerned should I be on paper?

I mean, it looks like, you know, we get fairly sharp sequential drop in commercial, large engine shipments in the third quarter from the second quarter and also in military shipments from the third quarter from the second?

And if R&D is going to be 4% of sales, presumably, that will be moving up.

How concerned should we be therefore about profitability at Pratt?

You see the spares business coming back so the mix starts to save you or, you know, should we be, you know, really more concerned about this?

Let me just correct the we question on the R&D spending.

Steve's comment was more on a general basis.

For this year our guidance is that the spending in the second half would be about the same as what we see in the first half.

So I think that would put us closer to the 3.6% level for this year.

But on the long term, if I'm interpreting it correctly, Steve, I think long term you meant 12% of sales.

I'm sorry if I want clear on that earlier.

We were looking at as we look back over the last several years.

You are right about, in terms of the mix, clearly what we expect to see in the second half is tougher compares on account of the military side.

I think you'll see some tought compares on account of Euro possibly and Carrier as we thought before.

This trend will be on the commercial aero side, which shows some sequential improvement.

So I think the balance would keep us in the range as we have talked before.

Great.

Thank you very much.

Thank you.

Your next question comes from Michael Regan with CSFB.

Thanks.

Good morning.

Good morning.

Steve, if I look at cash flow for the quarter, about flat from operations year-over-year.

You had a big swing in the other net line.

Can you break that down at all as a contributor of $250 million?

Yeah, I think as I mentioned --

Or Aklilu.

Thanks, Michael.

I don't expect the CFO to have the cash flow details.

You'd be surprised the kind of questions Steve asks me now.

Let me take this one.

The 209 -- a couple of things.

You typically have sort of the noncash items reconciling net income down to free cash flow if you will.

So that is the minority interest part.

There is the preferred taxes.

Then we talked about the reclassification or reassessment of balance sheet liabilities then long-term, short-term which moved things around from working capital to other net all within free cash flow.

Sometimes sometimes is moves to other net.

This year, as a member of this quarter, we have the benefited associated with the pension contributions we made in Q1 coming through to the extent of about, you know, approximately $100 million or so.

So the decline in working capital was offset by a gain?

Yes.

Gotcha.

Then Steve, as people have asked relatives of aerospace, and the kind of margin you had at Pratt in the second quarter, as you guys dig into the numbers, obviously we can't tell because of mix, but is there a fair amount of comfort with Louis and his team that the majority of what you are seeing is all leverage related and all of the mix from the spare's business and that going back in time to this level of spare shipment historically, we've got big margin improvements so that fundamentally, this business is continuing to improve their margins despite what we're seeing now?

Yeah.

I think if we had the spares phenomenon five, six years ago, you would not see 18% ROR at Pratt.

Okay.

That that's great, thanks.

Thanks, Michael.

Your next question comes from Sam Pearlstein Jeffries and Company.

Good morning.

Just wanted to touch on the flight systems margins again.

If I just look at the profit decline we've seen there.

You know, with the strike in Rockford an impact and maybe we talked a lot about Hamilton Sundstrand margins but what did Sikorsky margins look like on a year to year basis?

The Rockford strike no impact or very little.

Not worth talking about.

The Sikorsky margins were up because of the after market business being up and the international being the other driver which were a big part of the revenue last year.

And as you recall, we did the Deer Co acquisition last year during the quarters.

We now have a full quarter of Deer Co in '03.

So that's the after market that Aklilu is referring to.

Thank you.

In terms of Otis and some of the regional strength, you mentioned China is one of the strong areas.

Are you seeing any pent up demand as construction projects slowed with the SARS impact and do you think you are caught up at this point or should we continue to see improvement from that pent up demand as we go though the second half?

The SARS epidemic or problem in China did not slow any of the construction projects coming out of the ground.

The construction site we were involved with did not have any work slowdowns.

We did see the administrative side slowing.

What that means is architects, planners, government officials had taken time away from the office, so projects that were in the planning process have slowed because those were the folks that were staying home.

The construction workers did not.

So that's what we saw and how that will manifest itself we'll have to wait and see.

And then just looking at the balance sheet it looks like sequentially there's over a $300 million increase in receivables, is there anything behind that that any one particular area that was behind that?

Two things to keep in mind when you look at balance sheet.

There is a big component which is FX, especially with the movement which has happened with currencies.

The other thing is Carriers.

Typically, you have the increase in receivables from Carrier in this time of the year.

Okay, thank you.

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

Good morning.

The R&D drop, I assume, was all at Pratt?

Largely, George.

Largely at Pratt, yes.

Okay.

And if you looked at the TW-6,000 at this point, I mean, when's kind of your thinking on it?

I mean, I would assume that the fact Jet Blue bought [INAUDIBLE] airplanes rather than the 310 obviously is a big neglect in that program?

The PW-6,000 program is going to, you know, these engine programs last for decades.

So we continue on the development of the engine.

I think we have our second flight test aircraft at Airbus now.

We actually ramped up spending on the 6,000 in the quarter as we look to bring it to certification towards the end of next year and hopefully in service in '05.

So clearly, we'd like to have to win all types of campaigns from the 6,000 do well on that platform.

This engine will be around for a long period of time.

So I don't think we'll read to much in one particular campaign.

What's the fist planned delivery for that engine now?

I'd have to get back to you on the exact date but I believe it's some time in 2005.

Okay, and then one more for Aklilu, the inventory build potential at Carrier, normally, the third quarter profits are down from the second quarter at Carrier anyway.

Would you think there's any risk that the third quarter profit level at Carrier would not be above the third quarter level last year?

Last year was a very hot summer for Carrier if you remember.

It was a long, hot summer.

We loved it.

I think the question is, will it be that -- will it get hot and stay hot enough for a while?

We clearly think there will be some pressure on the margins at Carrier as a result of the phenomena.

How it translates into exact profit numbers is too early to call.

We've also had, you know, as Aklilu mentioned in the press release, five quarters now of margin improvement at Carrier.

So clearly revenues may move around but the agenda at Carrier is still margin improvement even if the weather is not going to cooperate that much in the third quarter.

Okay, thanks very much.

Leslie, anything else?

Yes, sir, one moment, please.

We have time for one more question, if there is one.

Okay, yes, sir.

Do you have another question.

Your question comes from Christopher Mecray with Deutsche Banc.

Snuck in under the wire.

Thank you.

Would you guys be in a position to comment on what degree of pent-up demand might exist in the commercial after market at the point at which is parts of capacity comes back in the system?

It's a dominant dominate feature in the mid 90s.

Lots of JTA overhaul that needed to get done, that sort of thing.

Any commentary you might be able to help us with?

No, I think, Chris, we'll have to wait to see what the airlines do on that in terms of what their choice is in terms of trying to run the aircraft harder or take capacity out of the desert or even get new aircraft as they consider what to do should the demand and profitability begin to recover for the first time in a couple of years.

We'll have to watch that.

You don't have any sense from them in discussions that might indicate one thing happening before the other and to what degree they may have can cannibalized?

I think they've been looking for a decade to take engine parts out of the desert.

They are always looking to do that.

That's not new phenomenon.

In terms of capacity right now because of their profitability I think they're looking really hard to kind of maximize their profits and load using their current capacity and again, I think they'll be real reluctant to have a lot of capacity and to see how it manifests itself.

Great.

Thanks very much.

Thank you.

Thank you all.

As always, the investor relations group will be around the rest of the day to answer your calls and tomorrow and Monday and all that.

So we look forward to your calls.

Thank you all.

Ladies and gentlemen, thank you for participating in the United Technologies second quarter conference call.

You may now disconnect.