雷神技術公司 (RTX) 2003 Q3 法說會逐字稿

Good morning.

Welcome to the United Technologies Corporation's third quarter conference call.

On the call today are Steve Page, chief financial officer, Jim Geisler, director of Planning and Analysis, and Rick Barrow (ph), manager of Investor Relations, as well as Akhil Johri, the CFO of Chubb.

This call is being carried live on the Internet and there's a presentation available at www.utc.com.

The company reminds listeners that their earnings and 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 10Q and 10K reports, provide details on important factors that could cause results to differ material from those anticipated in the forward-looking statements.

Please get, Mr. Page.

Good morning.

I think you heard that Akhil Johri is with us this morning as the CFO of Chubb.

The last time were together 3 months ago he was the director of Investor Relations.

And as you know he's taking this most important position for us.

I do want to introduce our new director of Investor Relations, David Porter.

Mr. Porter has been with us for a couple years now.

In fact, since I returned as CFO over a year ago, he and I have worked fairly closely together.

He is an assistant controller for us, works down the hall from where we are, and he has been, as I say, with us since 2001.

Prior to that, he spent over ten years with PricewaterhouseCoopers, along with another stop or two.

So David is now our new director of Investor Relations, you will all be meeting him in the next few weeks as we go on our various road shows, and I hope you all give him the same support as you did Akhil.

And thanks to Akhil for his work this year.

I think it's been a difficult transition, having been on this job for only six months, then going out to Chubb, and I do very much appreciate what you have done for us during this period, and we wish you all the best at Chubb.

You'll hear from Akhil in a few minutes about what is going on at Chubb.

Okay.

That's that transition.

Let's talk about the quarter.

As you probably saw from the press release, the quarter was fairly good.

This gives us confidence in the full year now at $4.65.

You'll recall for the past 12 months we've been giving you full-year guidance at $4.55 to $4.80, and now we're comfortable with the consensus you have of $4.65.

This is about a 5% earnings per share growth for the full year, which is the same as we've had in the quarter and also year-to-date.

The cash flow, the cash flow is very strong as we reported in the third quarter, of about $900 million.

And this is after we included $125 million for the pension contribution.

This comes from really good working capital performance, and the inventory turn program that I think we all discussed for the past nine months.

We're actually seeing some traction in the inventory turn program.

In fact, the inventory turns for the nine months are up about half a turn, which is, of course one of the benefits associated with the new program that we put in.

So the cash flow guidance then for the full year, as you saw in the press release, we expect that to be in the range of net income now, and that includes the pension contribution.

The pension contribution to date has been about $725 million on a pretax basis, so we forecast this cash flow strength to continue for the balance of the year.

With that, we expect that the debt to capital will improve as we finish the year.

As you saw in the quarter, it was two points better than the end of 2002, and that is after the Chubb acquisition.

So it is a two-point improvement in debt to capital, which we're very pleased with.

You probably saw the press release from S&P, which unfortunately downgraded us from an A-plus, with a negative outlook, to an A with a stable outlook.

We struggled with that a lot, given the fact that our cash flows are as strong as they are and our debt to capital has in fact improved.

Talking to the agency, they did talk about their concern about aerospace, the pension liability certainly acquisitions, the usual things that they talk about at a time like this.

So S&P has us at an A, and let me just refresh your memory.

Moody's has us as an A-2, so these are now equivalent ratings and both agencies has confirmed our A-1, P-1 commercial paper, which is, of course, good news.

And I think some of you in fact told me about the fact that our debt, it does trade at better than a Single-A.

I think that's certainly an indication of what we talked about before, which is very strong cash flows and a good balance sheet.

Another piece of news for the quarter, as you know, the Chubb transaction closed, and in the numbers that you see, we do have two months of Chubb included in those numbers.

Akhil will take you through some of the details of what's happening at Chubb in a few minutes.

With the closure of Chubb now, about 60% of our revenues comes from our commercial businesses.

This is an all-time high for us, and we're very pleased with the mix of our businesses--60% commercial, 20% commercial aerospace and 20% military.

Just a comment on two about the performance of the divisions in the quarter.

Otis has been very strong, not only in the quarter but also in the full year numbers.

And this is Ari Bousbib and his team continuing the strength over the last couple years and we've seen strong improvement with a good backlog as we look ahead.

Geraurd Darnis and his team carrier has had its sixth consecutive quarter of margin expansion.

That is truly remarkable.

As you know, we've had some difficulties with carrier in the past and it looks like his team has gotten that thing on track, and we're very comfortable with the outlook for that also.

The military business, another bright spot for us.

If you'll recall, it was up about 20%, revenues were up about 20% in the military business last year.

It's up mid teens this year, so it's a good performance, continued good performance.

Pratt and Hamilton have done a terrific job on the joint strike fighter.

We in fact just completed the assembly of the first production engine for the joint strike fighter in the quarter, and that was an important milestone for the F-135 program.

And so we're very pleased with that.

Again nice work by Louis Chenevert and Ron McKenna on keeping track on that important milestone.

Okay.

Well, that's a lot of good news.

We do have the commercial aviation part of our business.

I told you I think the last time we met that I thought the worst was behind us in commercial aviation, I think I can still say it is behind us.

The slope of the improvement curve is certainly not clear as we sit here today.

We do see some interesting numbers, which is domestic revenue past year miles are increasing.

We do so international travel increasing.

However, the spares business remains sluggish, and I think that goes to the state of the airline industry, which is still losing billions of dollars, as you all know.

So that continues to be difficult for us.

But we have seen some improvement, although it's been fairly modest in the commercial aviation part of our business.

You also read during the quarter that Carrier announced its intent to consolidate its Syracuse manufacturing operations.

It has a couple manufacturing plants there.

It plans to close those plants and move those closer to the customer.

A lot of the activity at one of the plants is Asian-based.

So we expect to move those plants into Asia.

One of those plants into Asia, again to be closer to the customer, and also to actually reduce our manufacturing costs.

We expect to do this in the fourth quarter, this quarter we're in now.

It's been our long-time practice, of course, to cover these restructuring with one-time gains, and we do have a couple one-time gains that we expect to have in the fourth quarter, to do this.

All of that, all of that restructuring and gains are within the $4.65 that I gave you earlier as our consensus for the full year.

We, of course, are never pleased with plant closures.

They are very disruptive to not only the employees, but obviously their families and certainly to the community.

However, as we think about this, we do realize that it's probably a bigger problem if we don't downsize these factories and if we aren't the low-cost producer.

We don't like those consequences.

These are difficult decisions, but they need to be made.

That's just a general overview of where we are, and Mr. Geisler will take you through the third quarter performance and right after that Akhil will talk about what's going on at Chubb.

Jim?

All right.

Thank you, Steve.

For those of you following along on the webcast, we're on slide four right now.

Consolidated revenues were $8 billion in the quarter, now that's approximately 9% above last year.

There was growth in the commercial segments, as Steve mentioned, led by Otis.

And about 6% of the total revenue growth was due to acquisitions, primary Chubb, with most of the rest of the remainder due to the favorable impact of foreign currency translation.

For the quarter, earns per share were $1.27, up 5%.

That's 6 cents higher than last year.

In addition, we had about a couple cents of restructuring and related charges sprinkled through out the businesses.

The euro contributed about 5 cents of EPS during the quarter versus last year, which is not surprising given how strong the Euro has been all year.

Net income was $639 million, up 4% from last year.

On slide five, you can see the elements of cash flow.

Free cash flow was $896 million in the quarter and exceeded net income by 40%, including pension contributions of $125 million.

Working capital was a source of cash, as Carrier came down from their traditional 2Q seasonal peak, and we had good collections.

CAPEX is $126 million in the third quarter.

Now, year to date, CAPEX about 20% below last year, and we expect for the full year, CAPEX to also be about 20% below 2002, as the business units focus on capacity and share investment requirements with vendors.

Year to day free cash flow was $1.76 billion in the range of net income, and this cash flow performance to date supports our full-year cash flow guidance.

Moving on the to the segments on page 6, at Otis, operating profit margin improved 170 basis points to a record 18% in the quarter, and operating profit was up 23% on 11% revenue growth.

Revenues increased in all regions, led by strong new equipment sales in China and Korea.

And about half of the revenue growth was from foreign exchange.

The operating profit increase was led by margin expansion in Europe and Asia, and a little more than a third of the operating profit improvement was due to foreign currency translation.

For the full year we expect Otis revenues to be up double digits, and margins to expand by more than a point, thanks to strong execution and foreign currency benefit.

Now, also in the quarter, Otis closed on the acquisition of Amtec Elevator in North America, which will add approximately 18,000 maintenance units and $115 million in annual sales.

Moving on to slide seven, Carrier's revenues increased 5% in the quarter, with almost 4 points of organic growth.

Carrier's growth came in transportation refrigeration, with revenues up double digits in Europe, in part due to hot weather, in China where our business remains strong.

The North American residential business remains solid, while the North American commercial HVAC business showed some signs of stabilization, although it is very early.

The North American commercial refrigeration market continues to be weak.

Now, operating profit at Carrier improved by 10%, with margins climbing to 12.4%, 60 basis points higher than last year.

Strong performance in trans (inaudible) and in Europe led the market expansion, despite lower profits and commercial refrigeration and continued pricing pressure in commercial HVAC.

Carrier's year-to-date margin increase of 60 basis points should be around the improvement rate for the full year--before the impact of the potential fourth quarter restructuring that Steve mentioned.

Revenues are up 4% year to date, and we anticipate that kind of growth for the full year.

Moving over to aerospace, for Pratt & Whitney, revenues were slightly lower than last year.

Military sales continued to benefit from our leadership role in the joint strike fighter program, as well as increased spares volume.

The double- digit military growth was offset by declines in large commercial OEM and high margin aftermarket business.

Pratt & Whitney Canada also shipped fewer small engines in the quarter.

Compared to the second quarter, Pratt's operating profit was 4% higher on lower revenues.

On a sequential basis, Pratt & Whitney had lower military engine shipments and higher -- slightly higher -- commercial spare part sales after a tough second quarter.

In the quarter, new large commercial engine orders were announced, by Pratt & Whitney and its partners valued at $430 million for Shanghai Airlines, Air China, CIT, aerospace, and ILFC.

So a bit of good news on the orders front.

Hamilton Sundstrand's revenues were higher, with commercial aerospace OEM weakness more than offset by higher military sales.

Higher military volumes and improved commercial spare parts generated operating profit growth both year over year and sequentially.

Now, the results for Hamilton Sundstrand and in flight include the favorable impact of a commercial contract termination fully offset by the estimated cost of some commercial litigation.

Sikorsky shipped 18 new and remaining helicopters versus 31 last year due to higher military sales last year.

Their lower helicopters sales were partially offset by better aftermarket performance.

In the quarter, Avik 1 (ph), commercial aircraft of Shanghai, selected Hamilton Sundstrand to supply multiple power units for the new 80 to 100 seat regional jet, the ARJ 21, providing up to $1.3 billion to Hamilton Sundstrand over the life of the program.

Now, if you step back and look at aerospace for the year to date, I think the businesses have continued to perform pretty well in light of the challenging environment for commercial aerospace.

However, we do expect operating profit to be down for the full year because of weaker commercial aftermarket.

But we anticipate and are hopeful the sequential operating profit improvement will continue, but we remain cautious concerning the outlook for commercial aerospace.

As we've told you before, our aerospace companies continue to do well in the military side of the house.

For reference we have slide 10, which provides a summary of the segment performance to date and full-year guidance for UTC.

On slide 11, a couple items before we move on to Chubb.

We continued our share repurchase programs in the quarter buying back $50 million worth of shares.

We indicated we would scale back our share repurchase due to our increased acquisition activity around the acquisition of Chubb.

We expect now acquisitions and their related debt should end the year around $2.3 billion, as we don't see much activity in the fourth quarter, although we continue to look for attractive opportunities in our core businesses, including Chubb.

With lighter acquisition spending in the immediate future, we expect to increase the share buyback rate to end the year at around $400 million.

So we're looking at a fourth quarter that's in the neighborhood of $100 million for share buyback.

We made an additional $125 million voluntary pension contribution in the third quarter, while still generating free cash flow in excess of that income.

We would anticipate a similar sized pension contribution in the fourth quarter.

Customer financing was an outflow of $167 million in the quarter, as we made some secured funding for a couple new aircraft.

We would expect full-year customer financing to be around $250 million--in line with our original guidance at the beginning of the year.

Also, as Steve mentioned, we expect debt to cap for the year will end the year at a lower level than the end of 2002, even with the acquisition of Chubb, and continued share repurchase.

Now, year-end debt-to-cap will include the benefit of UTC's stock ownership conversion, benefiting equity, likely offsetting a pension-related charge equity that we also expect to make in the fourth quarter.

The effective tax rate was 28% flat with the first half of the year, and the rate we expect for the full year.

Now, we are currently in the process of settling some claims with the IRS related to open tax years that may result in a gain in 2004 that would impact next year's tax rate.

We would expect to use this opportunity as we have in the past to fund cost reduction actions next and we will update you on this activity as it progresses.

Finally I'd like to draw your attention to the Eliminations and Other line for both revenues and operating profit.

They include the results for Chubb for the first time, about $400 million in revenues, and 5% ROS.

That's after the amortization of intangibles.

So with that, I'd like to turn the call over to Akhil to talk to you more about Chubb.

Thanks, Jim.

It's great to be on the call.

As you can imagine, life changed somewhat dramatically since the last time I spoke with you in July.

For the last two months I have traveled extensively with the new management team to its global operations covering five continents and over 90% of the revenue base.

Over the next ten minutes or so, I would like to provide you with a bit of insight into the opportunities we saw.

Slide 13 shows Chubb's new management team.

As you would expect, there is a lot of UTC experience here, particularly from Otis elevator company.

Chubb's President, general counsel, CIO, and VP-Quality, all have significant Otis experience, actually more than 40 years among just the four of them.

This is no coincidence.

There are aspects of Otis's discipline operating principles, both in the front and the back office operations, which will be key to improving Chubb's performance.

You will also notice that we have added several new positions at the senior management level.

This has been done with a specific focus on improving operation's effectiveness and to facilitate transfer of best practices across business units.

We have created a business development group headed by an experienced executive from UTC's M & A group to actively evaluate consolidation opportunities in the fragmented electronic security and fire protection industries.

In our travels, we came across many capable security industry managers in the field, with significant years of experience and knowledge.

We feel good about the talent which is available throughout the Chubb organization, and which has been complemented with the insertion of UTC talent.

On the next slide is an overview of Chubb's business mix by segment and geography.

As you know, we operate in many segments of the security industry.

Fire protection industry has a very attractive model.

Mandatory inspections, and regulated service provides Chubb with significant follow-on service revenues after the original sales of equipment in this segment, similar to the attractive Otis model.

In the fast-growing industry, Chubb provides system integration with products sourced from low-cost high quality providers on a global scale.

And in the geographic slide you will notice or balance.

It also highlights the fact that we have limited presence in the U.S., the largest security and fire market in the world and China, which, like in other industries, has significant growth potential.

Both are attractive areas for business development opportunities.

Chubb has the leading position in the key markets it participates in, Australia, the UK, France, Hong Kong and Canada.

Five of the them count for nearly 75% of Chubb sales.

And Chubb has a number one position in 6 of the 13 market segments that are present in those regions.

Slide 15 shows the stock price for Chubb over the last 15 months before UTC acquisition.

This reflects tough market conditions and lower than expected operating performance.

In 2003, the industry has been weak.

Chubb itself has had no organic growth to date and significant margin pressure.

And Chubb is not the only one suffering in this industry at this point.

Also, over this period, Chubb revised its guidance downwards several times, and then missed the revised guidance.

This over promising led to little restructuring, some deterioration in customer relationships and very little investment in the business.

In due diligence, UTC saw the weaker conditions and poorer processes at Chubb.

We factored that into paying a reasonable price at which Chubb is (inaudible) even at the lower level of profitability.

There is ample opportunities to improve in many areas at Chubb, which I will cover on the next couple of slides.

Slide 16 shows one of the restructuring opportunities we saw at Chubb in our travels.

This is an example of a country operation where each Chubb business operates independent of one another.

Just the electronic security business in this country has 500 administration people supporting just over 1,000 customer facing personnel.

Our ratio is 1 to 2.

Clearly, there are opportunities to improve this ratio with some investment.

Then imagine if we consolidated the back offices across the various businesses within this country.

Lots of opportunity.

To realize this opportunity, we will need to invest in common systems and processes.

Slide 17 shows another good value that we found in Chubb.

The Chubb brand has history.

With generations of customer recognition throughout its key markets.

Studies have shown that it's if all other factors were the same, more people would prefer Chubb security, as compared with local players or other national players.

Where we lag is in responsiveness to service calls, when compared with local players.

That is the opportunity as we improve our service levels.

Chubb spends very little in R&D today, around $10 million a year.

Even with that smallest spent, however, Chubb has managed to develop proprietary technology which is impressive.

Slide 18 shows Chubb's electronic security product in Canada, called Verex, which is an important contributor to Canada's above-average performance.

We are expanding the market reach of Verex by enhancing its technical capabilities and other operating companies of Chubb outside Canada will also aggressively market this product.

You have seen slide 19 before.

UTC has very strong relationships with commercial vendings throughout the world.

Otis, Carrier, and UTC Power either supply their products, or provide service to a vast number of commercial buildings.

And where they do not have product or service, they have probably bid for the same and hence have contacts with the decision makers.

While we are not counting on huge revenue-based synergies for this acquisition to be successful, the reputation and relationships of Otis and Carrier do provide a longer-term cross-selling opportunity for Chubb.

Another piece of good news on slide 20.

There are several pockets of excellence within Chubb.

There are many operations with strong ROS at levels they would like to take the rest of Chubb to, and that is in every business segment.

What we did not see in our travels was much transfer of best practices across the businesses.

That will change.

This slide is evidence there is a long runway ahead for Chubb.

We expect to see steady margin expansion for the foreseeable future.

We also see a wide range of experience with attrition rates within the business units of Chubb.

There are operations with best in class attrition rates.

Our focus will be on leveraging that knowledge.

One of key tasks for the new VP of quality and his team will be implementing (inaudible) and institutionalizing process improvements.

This will have a positive impact on reduction of attrition rates and improving the top line.

In summary we remain excited about the opportunities that Chubb brings for UTC.

It's a good brand name with global presence and market leading positions.

We believe implementing UTC's well-established management practices, reporting discipline, and investments in I.T. and product technology will allow chubb to expand margins and deliver world class returns on a reliable and consistent bases over time.

We bought Chubb as a platform to expand in the growing fire protection and electronic security industries, industries which are fragmented and hence allows for growth also through consolidation.

Chubb President, Olivier Robere (ph) will be at the UTC's analyst meeting next year with a more comprehensive look at Chubb operations and the outlook for 2004.

This concludes my comments.

Steve?

Akhil, thank you, and Jim, thank you for your comments.

Before we open up to questions, I know you all will have a lot of questions about 2004, and we are in the middle of working on the plan for 2004.

We don't have those pulled together.

But it's our normal and usual practice to gather in December and to give you some detailed guidance for 04 and then to gather in the first quarter of '04, with the presidents, to discuss the details of their operations.

We'll spend more time in December to talk about '04.

As Jim mentioned, the issues that we have that we are looking at, that concerns us about '04 is the commercial aviation business.

We're cautious about that, we have seen some up-ticks, but the slope of the recovery is still not clear.

We'll give you guidance about the pension plan and the cost thereof as we get closer to the pension year-end, which is November, and we certainly have healthcare cost issues that we're going to continue to deal with.

And who knows where the euro will be next year?

I think we're all surprised that it is where it is today, and that certainly creates some uncertainty.

So there are some uncertainties in front of us, but we do think the balance of the portfolio as it did in 2003, will allow us to work through these uncertainties as we look at 2004.

Our balance now includes the Chubb business that Akhil just talked about.

We're obviously excited about having that as a platform for growth.

We do see, as Akhil mentioned, a very good fit with the customers of Otis and Carrier, and we really do like this platform a lot.

Okay.

Good third quarter.

I believe fairly strong performance, notwithstanding the fact that we had some tough issues in the first six months with bankruptcies and the war.

And as I said before, the first six months was bumpy.

I think the road now looks a lot smoother than it did, and we confirmed the $4.65 for the full year, and we fully expect the continued balance and the mix of our businesses to get us through this economy until it does recover, which we hope is next year.

This confidence that we have in the $4.65 and the cash flow forecast allow us to increase or dividend, which we announced a few weeks ago.

There will be a 30% increase in the dividend, and that of course will be the dividend that we pay in this quarter--the fourth quarter.

All right.

That's about all that we wanted to say.

Let's see what's on your minds.

Brandy?

(OPERATOR'S INSTRUCTIONS) Your first question comes from Joseph F. Campbell, Jr. of Lehman Brothers.

Joseph F. Campbell, Jr.: Good morning.

I wonder if Akhil or Steve could comment on the way in which you expect to sort of dovetail the ongoing fixing up and standardization of systems and improvements to the less than desirable performance that came from Chubb over the last couple years with the ambition of using Chubb as a platform obviously through acquisitions?

You know, is it too early?

Do we run the risk we had in Carrier where we got too ambitious in trying to go?

Or is this something that takes a year to sort it out and then we expect acquisitions?

What's the way we should be thinking of it and how are you thinking of it?

Well, Joe, acquisitions unfortunately are not subject to our timing.

If there is a property that comes onto the market in the fourth quarter, although as Jim said a few minutes ago, we gave you guidance for the full-year acquisition spend, what that tells is we're not working on anything.

However, if property that comes on the property market looks like it would be consistent with the strategy, we would do it.

I agree with what you've said completely.

All of us together would like to see a stronger base at Chubb.

We don't have that yet, Akhil is in the process, obviously his team and Olivier's team is in the process of building a strong base.

Ideally, Joe, you sort of like to do it 12 to 18 months from now-ideally.

However, Akhil?

Joe, I would just add to that as I mentioned earlier there are a couple markets where we don't have a presence, so we don't have a platform to begin with, which is the U.S. market and China.

So if there were attractive opportunities in that geography, it would not impact the rest of Chubb.

The other thing I would say is there are several operations within Chubb which are pretty strong and stable and performing well.

And so if there are (inaudible) opportunities in those spaces, we would again look at that.

Chubb is a platform.

We do need to be careful in terms of stabilizing it, but if there are opportunities, and if they come up, we would certainly look at them.

Joseph F. Campbell, Jr.: And there's a couple operations that people have talked about, whether you ultimately will retain.

I ask not so much about whether in fact you're going to sell them or what your timing is, so much as just thinking about whether or not, with all the tumultuous stuff that comes with change and the insertion of all these UTC people, whether you're likely to consider some of the divestitures that have been talked about?

Or, whether this is something you would rather wait and let things settle down?

There's the guarding business, which at least initially people weren't sure that was so integrated with the commercial security business that it needed to be retained, and then there's the lock business also in Australia the business looks mostly retail, or consumer rather than industrial.

And I wondered what the thoughts about those businesses were and your thoughts also about the timing, you know, where you might consider whether you wanted to sell things or not, or is there a period where you sort of study them for a while before making decisions?

It's a combination of everything you want.

The first step for us was as a team to go around and understand the businesses, which we have done in the last two months or do.

We are digesting a lot of that information, thinking about a lot of the issues that you brought up, looking at every business, both from strategic fit and performance point of view, and we will be discussing with UTC management sometime in November our approach to divestiture or restructuring associated with the Chubb operations where appropriate.

So I would say when Olivier is in front of you next early next year, possibly we'll have more idea and more discussion on our thought process about divestitures and other proposals.

Joseph F. Campbell, Jr.: Thank you very much.

Your next question is from Don MacDougall from J.P. Morgan.

Good morning.

Akhil, a question on Chubb with regards to accretion, are you prepared to present any range of EPS impact next year from this deal?

Don, this is Jim.

I'll take that.

I think Chubb was slightly accretive in the quarter, and we would expect, as Akhil said, despite the fact we'll be making additional investments for it to become increasingly accretive over time.

Our guidance over the year for $4.65 includes Chubb and also the guidance in December will also include Chubb.

As we divest certain businesses and add, that product math would be tough to trace and follow through as we do things like that as we refund and refinance debt.

We think it will be increasingly accretive going forward and will be part of our guidance, as it is now.

Jumping over to aerospace and spares in particular, Pratt has seen more severe declines than some of the other players out there that we follow.

I think that's a function of your installed base and the fact that you probably had more planes parked.

I'm wondering as you looked at the planes that are in the desert and your analysis of the ones likely to come back, is it reasonable to assume that Pratt will see perhaps more growth as the recovery takes hold than the industry?

Well, I think we would be very cautious on saying first that a recovery is under way and we would outperform in such a recovery.

As you pointed out, the airlines have some aircraft in the desert and they're monitoring their capacity very closely right now.

So I think the recoveries, if there is one, is in the embryonic stage, and we don't look for a snap-back, either related to the industry or our particular fleet.

Jumping over to Carrier, we heard from one of your competitors yesterday that they had been taking some share in the residential market.

I was wondering if you could comment on the residential share.

And secondly they also commented think took were feeling more optimistic about the commercial HVAC markets, noting that orders were up in the quarter.

Could you make any comments on your commercial orders in HVAC?

I think we can comment on both businesses, Don.

In the residential business in the quarter, I think the industry saw slight growth and we were up in line with that growth and it was again off a tough compare.

But I think we grew with the industry on the residential side.

On the commercial side, I think we commented with you saw some signs of stabilization and saw in the quarter really flat shipments and our shipments were flat as well.

We did better, if I dissect that on the package side, the smaller side, which sometimes leads a recovery in the commercial HVAC sector.

As well, we've had three down years, which is the first time I think in 25 years that we saw three down years.

So I wouldn't say we're in the recovery mode, but we've seen a flattening here in the third quarter that we haven't seen in previous quarters.

Just finally, again on Carrier, how would you characterize inventory levels right now?

I would say in the channel we're about -- the channel for the industry and for Carrier seems about equal to last year, so kind of an adequate stage to sell through in the fourth quarter.

Thanks for your help.

Thanks, Don.

Your next question comes from Steve Binder of Bear Stearns.

Good morning.

Steve, I wanted to touch base on the restructuring charges you mentioned, at Carrier.

Are there any units you expect to restructure or take any additional expenses in Q4?

And what were the gains that will offset that?

The majority of the restructuring will be the Carrier Syracuse discussion that we had.

The character of the gains are really divestitures.

All right.

Then, with respect to Jim or Akhil, you talked about 5% return on sales of the quarter at Chubb.

But the eliminations on the line-- it didn't look like there was an appreciable difference.

Was there some one-time gains in the quarter?

Any positive credits there?

No.

Actually Chubb was 5% ROS, and we also had a variety of corporate entities, including financial entities.

And they showed a reduction in profitability that kind of obscure the benefit of Chubb's ROS.

You typical run $25 million, $30 million on a quarter there, don't you?

It tends to move around, but then again, you have the Chubb 5% or about $20 million in there, and then again lower income, if you will, from a couple corporate office entities.

Book-to-bill, can you touch on how we progressed at Pratt on the large commercial spare part orders in the August/September time frame?

Was it below one for that period of time?

No, book-to-bill was about one for the quarter, and for that period of time, and I think that underlines the fact that what sequential improvement we have seen is pretty modest to date, because we're not building backlog in the commercial after market for spares.

And just two other things. 77 Steve?

Can you make just touch, when you look at that investment opportunity, how much of it is your takeaway on the market potential for that plane, versus the potential customer base.

Because if the customer base is largely customers who aren't buying Pratt or defected from Pratt.

The same applies in Europe.

The only really market is Japan for you.

I'm wondering, is that a program that you're approaching cautiously or aggressively?

We're working very hard now with our customer, certainly Boeing and our other customers who have expressed an interest in the 77.

We've seen some very interesting numbers as to the future of that aircraft.

We've seen some fairly significant numbers that they expect to sell over the next 20 years.

Are we aggressive or conservative as we approach this?

That's a real tough question.

The answer is we're certainly going to look at the business case we're making this investment in this aircraft, which includes all the factors that you mentioned plus what I said, and we'll make that decision at the time it's appropriate.

We would like to be an engine on this aircraft, but it would have to make business sense for us.

And we'll just have to wait and see.

All right.

Lastly, Akhil, if you're still there, at Chubb, two things really.

One was you articulated the story at Chubb, but you're talking about R&D, you're talking about investment in systems, but you're talking about margine expansion and kind of gave some examples where they might be top-heavy.

But when you really think about the drivers in margin, my first question is if you look at the drivers of margin improvement, is it more the gross margin line or overhead-related reduction?

And will it take some time before we see some meaningful margin improvement?

But number two, you came out of Carrier and I touched on this in the 2Q conference call, you talked about acquisition opportunities in North America and China and if they're available, you'll want to pursue them.

I'm wondering, since you've had some time to look at Chubb, how does really Chubb really differ compared to the commercial refrigeration market, where it's kind of an adjunct market that you guys didn't benefit from and have had some troubles with as you basically pursued that new business opportunity.

Why is Chubb different, such that you are willing to make acquisitions sooner rather than later?

I think in terms of outlook for margin, I would say clearly an opportunity both on the gross margin side and on the overhead side.

As I described, there is a back office consolidation opportunity in Chubb, which is primarily the overhead side of the story.

It will require some investment, as you had rightly pointed out, to get the processes and I.T. systems in place to deliver on that.

And it will be over a long period of time as we realize those opportunities as we have done in other UTC businesses.

On the growth opportunity side, there is better opportunity on segmentation, and we can realize greater margins, and increasing the service content.

I think the difference, to move to your second question, the difference between commercial and Chubb would be the service content that Chubb brings, the recurring revenues, the aftermarket side of the business which provides more stability and opportunity for greater margins.

That's a difference here.

There is, following Otis example -- and you saw from the number of people we are putting in Chubb from Otis who will have a key role here -- we would take a lot from what Otis has done and learned in terms of product activity from the service operations.

We have services that differentiates one supplier from the other in the space we are in right now and that is where the focus will be.

I apologize, but I did ask one other thing, the pension contribution in '04, do you have a sense of what kind of range we could be at in '04?

You're suggesting the range we're going to be in '04?

I think it will be similar to '03, a half billion-ish.

The reason I ask because of the working capital turns and clearly when you back out the pension contribution you're running 30%over net income.

Is that performance going to be sustainable with or without contribution?

With contributions that one time is net income and you could be running ahead of net income?

Well, as you know, we've instituted this new inventory turn program that we've talked about over time.

So we do expect to see some cash flow benefits associated with the inventory improvement turn.

The other issue, of course, you realize is we've had no revenue growth this year, and cash generation, when your business is flat, is pretty easy.

Therefore, you really do want to see us use some cash as our businesses start to grow again.

So I think it's the dynamics of those two issues, which is no growth and also some very good aggressive inventory reduction programs.

Thank you.

Good cash performance, by the way.

Thanks, Steve.

Your next question comes from Howard Rubel of SoundView.

Thank you.

I have three questions.

First, could you give us a sense -- or could you give us the numbers for deliveries for aircraft engines and also Sikorsky?

Howard, this is Rick.

The engines for commercial side of Pratt were 72, up from 70 last year.

Military were 33 engines, down from 40.

Remember, a lot of the military growth in the quarter is coming from the development side, although there was good mix on those military deliveries with higher F-119s.

Pratt, Canada small engine side, was 272, down from 360 last year.

You know down around 20% plus or so.

That's kind of what we indicated earlier on in the year and that's what we've been tracking throughout the year.

The helicopters were 18 versus 31 last year.

If you remember last year we had some higher international deliveries.

We also had some to Israel and Turkey and Austria.

We also had some power shipments down from eight last year.

Well, there's some that's not all bad.

If we were to take a look at first JSF development program, that continues to require a substantial amount of engineers on a sequential basis, my guess is the business continues to grow at, you know -- it's requiring more resources if you were to look at headcount or something.

Could you give us a sense of that?

We are at kind of getting your high point in terms of JSF spending as we move through engine development.

It would be tough to do it in personnel, Howard, because we are in the phase of buying material and putting engines.

Maybe we can talk about that more off-line if you're interested in the manpower statistics.

But clearly JSF is a big piece of our military engine business.

As you see it, it continues to ramp for another 12 to 18 months pretty much in front of and continue to require reasonable resources?

It will require reasonable sources.

The biggest piece of the ramp is probably behind us at this point.

Then the last question, also just related to Sikorsky.

If we were to look at what you've received in the defense budget and what you probably have got in the international hopper, how would you characterize next year?

It should be a little bit better than this year?

Is that a fair look at the world?

I think this year, were're reasonably level-loaded, probably the fourth quarter a bit better, I think earlier in the year we said around 75 deliveries or in that neighborhood.

That's where we think we'll be.

The defense budget seems to come in pretty favorably.

I believe it's 38 in the budget and some continued Camanche (ph) development, but we'll go over all that detail when we get together in December.

Thank you, gentlemen.

Your next question comes from Cai Von Rumohr.

Yes.

You mentioned commercial spares were a bit better than the second quarter, what the percentage gain was versus Q2 and versus last year for the Pratt spares and Hamilton Sundstrand spares.

Hamilton, as we've talked about is up year over year, and the sequential increase is both pretty modest, more in the area of around 10% or so, and quarter is kind of a narrow time to look at.

So that number is going to sound business, but I caution on some pretty easy compares in both categories.

Pratt, maybe because of the nature of the fleet or what it's gone through, down year over year.

If you recall, earlier in the year we were seeing reductions well above that, so there's been a moderation there.

But, again, although I these are small compares.

These are small improvements in some cases over a relatively narrow period of time.

And when you say small sequential improvements, can you give us some quantification for both Sundstrand and Pratt.

That's what I was saying.

At Hamilton its going to be a little more than 10% and at Pratt less than 10%, on the sequential side.

And again, narrow and we would like to see it over a longer period of time.

Your R&D to sales was down again.

Could you walk us through a little bit of that.

Do we expect to be at 3.3% here in the fourth quarter and any kind of color on what the target is for next year for R&D?

Those percentages, we need to start looking at the absolute numbers.

The percentages are misleading, and we can give you the detail off-line.

First of all, you have FX drive the revenue base, but not the R&D.

You know basically all our R&D is in the United States.

The second issue you now have is you have Chubb.

I think Akhil mentioned you've got just a few million of R&D in your numbers for the reported period, the two months, and of this $400 million of revenue, so you have a factor that's close to zero.

So I think you need to look at those components, and I would go back to the absolute dollar amount.

We're going to spend over a billion for our R&D which is about what we did last year, and we're going to spend a billion of customer-funded R&D, or over a billion, which is similar to last.

Then next year, should we expect that to move up in absolute bases?

You're going to see us in December, are you not?

Cai Von Rumohr.

Yes, I am.

We'll cover that in excruciating detail.

Thanks.

And military spares, I guess you and other people have mentioned strengths in military spares, could you give us any quatification of how much, and does that still look pretty good for the fourth quarter?

I think, Cai, we've seen a ramping up there as well, to not get a big surge in mill tears.

I don't have the numbers in front of me on military spare part sales, but why don't we talk after the call and we can go through more detail.

Terrific.

Thanks very much.

Your next question comes from Byron Kin Callan, IIIfrom Merrill Lynch.

Byron Kin Callan, III: Good morning, gentlemen.

First on Carrier in Europe, given the hot weather, particularly in France, you mentioned a bit of strength in the quarter, but do you see that carrying through to the fourth quarter, as maybe people rethink their needs in that part of the world?

I think you may see some sell-through as the channel was depleted.

Maybe see the sell-through as people fill back up the channel after the hot summer.

I think it's probably early to say there's been a change in people's demands for air conditioning.

I think there is a stat of only like 10% of houses or dwellings have air conditioning in Europe, that's certainly far below the States, but again I think to build a business plan or to announce because of one hot summer there's been a major change in people's spending habits is probably premature.

We'll have to see how this develops.

Byron Kin Callan, III: Okay.

Then on to Otis, if we can talk a bit about China and how you think your holding shares in that other part of the world, are you sustaining share or picking up share?

Also, on Otis you mentioned about a third of the profit increase was on currency.

Is there any way to provide a little more detail on what the other two thirds was?

Byron Kin Callan, III: The other two thirds was based on the revenue growth, which certainly you've seen in the numbers.

The revenue growth comes from again Asia, both China and Korea.

The profitability improvement is really throughout the lines below revenue.

Cost of sales has improved, margins has improved.

SG&A continues to improve.

Field efficiencies, they have an awful lot of people in the field that also install and service elevators, and there's been a continued product activity improvement, As the team applies the A.C.E. principles to not only the factory but also the field.

We expect that improvement to continue on, but given the backlog of the run rate these guys have, we certainly expect that what you saw in the third quarter will continue.

Byron Kin Callan, III: Great.

The share in China, just generically?

Jim, do you have that?

We have good share.

It's tough to get share in China there's so many small domestic players, but I think we feel we have about a quarter of the mark a quarter to 30%.

I think the key is to continue to grow and penetrate that market as cities in the western part begin to face more urbanization.

So we like our position there, look to grow it, and grow along with the market.

Byron Kin Callan, III: Great.

Thank you.

Thank you, Bryan.

Your next question comes from Chris Mecray of Deutsche Banc.

Akhil, can you give us a sense on Chubb how you reconcile the margins reported pre-acquisition to today.

You mentioned amortization of intangibles, but are there other things that come into play?

Chris, if you look at it, I think Chubb reporting -- had come up with a trading statement around April, which sort of brought the ROS under the U.K. gap numbers down to around 7.5%.

They had given a number of about $115 million pounds.

This is on U.K.

GAAP basis, on $1.5 billion of revenues.

We knew that that number still required a huge second half push if you will, to achieve even the 115 based on the trends we were seeing at that time.

So it was somewhere between 6% to 7% ROS on a U.K.

GAAP base.

I think the only significant change would be amortization of intangibles.

Based on the guidance we gave last time, it's about two points of ROS.

So if you were to look and go back from that reconciliation, which I just did, a 6% to 7% sort of operating ROS level adjusted for two points, that's roughly 4% to 5%, and we're pretty much at that level at this time.

Thanks.

That's very helpful.

In terms of looking forward, at what point are you going to switch from reviewing the business to taking the actions -- are you doing that already, or is it something you dip your toes into more gradually?

No, I think UTC does not allow operating management to dip toes in gradually.

I don't think we have the luxury of that.

So, these actions are being contemplated and are being discussed and you'll hear more about them over the next couple months.

Fair enough.

Thanks a lot.

Your next question comes from Carrie Stirton (ph) of Stanford Bernstein.

I had a question about Otis and China in particular.

It's possibly to read these days that credit may be tightening in that market.

I was wondering whether or not you had seen any early signs of increased difficulty in getting new commercial or large residential products that Otis and for that matter Carrier would deal with off the ground in recent times?

Carrie, I have not seen any of this, and I'm looking to Jim and Akhil.

The projects we are basically involved with, most of the projects are residential strongly supported by the government, as you know.

We have not seen any lessening in the appetite for residential construction in China.

Jim?

Jim Geisler I think we could only echo that.

I don't think we feel that we're part of any slowdown there.

Okay.

Thanks.

Your next question comes from George Shapiro of Smith Barney.

Good morning.

On this spares side, can you tell us where we are relative to 2000, which I assume was the peak in the spares business?

Jim Geisler George, I don't have the 2000 spares right in front of me, maybe we can talk more about it off-line, but I think generically we've seen a decline, very severe in the last couple quarters.

Year to date we're below the 2002 level, and I think our spares are well below both 2000 and 2002.

And maybe we could talk in more detail off-line.

Another question, on customer financing, the $167 million this quarter, my guess is that's probably the biggest quarterly number we have seen from you guys, so I guess you probably won't tell us who the customer is, but maybe the rationale for why we see such a relatively big number this quarter, as opposed to not seeing it before?

George, these are commitments that we have made to various customers on these campaigns that were signed years ago.

And when the customer draws the aircraft down, we have to step up and provide the financing.

It's not our decision, but the customer's decision to draw-down.

Maybe let me ask it different.

Why, then after not being drawn down as much for the last several years, you would see a bigger draw down this quarter?

You're asking me why the customer decided to take delivery this quarter?

I assume you've had commitments with other customers who haven't drawn down.

I'm wondering what rationale you might provide for why all of a sudden we're seeing it this quarter?

George, I don't have a good answer to why the customer is pulling down the financing.

It's triggered on the delivery of the aircraft, which is directed by the customer.

As you know, the customers over the last couple years have slid deliveries to the right.

We've seen those and cancellations.

I don't have a better answer than that, George.

I'm sorry.

George, I would add, earlier in the script we looked for an output of 250, and most of that happened in the third quarter because of the customer and his timing requirement.

So I don't think we'll breach the 250.

I know.

It's just that in other years you've come in a lot his than the guidance, and it struck me as a bit odd that this quarter that we're seeing that you probably would get at least close to what your guidance headline.

Okay.

Okay.

That was it for me.

Most of the others were answered.

Thanks.

Thanks, George.

We're mindful today is a pretty busy earnings release day for everybody.

So why don't we take one more question.

Your next question comes from Sam Pearlstein of Jeffries and Company.

If I look at where you're talking about cash flow for the past year, and in the past you've said excluding pension you would be in line with net income.

You're making about $750 million of contributions it looks like this year, or something.

Why is there such a business swing in the cash flow outlook in just the last few months.

Just a couple things, the guys are doing a great job with working capital.

We do have growth in revenue as we talked about.

Certainly we also have capital spend, which I think has been well-managed and controlled.

We do have this new incentive program that we put in inventory terms and it seems to have some traction after the first nine months.

We're very pleased with the results for the first nine months of this year.

Okay.

Then in terms every Chubb itself is the current assumption, is that still preliminary in terms of how you have allocated that, or is that done at this point?

It is preliminary, Sam, at this point, but we have talked about the range before of 8 to 12 cents EPS and that's probably a reasonably good number at least at this point.

And what was the assumption in coming to that margin with regard to the pension expense?

Pension expense, we are obviously moving (inaudible).

I don't think it is huge.

We are studying it at this point but I don't think there's a huge material change to expense which was already in Chubb's estimate before.

Sam Pearlstein Okay.

Just two final quick questions.

One is, Steve you mentioned a further charge with regards to the equity and pension in the fourth quarter.

Can you give us some indication in terms of magnitude of what kind of charge you're expecting?

And then, Jim, you mentioned a couple one-time items happening in this quarter at Hamilton Sundstrand, can you go over what those were?

And I don't know if you can quantify the magnitude?

Sam, the charge could be $500 to $600 million to $700 hundred million dollars, which is a pension adjustment similar to what we did in the fourth quarter last year.

These adjustments are math mat cat true-ups of the pension fund and obviously it's a function of the discount rate, which we will know at the end of November.

Jim?

Jim Geisler Just give me a bit more visibility.

We talked about a contract termination.

We had the termination of an unfavorable contract we had to have commercial airline.

If you look around the last 18 months, you've had a lot of airlines restructuring costs and in and out of bankruptcy.

So we terminated a contract with a favorable outcome to us.

It's a couple 2 to 3 cents in the quarter.

As well as the same side, on the litigation side, we had a -- we have a matter pending before the courts right now, and we thought it was prudent to take a reserve for that potential exposure, but we believe it's not material to UTC.

That is also 2 or 3 cents, and these things fully offset each other with inside the flight segments.

Okay.

Thanks.

Thanks, Sam.

Okay.

Thanks you so much.

We'll all be here for the next several days to take any additional questions.

Thank you all.

This concludes today conference.

You may now disconnect.