雷神技術公司 (RTX) 2004 Q1 法說會逐字稿

Welcome to the United Technologies first quarter conference call.

On today's call are Jim Geisler, Vice President Finance, David Porter, Director Investor Relations, and Greg Hayes, Vice President Accounting and Controller.

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

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

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

Please go ahead Mr. Geisler.

Thank you and good morning, everyone.

We have very strong FIRST-QUARTER results to share with you this morning.

With 14 percent EPS growth in the quarter, we are off to a great start in 2004.

Revenue growth at 29 percent includes 8 points of organic revenue growth driven by a strong performance in some recovering markets around the globe.

Otis and Carrier are up double digits operating profit when adding back restructuring, and I would note as an aside that we updated our release to (indiscernible) the commercial performance with strong reflecting reported results as well.

We also surpassed our cash flow target in the quarter with free cash flow exceeding net income.

Now Dave and Greg will provide additional details on the quarter in a moment, but before that, I would like to share some thoughts on the recent 7E7 engine decision.

Pratt's proposed engine solution was an innovative and strong technical offering, and we received some very good feedback from the Boeing Company, and we were disappointed we were not selected.

Our proposal was structured with a strong attention to shareowner value, and the fact is that this program would have required significant investment over many years, both in terms of ongoing engine development costs and significant onetime upfront investment.

Now given the decision, we have substantially more earnings power in future years along with additional alternatives for future restructuring and investments around our company.

As we said in March, there is a big appetite at UTC for restructuring opportunities and investment in the business.

There are cost reduction actions and productivity initiatives that can provide momentum to our earnings growth in 2005 and beyond.

We expect full year restructuring will offset this year's gains, and maybe somewhat more, as was the case this quarter.

We like this model of gain equals restructuring; it has worked well for us for many years, fueling margin expansion across our businesses, and this will continue to be our model going forward.

Now at the same time, Pratt remains committed to growth.

We have strong military and small engine businesses.

In commercial our IE and engine alliance partnership programs will continue to ship engines for many, many years.

And as you will recall, Louis Cheneviere (ph) recently gave his goal of doubling aftermarket services by 2008.

Again, very well positioned going forward.

Now regarding the 7E7 itself, we believe it will be a good aircraft and we are truly very pleased with Boeing's selection of Hamilton Sundstrand to provide five major systems on this new aircraft.

Hamilton's technical expertise and ability to integrate across these systems was a recognized competency in the program and was instrumental to winning the business.

We feel Hamilton's wins provide us with a good value proposition and approximately 5.5 billion of content expected over the life of the program.

Now in terms of the quarter, at our March meeting we told you to expect a strong first quarter, and that's what we have today.

Dave will take you through the actuals and Greg will speak to some important accounting and corporate items and provide an update on 2004 restructuring, and I will come back to reconfirm our 2004 earnings and cash flow guidance.

So with that, Dave?

Okay.

Thanks, Jim.

And for those of you that are following along with the webcast I'm going to begin my comments this morning on slide three.

Earnings per share of $1.14 were up 14 percent over the prior year first quarter.

Strong performance at both Otis and Carrier, both of which had double-digit operating profit improvements in the quarter, and year-over-year improvement in the commercial aerospace aftermarket.

You'll recall last year at this time with the outbreak of war in Iraq and the beginning of SARS, the air travel environment was off to a tough start in 2003, making this year's first quarter comparison somewhat easier.

As Jim mentioned, 14 percent earnings growth provides great momentum as we begin 2004.

Revenues were up 29 percent.

About 40 percent of this increase (technical difficulty) primarily the roll-in effect of Chubb, and also reflects strong organic growth across the business, representing about 8 points of the increase in the quarter.

Organic growth was strong in the commercial businesses and in the commercial aerospace (technical difficulty) I just mentioned.

Currency continued to be a benefit, contributing almost five points of the year-over-year revenue increase and six points to the earnings per share in the quarter.

And then finally, the MTU-related gain which we reported in January contributed about four points to the reported revenue growth.

Free cash flow of 667 million was 115 percent of net income and included 308 million of voluntary pension contributions, as well as the 250 million cash realized in the MTU transaction.

This strong cash performance reflects our businesses' continuing ability to generate solid cash returns.

Now let me discuss business unit performance in a little more detail.

Because of the impact of below the line gains and the restructuring in the segments, which Greg will speak to in a moment, I'll talk to segment results with Q1 restructuring added back.

Adjusted segment operating profit increased $160 million, or 17 percent, in the quarter, more slowly than revenue as a result of the roll-in effect from Chubb as well as the higher year-over-year R&D costs in the aerospace business.

On slide four, Otis operating profit was up 24 percent on 16 percent higher revenues, resulting in 110 basis point increase in operating profit margin, and included more than four points of organic growth.

Both revenues and operating profit were up in all regions.

About 60 percent of the revenue growth and half of the operating profit improvement was due to currency translation.

Since over 3/4 of the Otis business is international, I will talk to results on a constant currency basis.

The revenue increase for the quarter was led by growth in Asia and in North America, with acquisitions -- mainly Amtech in North America -- also contributing to the year-over-year growth.

Otis new equipment orders increased double-digits in the quarter, lead by strong double-digit growth in China.

Otis announced a plan to close its escalator facility in Stadthagen, Germany in the quarter and a plan to move production to an existing factory in Eastern Europe.

Otis won major contracts in the quarter in both Australia (inaudible) totaling more than 25 million to supply and install elevators in a commercial office tower development in Sydney and for the Brisbane Square office tower.

Otis was also awarded a contract for escalators and elevators that will be installed in six stations of the subway line under construction in Turin, Italy, the host site for the 2006 Olympic Winter Games.

On slide five, Carrier revenues increased 14 percent in the quarter with nine points of organic growth.

All businesses reported year-over-year revenue growth in the quarter, with transport refrigeration up strong double-digits and the combined residential and commercial HVAC sales in North America up about 10 percent.

Transport refrigeration, including both container and truck trailer volumes, continued to be strong, as was China.

North American HVAC results reflected continue strength in the residential market and some improvement in the U.S. commercial market as well.

The weaker U.S. dollar contributed about a third of this quarter's reported revenue increase at Carrier.

Operating profit improved 25 percent with margins up 70 basis points from last year's first quarter.

Margin improvement reflects volume increases in North American residential HVAC and in transport refrigeration -- also includes the benefits of continued productivity initiatives and factory consolidation, which were offset in part by continuing pricing pressure, particularly in the North American commercial HVAC and commercial refrigeration business, and favorable foreign currency translation, which accounted for about a third of the improvement at Carrier.

You'll recall that in February, Carrier announced plans to close its McMinnville, Tennessee facility which manufactures a broad range of commercial HVAC product lines.

Production will be relocated to other existing company factories in North America and reflects Carrier's strategies to leverage its manufacturing scale and reduce complexity.

Carrier's plan announced in last year's fourth quarter to relocate its refrigerator container plant from Syracuse to Singapore is (technical difficulty).

Turning to Chubb, operating profit was 32 million in the quarter on revenues of 703 million.

Sequentially, reported revenues were down 2 percent and operating margins were essentially flat, in line with our expectations for the quarter.

Chubb has noted some recovery in Hong Kong, its largest Asian market, and also in France in both the fire and security businesses, which was offset by continuing weakness in Australia and in the UK.

As Olivier (ph) said in March, Chubb has higher second half sales volume as customers close out their annual capital budget cycles and the demand for security personnel services is seasonally strong during the fourth quarter holiday shopping season.

You can expect to see this type of seasonal sales pattern at Chubb as we move forward.

A favorable foreign exchange offset seven points of the revenue decline in the quarter, reflecting the benefit of Chubb's mostly international businesses.

Turning to the aerospace companies and Pratt & Whitney on slide seven.

Revenue was up 12 percent, reflecting higher aftermarket volumes, continued development revenue in the military business and recovering volume with Pratt & Whitney Canada, partially offset by lower large commercial and military engine revenues.

Operating profit was down slightly on the higher revenues.

Margins were reduced in the quarter by higher R&D cost and an additional provision of about 6 cents a share for their collaboration accounting phase, which Greg will speak to in a few minutes.

You'll recall that last year's R&D expenses benefited from cost reimbursements at Pratt Canada.

The increase in R&D also reflects higher spending on the 7E7 and GP7000 programs in the quarter.

As Boeing announced in March, Pratt's PW4000 engine was selected for the 767 Tanker program.

This engine will be the standard production engine offering for future Boeing 767 Tankers both domestically and internationally, and this selection represents the first military application for the PW4000 engine family.

And Boeing has estimated it will sell as many as 500 tankers both domestically and internationally over the next 30 years.

In the quarter Pratt was also awarded significant long-term Fleet Management Programs, including a $2 billion award at UAL to maintain United's V2500 fleet and two PW4000 FMPs for Shanghai and Pakistan Airlines.

Moving to slide eight and the flight segment.

Revenue and operating profit were up 11 percent year-over-year, reflecting higher aftermarket volume at both Hamilton and Sikorsky, as well as increased investor revenues at Hamilton.

Flight margins were also impacted in the quarter by higher R&D cost.

Hamilton's revenues were up almost 9 percent, led by commercial and military aftermarket volume, as well as increased sales in the industrial companies, lead by improvements in the industrial compressor business.

Hamilton has won five major systems to date on the Boeing 7E7 aircraft, making Hamilton five-for-five in programs awarded to date.

As Ron McKenna told you last month, Hamilton has provided an innovative and integrated system solution for this new aircraft.

The content they wanted would normally go to two or perhaps three suppliers, and provides almost twice the shipset (ph) value that Hamilton has on the Boeing 757 and early model 767s.

At Sikorsky, revenues were up about 15 percent, reflecting increased commercial aircraft deliveries and higher commercial and military aftermarket sales.

For the quarter, Sikorsky shipped 20 helicopters versus 16 last year.

In the quarter, the Army announced the termination of the Comanche program, as you know.

This was a disappointing decision; we are working very closely with our Army customer to transition and wind down the program, and to identify key technologies for transitioning to other platforms.

We expect to recoup the direct costs associated with the wind down in the program as part of the termination process.

Also in the quarter, Sikorsky was notified that the Navy elected to delay a decision on the Presidential, indicating the need for additional time to review and evaluate program proposals.

Sikorsky and its All-America team will continue to be responsive to customer requirements.

In the quarter, Sikorsky confirmed more than 20 firm orders for S92 aircraft, with options for a similar number of additional aircraft.

This is a great launch for the S92, sells out 2004, as well as a portion of 2005.

Before I turn it over to Greg, let me note a couple of additional key elements in our results for the quarter.

Military sales were up 8 percent with double-digit growth in both development and aftermarket revenues across the aerospace businesses.

You will recall that 2003 was a particularly strong year for UTC's military business with key milestones in the Joint Strike Fighter program.

Military sales were up nearly 10 percent in 2003 and contributed about 20 percent of UTC's consolidated '03 revenues.

China also remained a significant part of the UTC story with 25 percent sales growth in the quarter and Otis and Carrier combined, and for all of UTC, China's sales were up over 20 percent.

In 2003, UTC's business with China contributed $1 billion to revenue.

Now, Greg will take you through some of the corporate and other items outside of segment results.

Thanks, Dave.

For those of you following along, we are on page 9 of the webcast.

I'd like to take just a few minutes to take us back through some of the gain in restructuring that we've been talking about over the last few months.

As we have noted, we anticipate approximately $500 million of onetime gains in the first half of the year. 250 million in cash for the DaimlerChrysler in January related to their sale of MTU to KKR.

In the second quarter we expect a similarly sized noncash gain from a favorable settlement with the IRS related to our open tax years from 1986 to 1993.

As Jim noted, we now expect restructuring will offset these gains for the full year; however, quarter to quarter earnings impacts will be uneven for the remainder of the year, as noted on the chart.

As you know, accounting rules related to restructuring actions have evolved over the past few years, making it nearly impossible to accrue all the costs related to facility closure in the period the decision is made.

Restructuring plans that include facility closures typically have expenses recorded over several quarters.

Our experience is that generally about 60 percent of the costs associated with the closure actions are recorded in the period of announcement, with the remaining costs -- so-called trailing costs or period costs -- recorded in subsequent periods.

On slide nine, we've laid out the 2004 gains and restructuring costs as we now expect they'll be recorded across the year.

In the first quarter, we recorded 259 million of restructured costs, more than offsetting the gain related to MTU.

This restructuring includes both new actions, which totaled 216 million, and period costs of 43 million associated with actions initiated in 2003.

For those significant (indiscernible) which was the closure of the Carrier Syracuse manufacturing operations, which we announced late last year.

In terms of the first quarter 2004 actions, we announced Carrier's McMinnville, Tennessee commercial HVAC facility and Otis' Stadthagen, Germany escalator manufacturing facility.

We also initiated a number of actions across Pratt & Whitney to consolidate facilities (indiscernible) resource work.

These programs collectively represent about 70 percent of the charge taken for new programs in the quarter.

And, these programs are expected to generate a similar proportion of estimated annual savings of approximately $150 million.

For the actions that we've taken to date, we expect about 425 million in total 2004 costs; 259 million in the first quarter and the remainder over the balance of the year.

That leaves about $75 million of new actions to be incurred over the last three quarters, which we would expect to initiate largely in the second quarter.

Now when you add it all up, this means that we would expect to record about 150 million of total restructuring costs in the second quarter, against the anticipated gain of approximately 250 million.

The 150 million includes period costs related to previous actions as well as the estimated cost of new actions launched in the quarter.

Although we haven't made any decisions to date on specific new programs for the second quarter, we continue to evaluate and prioritize a number of potential cost reduction opportunities, and were focused on high return actions that can expand margins over the long-term.

Moving on to slide ten on cash.

Good performance in the quarter with (indiscernible) cash flow in 115 percent of net income.

With the cash provided by the DaimlerChrysler payment earlier this quarter, we were able to accelerate the voluntary contributions to our global pension plans, making $308 million in contributions in the quarter.

The $500 million improvement year-over-year in cash results, really from lower pension contributions compared to the first quarter of 2003, when we made a $500 million contribution, as well as the MTU related cash we received for this year's first quarter.

For the full year, we still expect free cash flow will equal net income before pension contributions.

In the quarter, we continued our share repurchase program, totaling 260 million in share buybacks.

And for the year, we still anticipate 600 million in total share repurchases.

We had limited acquisition activity in the quarter, totaling only about $44 million, and that was primarily at Otis.

For the full year, we continue to expect to spend about $2 billion on acquisitions, now largely in the second half of the year, as we continue to see a healthy pipeline of opportunities.

As you'll recall, in February Carrier announced its intent to acquire the Linde commercial refrigeration business.

We now expect that this will close sometime in the second half of the year.

For the quarter, company funded R&D spending was 308 million, up $73 million from the first quarter of last year. (indiscernible) funded R&D was also higher in the quarter.

As Dave mentioned, much of this increase was in our aerospace businesses.

For the full year we expect Company funded R&D to increase about 150 million, and combined, company and customer R&D to be down just slightly as a result of the Comanche termination.

Debt to capital -- 29 percent down, two points from the end of 2003.

But we expect full year debt to capital ratio to be about flat with the year-end of 2003 of about 33 percent.

The effective tax rate for the quarter was 28 percent, in line with past quarters and our 2004 plan.

We do expect next quarter's effective tax rate to decline as a result of the anticipated tax settlement.

As far as eliminations and other (inaudible) credit in the quarter reflecting the $250 million MTU gain I discussed earlier.

And corporate expenses were also higher in this year's first quarter, in line with our fourth-quarter '03 run rate.

Now, as Dave mentioned earlier, Pratt & Whitney recorded an additional 6 cents provision in the quarter related to the collaboration accounting matter, following a court decision on a related U.S. government matter.

As we've noted before, the collaboration accounting matter has been sent back to the Armed Services Board of Contract Appeals, or ASBCA, for additional review, although it's unlikely we will have a resolution of this in 2004.

We believe we are adequately covered for this issue, and it's something we will continue to monitor closely.

Just a quick word on the Otis and EU matter which we noted in March.

Although there was really nothing new to report, I do want to reiterate that our own investigation is continuing.

We continue to cooperate fully with the EU.

As we told you last month, it's really still too early any in the investigation to determine the level of fines if any which might be assessed.

With that, let me turn it back over to Jim, who will take us through the 2004 outlook.

Thanks, Greg.

Our outlook is unchanged from what we told you last month, but I would like to take a moment to reiterate some key points.

For 2004, we expect earnings in the $5 to $5.30 per share range, and we are very comfortable in that range and with the current consensus.

Let me just reiterate that; we are comfortable in the range and with the current consensus, despite the inevitable bad things that will inevitably happen.

And I would also note that as we said before, we would likely offset stronger performance with further cost reduction actions or investments that strengthen our businesses for 2005 and the future.

As Greg mentioned, our cash outlook for 2004 is free cash flow equal to net income before anticipated voluntary contributions of approximately $500 million to our global pension plans.

As you will recall, in 2003, as well as in the first quarter of this year, we were able to achieve a higher standard -- absorbing the pension and achieving free cash flow equal to net income -- and we would like to do the same this year as we move through the year.

On what to expect by segment -- and I'm on page 11 if you are following along -- we expect Otis to grow revenues mid single digits while generating operating profit margins up about a point.

Carrier should generate margin improvement of between half a point and a point on mid single digit revenue growth, although commodity prices will likely move higher as we go through the year.

We expect Chubb to generate approximately $2.5 billion in revenue with an operating profit margin flat with '03, unchanged from what we told you last month.

Our 2004 guidance contemplates €1.15.

Recently, the rate has been closer to 1.18.

And if it remains there or below, we would have tougher compares as the year goes forward; so some of the benefit may be diminishing.

At Pratt, we expect mid single digit revenue growth and margins up as much as one percentage point.

Flight revenue growth is also expected to be mid single digits and margins up about 50 basis points, down from the (indiscernible) point outlook, reflecting the timing of the Comanche ramp-down discussed earlier and the delay of the Presidential helicopter program.

We feel very good about our overall level of full year performance, confirmed by (technical difficulty) first quarter.

We like our mix of businesses, our balance, our strong aftermarket component and global presence, double-digit operating profit increases at our Otis and Carrier commercial businesses, and the continued outlook for growth in China.

So with that, why don't we open the call for your questions.

(OPERATOR INSTRUCTIONS).

Joseph Campbell, Lehman Brothers.

I wondered if we could go over sort of what is going on in Pratt again.

You've given us some of the details, but just to make share I understand the arithmetic right.

The guidance for the year is that the margins will be up as much as a point, but we had, then, discussions during the various meetings -- both December and March -- about the fact that George David thought that he wasn't willing to plan on a commercial recovery, just because it seemed too risky.

And then there was all these uncertainties about the 7E7 R&D.

There's a charge in here -- so I don't know, it looks kind of like maybe if you add the chargeback, the margins were -- maybe they were 16 percent instead of 14, so that would be up a point.

But I'm sort of confused as to whether what we are seeing in the first quarter, if we were to strip out the charges and so on, what it would reflect with regard to a kind of run rate.

I gathered -- is the R&D higher in the first quarter because of the 7E7, and therefore, not on the run rate?

Or is the GP7000 spending going to make this a typical quarter or not?

Can you sort of add some color here?

It's Dave.

Let me try to at least add some color on what we reported in the quarter for Pratt.

Revenues up 12 percent, as we mentioned, on recovery in the aftermarket.

Good year-over-year compare there.

The margin comment that you made about two points or so, attributable to the collaboration accounting case that Greg took us through a moment or so ago, does depress margin in the quarter about two points or so.

And the higher R&D spend that we talked about (technical difficulty) numbers that we reported this morning; much of that at the (technical difficulty) up about 70 million for the Corporation, and the great majority, about 60 million or so, at Pratt.

But the question is how much of it is -- clearly the 7E7 represented some cost.

We don't want to know precisely just what you spent bidding and so on, but the question is, is this kind of the right run rate for the R&D or is this higher relative to what we might expect going forward?

A little higher, Joe.

There's a small amount of 7E7 spend in the quarter. (technical difficulty) mentioned GP7000 as well, and the higher spending on development in Canada.

As we talked about when we were together (technical difficulty) for R&D spend at the Company in '04 to be up about 150 million or so.

Obviously, with 70-plus million in the first quarter, the run rate may flatten as we move through the year.

Steve Binder, Bear Stearns.

I just wanted to make sure that collaboration charge is not included in the 51 million of restructuring-related charges for Pratt; is that correct?

Correct.

Can we basically -- I think, Greg, you had talked earlier at the March 18 analyst meeting about a number of onetime items, potentially, that you might need to take provisions for for the year.

And you kind of gave a little bit of an update on the EU situation.

Can we expect further onetime charges embedded in your guidance similar to what we saw in the first quarter throughout the year, outside of restructuring?

Right now we don't anticipate any additional charges throughout the year.

We were faced with a situation at Pratt in the first quarter where we had a related government contracting matter that settled that forced us to accrue some additional cost on the collaboration matter.

But we think for the most part we're pretty much done with collaboration for the year.

We feel pretty good about where we are.

It's too early to tell what if anything might happen on EU.

Your goodwill account rose, I think, about $185 million in the quarter from the end of the year; is that a purchase price adjustment on Chubb?

There's actually two things that make that up, Steve.

It's about $100 million, roughly, of FX translation in that, as well as about 60 million of additional restructuring charges at Chubb that we recorded as part of the goodwill accounting.

It looks like the accrued liability account was up sharply, like I think 630 million (indiscernible) end of the year.

And I imagine part of that is Chubb, and a good chunk of that is the restructuring actions you took in the quarter.

What other items kind of caused that account to grow substantially in the quarter?

It's two things that really impacted it dramatically.

One was the restructuring.

As we mentioned we took 259 (indiscernible) charges; only about 50 million of actual cash spend against those charges in the quarter.

The other part is just the timing of tax payments.

We got a refund this year in the first quarter versus a slight upflow last year.

So for the most part it's taxes and restructuring that drive the other accrueds up.

Can you maybe just touch on your spare sales at Pratt?

On a sequential basis how did they -- how is that variance?

Was it up in Q1 versus Q4?

No, Steve; the spare sequentially is a flat number.

I guess last, Jim, your earnings per share -- obviously, the stock weakness is partly because you didn't take up guidance for the year.

EPS is on a reported basis;

I understand what you're talking about restructuring being greater than any positive onetime items you have this year, but balances -- your earnings were 21.5 percent of the top end of that guidance for the year, $5.30 cents.

Historically, your first quarter has been 21 percent or less for the full year.

So, any reason why you didn't take that bottom end of the range up and kind of refine the earnings outlook for the year?

We can go back and look at the calendar that it's April.

We have one very good quarter underneath our belts, and we have high confidence for the future.

We will see how the year evolves.

And again, we've expressed, I think, many times to you and others, even over the past decade -- when goodness happens in the business, we reinvest it to grow out in the future. (inaudible) the year, there's more likely 2004 -- we think about 2005 as well.

One other thing on cash flow.

I think in the language, you talked about your target has been free cash flow equal to net income prior to contributions.

You've talked in the past about your goal would be to basically match contributions, so that cash flow would still absorb the contributions.

What is your comfort range on achieving that, especially given the strength in the first quarter?

I think we did that in the first quarter.

We met the higher standard.

But again, it's one quarter out of four, but we like the position that we're in and we like the outlook for the year.

Heidi Wood, Morgan Stanley.

A question on Pratt for you with the 7E7.

Is there any structural or engineering reason why you guys couldn't team up with Rolls or GE, such as you did with GE on the GP7000?

This is Jim.

No; there's no structural reason why there couldn't be teaming; we like teaming via IE and the engine alliance, but these engine programs always come back to a matter of economics.

So we would be open to teaming, but it comes back to the business case, whether you win it by yourself or team.

So you don't rule out the potential for further discussions on that, then?

Never say never.

On the industrial business at Sundstrand industrial businesses, can you tell us a little bit how the business performance was there, and what was book to bill?

I told you earlier, Heidi, that revenues in the industrial businesses were up in the quarter.

Ron back in March had suggested that he saw about 10 percent growth in the industrials for the year, in line with what we saw in Q1.

Much of that out of the compressor business, where we are seeing a pretty good start to the year as capital spending seems to be coming back in the industrial base -- customer industrial base at Hamilton.

Was book to bill greater than one in all the industrial businesses, then, Greg?

(inaudible) to go through some of that detail off line, Heidi?

Because that's a business by business look.

Great, can you tell us a little bit on Otis how much were sales to China in the quarter and bookings to China?

We mentioned earlier that China was up about 20 percent for the Corporation, more like 25 percent inside of the Otis and Carrier businesses.

New equipment in particular was very strong in China at Otis.

I think we've reported that now for several successive quarters.

It's a real good performance in China at Otis.

Okay.

I guess I'll take my questions off line.

Thanks a lot.

Sam Pearlstein, Jefferies & Co.

Good morning.

I just wanted to confirm one thing, which is -- so in the second quarter, you're saying that the gain is going to be roughly $100 million more than the onetime restructuring actions that you are going to report?

Is that what you were telling us?

Correct.

I guess given the fact that you are talking about strength really across the Board, certainly less uncertainty with the 7E7 R&D spending, and now we are already a quarter behind us.

I know, Jim, it is only April, but you mentioned I guess if things were better than expected, perhaps you might restructure away some of that benefit and/or additional R&D investments.

Is that the way we should be thinking about that?

If you had earning potential above the high end of the range, that it's likely that we would see more actions later in the year?

We have a strong appetite for restructuring again, because it strengthens the business out beyond 2004.

And again, while we talk about the guidance (indiscernible) I'll remind you, we are comfortable with the consensus, which is up from where it was three or four months ago.

And within the segments in Carrier, on your presentation you talked about North American commercial market improvement.

Can you kind of put that in some context?

Because I know one of your competitors last week was talking about continued pricing pressure in the commercial HVAC market, and just talk about that market vis-à-vis more the general HVAC market.

We did mention in earlier remarks that we see pricing pressure continuing in the commercial HVAC market as well, good performance in the quarter in North America; organically up about 10 percent between both RAS (ph) and the commercial businesses.

But you're right; pricing pressure, clearly, has continued.

Lastly, when do you think we would see a resolution with regards to Comanche termination costs, and be able to quantify that kind of a number?

The Comanche program, we actually got to stop work, I think, on March 23rd of this year.

And we have about a year to complete the actual filing of the termination claim.

We hope to get it done more quickly than that, but with over 350 subcontractors, it's going to take us some time to work through the process.

So I would expect it will be late this year, early next year before we have the claim finalized, and then perhaps six months to a year before we actually see a resolution of the actual claim.

Byron Callan, Merrill Lynch.

Two quick things.

First, I don't know if you mentioned it, but there was a restructuring charge in Flight; can you elaborate on that?

Byron, Jim Geisler.

That was largely in the Hamilton business; it wasn't a big number in the quarter, but that just goes to, largely, G&A actions spread across the organization.

Secondly, just on China in general, any change in your assessment of how that market is going to play out?

Really, over the balance of this year there has been some speculation about a slowing of economic growth, that things are actually overheating there.

Have you changed your internal view on China in any way, shape or form?

We have not.

You saw in the first quarter, not was the economic growth in China very strong but it was also very strong for our company.

We tend to lag the general economy.

So if there's a slowing in China, I don't think that's going to have much of an impact for us in 2004.

And I would add, I don't think we see a slowing right now.

Finally, just on the issue of commodities prices, I think you mentioned that that could create a little bit more headwind, particularly for Carrier later this year.

Can you elaborate on that?

Is that just kind of working off existing inventory and buying raw material at higher prices, or is there hedging that you may have had in place that runs out?

How does that play through?

I'm afraid we haven't seen much of the impact of commodity pricing, I think, because, again, of inventory levels.

And we have done some hedging in the past of commodities like copper that you can hedge easily.

Commodities does become more of a headwind as you move through the year.

We noted it in the script, but we did not change our guidance for it because we're going to work hard to offset it a couple of ways.

One is in kind of our own re-engineering.

I think you heard Ari talk about a little bit of that for his segment, Otis, at the analyst meeting.

Another way is to work with suppliers to lower their costs.

And then finally, we're getting this price passed onto us, so we have to look at the market and see if it's feasible to pass the price increase along to customers.

But we'll be working hard to offset commodity (technical difficulty)

Kerry Stirton, Sanford Bernstein.

Just wondering a little bit about Chubb in the security market generally, focused much more on the sale side of it than the operating profit.

But in addition to your quarter where there was essentially flat to slightly down revenues, other companies in the space have reported similar issues.

And in fact, you're saying here foreign exchange offsetting seven points of revenue decline.

Can you just, I guess, speak a little bit about what you see as the sales dynamics there, reason that that's flat and down?

And what you see coming at this segment for the rest of the year and the reasons for that, assuming it's more positive in this quarter?

Kerry, in the quarter -- it's Dave.

In the quarter, what we did see is, in comparison to 4Q, some seasonality in that business.

And there are two fairly significant parts of the Chubb business that have seasonal features to them, if you will -- the guarding business clearly peaks in the fourth quarter, as we noted last quarter.

And the capital expenditure cycle of a number of the Chubb customers gets steeper or increased in Q4 again, as Olivier had pointed out; stronger second half revenue performance.

In terms of markets, we are seeing good improvement and good results in Hong Kong, which is a key Asian market, and then in France as well in both the fire and security businesses.

And I mentioned earlier that we are continuing to see some weakness in both Australia and UK, other significant markets for the Chubb entity.

Just looking at this on a year-over-year basis, though, which I guess doesn't speak to seasonality -- something I guess I am wondering is whether just in the transition, there was kind of a general lull in activity energy level that means you're kind of having to bring this up sequentially from, say, two, three quarters ago?

And I don't know what the quarterly numbers were a couple of quarters back.

Again, from the perspective that we are seeing, seasonal 4Q to 1Q, some good improvement in the markets I mentioned earlier.

And really in line with our expectation, Kerry.

We see this as a seasonal business, as we've mentioned.

There's one other thing I would add on that.

You mentioned the disruptive impact of the acquisition.

If you recall, from announcement to close this deal happened very, very quickly.

So I think Chubb is a decentralized organization with people working in the field and touching customers everyday.

So I think there was little disruptive impact of the acquisition.

Jeff Hammond, KeyBanc Capital Markets.

To go back to Carrier, I guess I wanted to understand the leverage profile going forward, given that the demand environment is looking a little bit better.

I know you mentioned the pricing pressure, but would've expected a little more operating leverage, given that the strong organic growth -- particularly with transport being a nice operating leverage business.

(technical difficulty) business had, I think, good performance in the quarter (indiscernible) we gave guidance margins 50 to 100 basis points.

I think we're in that range.

We had operating profit growth at 25 percent.

So I think in balance this is a very good quarter, reflecting not only the recovery in the markets but also some of the cost reduction actions we have taken in the past, like the closure of Lewisburg and some of the other things Uro (ph) has done.

So I think this is spot on, and it's good performance.

And then to the commercial air conditioning environment, in terms of pricing -- both you and your competitors have announced price increases.

I know the unitary side is getting better.

But you mentioned the expectation that pricing pressure continues going forward.

Maybe a little more color why you think that happens going forward?

I think that's part of the long-term trend we see, generally a little bit of deflation in this industry every year.

And also on the commercial side, you've got the fact that there have been three down years, and we think maybe (indiscernible) the market is starting to turn, but you see kind of people hungry for share and to fill their factories.

So we see kind of a -- we see kind of a piece of the business that I think is starting to undergo some recovery, but people want the work desperately.

Mind you, in the past we've had weak markets, and we've always run the business for margin expansion, which is what we continue to do today as the markets recover.

George Shapiro, Smith Barney.

A couple of questions.

Once on the balance sheet, just a follow-up to, I think, Steve's question before.

It not only looked like it had about $1 billion of accrued liabilities going up, you had 700 million in inventories.

And I just was wondering what most of that was due to?

Again, inventories grew about $300 million from year end, from December 31 through March 31.

Most of that really related to a Carrier prebuilt, seasonal prebuilt that we saw of about 200 million.

The other piece there would, of course, be FX -- is also slightly increasing inventory.

Okay. (indiscernible) switch to -- engine deliveries at Pratt in the quarter; you made the comment that they were less, but if you could just provide the specific number of deliveries?

Sure, George.

It was 75 in the large commercial space in the quarter.

Pratt Canada delivered 336 against 295 in the prior year first quarter.

So real good (technical difficulty) there, and military shipments were down 29 this quarter, 38 in the prior year.

Okay.

You had mentioned that the aftermarket at Pratt was flat, sequentially, with the fourth quarter.

Was the same true at Hamilton Sundstrand?

I think generally that was true; it was flat from fourth quarter to first quarter.

But -- we talked, I think, a couple of quarters ago, George, about how we're going to see this recovery that began in the middle of last year, and it wouldn't maybe be very steady.

But clearly the trend is up from where we were last summer in both businesses.

Okay.

I'm just wondering -- there probably was a price increase in the first quarter which may have hurt the first quarter relative to the fourth quarter.

I was just curious as to what it was sequentially.

The other question I had is if you look at sequential margin at Flight Systems, I recognize revenues were down around 110 million, but the margin was down almost 100 basis points.

So I was just wondering what was going on there?

You know, we talked -- Dave talked about some higher commercial shipments on the F-76 (ph); they tend not to carry as much margin with them.

And again, I think part of this is just a little bit of not seasonality, but a very good fourth quarter of flight, so we're not -- we had a little bit of change in mix, and we're not concerned about the outlook for the year in flight.

So Jim, if you looked at Hamilton separately, the margin at Hamilton sequentially would have been relatively flat and the tick up -- or the weaker number would have been out of Sikorsky?

Yes, yes.

David Bleustein, UBS.

Both Honeywell and Ingersoll-Rand mentioned additional shipping days either in the quarter or the month of March as having an impact.

Did you see the same phenomenon?

No.

I wouldn't cite shipping days as a reason for good performance at UTC in the quarter.

Interesting.

You also mentioned some improvement in Carrier's North American commercial business.

What are the typical leadtimes and what is the backlog telling you about commercial activity later this year?

The backlog has increased.

There has been an uptick in the commercial backlog again.

Part of that is easy compare.

We've been through three down years in the commercial business;

I don't think we've seen that anytime in the last several decades.

So we're seeing a step up in the backlog, and I think you'll see a little bit higher level of activity as we move through the year.

What is the traditional leadtime in between and ordering the delivery?

It would be around half a year or so, but it's going to depend on the job -- again, we're more of a lagging indicator on the economy.

But it'll get you through a good portion of the year.

Cai Von Rumohr, SG Cowen.

Commercial aerospace aftermarket -- could you give us the percentage year-over-year gains at Pratt and at Hamilton Sundstrand, and tell us what you're looking now for both those two areas year-over-year gains for the year?

Year-over-year at Pratt in terms of spares was low double-digit, slightly more than 10 percent.

When I look to Hamilton, up similarly -- call it high single digit overall for Hamilton, and within the aerospace businesses there, again, in line with that high single digit number that I just described

So you're looking for a high single digit for the year?

No.

I'm reporting to you what the year-over-year first quarter compare was.

Right.

So what are you now looking for for the year?

That would be consistent with what we're going to do for the year, Cai.

Again, I think we're on the -- spares are supporting the guidance that we have laid out, and we see the trend hopefully continuing through the year.

Now, if we go back to the 7E7, we know that if you had wanted -- presumably this was in your guidance at some point -- but we were going to have 15 to 20 cents of expenses that we don't have.

Also, I gather there was going to be this quote unquote tribute or milestone payment of some 200 million.

And you had this bad thing cushion of 250, some of which you have eaten through with the collaboration.

Refresh my memory again as to why these numbers aren't going up?

Does -- if you're comfortable as you seem to indicate at 5.20 to 5.25, does that assume -- are you assuming in there more bad things collaboration or other things, or kind of picking up a part of collaborating with GE on the 7E7 or higher restructuring?

What kind of assumptions are in that (indiscernible) feeling comfortable with the 520 to 25.

That's a compound question.

Let me take a couple of pieces of it.

We can -- I think we can shed some light on this first.

You talked about 77, that there might be two pieces of that?

That's right.

We had talked in the meeting that there will be an engineering peace, and we would have met that by curtailing programs and partnering out and making it affordable within the guidance.

You talked about a tribute peace or maybe a milestone payment, and that's what they alluded to last month as being maybe we will use a piece of the game for it.

If that milestone payment is onetime, generational, to launch a new aircraft.

So we would have used maybe a onetime gain to offset that.

But now, since we don't have that (indiscernible) payment, we've said we're taking restructuring off to equal the gain.

So we're going to go spend the rest of the gain on restructuring.

I don't think we're worried about more bad things happening in the business.

We had a good first quarter.

What badness there was we navigated through well, and I think we'll continue to do that through the year.

And it is April, as a mentioned earlier.

So we'll maybe come back and revisit the guidance as we move through the year.

But we like our outlook and our performance in recovering markets right now.

Last question.

You mentioned the seasonality at Chop.

You did 700 million in the first quarter.

By my math that comes out to. 2.8 billion.

You're saying 2.5; is the 2.5 without FX, or how does that square?

25 was without FX, right?

And that is a driver to the first quarter, and I'm not business (technical difficulty) business of forecasting (technical difficulty) has come back to where -- near the guidance.

But clearly, we could -- again, we are in April, so let's get another quarter or two and see how the world evolves.

But we like the performance in the business and Chubb revenue included in the quarter.

With that, why don't we -- I'm mindful of the time given its (technical difficulty); everybody out there giving all the companies releasing.

So if there's one more question, maybe we'll take that?

There are no further questions at this time.

Outstanding.

We thank you for your participation today.

And as always, Rick and Myra (ph) and myself are available to discuss additional questions throughout the day.

Thank you again.

Thank you all for participating in today's conference.

You may now disconnect.