雷神技術公司 (RTX) 2004 Q3 法說會逐字稿

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

On the call today are Jim Geisler, Vice President of Finance;

Greg Hayes, Vice President, Accounting and Control: David Porter, Director Investor Relations: and George David, Chairman and Chief Executive Officer.

This call it is being carried live on the Internet and there is a presentation available for download from UTC's home page 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 and reports including its 10-K, 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.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Porter, you may begin.

We are experiencing technical difficulty.

Your conference will resume momentarily.

Thank you for your patience.

Good morning.

This is David Porter.

Thank you again for joining us and we apologize for what appears to be an interruption in the call this morning.

We're going to go through third-quarter results.

Jim and Greg and myself, but before that George David is here with us to provide some of his thoughts.

George?

Thank you, Dave.

This was another very nice quarter for UTC.

Our revenues were up 17 percent, EPS up 13 percent and we want to know right away that restructure was a 6 percent drag on EPS in the quarter so the underlying EPS growth rate was a really solid 19 percent.

And recall we told you throughout 2004 that the first half had these 2 big bang gains that is NTU (ph) in 1Q and a tax settlement in 2Q and we said that those gains would fund restructure costs throughout the year which is what is happening exactly as we told you.

Our revenue growth in the quarter was lower than the first half's exceptionally strong 26 percent in first half, but recall that did not have any Chubb compare in it as we acquired Chubb in August 2003.

The current quarter compare has got 2 months of Chubb revenues last year and obviously 3 this year.

What is notable in the current quarter I believe is continuing very strong organic revenue growth at 9 percent for the Corporation and that is on top of 8 percent in 1Q and 9 percent in 2Q.

The organic growth in the quarter breaks out as 9 percent at Otis, which we feel is real strong; 13 percent at the Arrow Companies, and that reflects continuing Arrow aftermarket recovery, OEM shipments at Pratt & Whitney Canada and the Comanche termination payment and 6 percent organic growth at Carrier Corporation.

Carrier was the weaker one of our divisions on organic growth in the quarter as we had consistently told you and as you have noted also from industry statistics and reporting of at least one air-conditioning peer company.

We think the Carrier revenue growth in the quarter was weather driven.

We had colder weather in some pretty important weather sensitive parts of the country and also reflects oil prices and their impacts on consumer spend.

We think these industry numbers for air-conditioning will get better for sure although not necessarily right away.

Let's just go back to Otis for second a focus and focus on one thing.

The new equipment orders for Otis Elevator Company Worldwide at constant foreign exchange year-to-date are up an amazing 12 percent.

I will pause and just let that sink in. 12 percent.

I have been around the elevator business for a long, long time.

We had never seen an orders bounce like this ever.

I believe it is continuing urbanization in Asia which we've talked you about for a long time.

It is also the great success of Otis' GEN2 productline.

That is the machine Otis elevator where we are gaining share of market worldwide and we expect that share gain to continue.

Our foreign exchange added 3 points to revenue growth in quarter and the balance of the growth -- that is the amount over organic revenue growth to get us to 17 percent was 1 more month of Chubb revenues in '04 versus '03.

Our operating income before restructure was up double digits in all segments except Carrier in the quarter.

Otis was up a very strong 20 percent;

Pratt & Whitney, 21 percent;

Flight, 15 percent; and Chubb a huge amount, but that is on a small base.

Carrier was also up a very healthy 9 percent and we believe it compares well to its peers and given the industry conditions Carrier experienced in the quarter.

The operating income margin was up in all segments at UTC and flat at Carrier Corporation.

Commodity pricing is giving us some pressure.

The impact for us is mostly at Carrier and Otis and it is in the 4 categories of energy, steel, copper and aluminum.

The third-quarter impact for the Corporation was a little bit over $50 million and we think for the year this commodity price impact that is year-over-year is going to be in the range of $150 million.

The bigger commodity pricing impact was at Carrier.

The drag there was more than what 100 basis points and was obviously the reason for the flat compare of segments op margin year-over-year.

You saw Carrier's release a couple of weeks ago on price increases in the 3 to 9 percent range on essentially all products in North America.

You know we've had some increases earlier in the year.

We have not have much luck is getting these to stick.

We're going to be tough this time around.

Commodity pricing is a fact and we have to deal with it as Carrier and as our industry.

I think the bottom line of all of this was a great quarter, a great quarter, with the only concerns being tougher markets at Carrier in North American and commodity pricing and we think Carrier did exceptionally well in these circumstances with 9 percent higher revenues and 9 percent higher Op income.

The outlook ahead for next year that is '05, it looks pretty good to us.

Realize also we won't talk to you in detail until our December investor meeting -- it looks good for us with a single footnote of commodity pricing and its impact across the economy and America in total.

We have the obvious points for the economy at record low cost of money, weaker dollar, lots of fiscal stimulus, election year, and also the natural ebbing of the '01 to '03 recession.

And I believe we see the consequences of all that in the very strong 9 percent organic revenue growth rate for UTC year-to-date.

Let's go back a year or two ago and think about our conversations with investors and your concerns generally a couple years ago that companies like UTC were not seeing organic revenue growth at high enough rates to drive double-digit earnings expansions and therefore that we had to rely instead on margin expansion and that was getting harder as our segments Op margin got higher and higher and higher.

I used to talk to you all the time.

We have a model in front of you that gets double-digit earnings expansion.

I used to talk about that always that 7 percent revenue growth overall, 7 percent in total, about half acquisitions and half organic and the balance was margin expansion.

Plus we bought shares back and had good tax rates and so forth.

Let's think hard about what today's 9 percent organic revenue growth means for us relative to that model we give you a couple years ago, because the acquisition story is still impacted and so was margin expansion.

This is a great Company.

Make no mistake about it.

With lots of maturity, lots of momentum in its systems, management, products, and like I said on the last quarters' call, it feels good, real good.

Mr. Geisler?

Thanks, George, and I think as everybody has heard, it was another really strong quarter here at UTC.

And so given that strong quarter and year-to-date performance we're tightening our full year earnings guidance today.

We now expect EPS to be in the range of $4.45 to $4.50 -- I misspoke as I'm being reminded now -- that is $5.45 to $5.50 and that is no Freudian slip.

That's where we are.

And that would be at the upper end of the previous range also that began with a 5 -- $5.40 to $5.50.

We've also increased our free cash flow guidance and now expecting free cash flow for the year to be in line with net income even with pension contributions of more than $700 million versus the previous placeholder of $500 million for pension contributions.

So again, I think very good on both primary metrics.

Now before we get into a little bit deeper dive on the third-quarter segment performance, I want to make some additional comments on 2005.

We are working on 2005 plan right now as we always do this time of year and we're going to share this in detail with you in December and as George said, in the past we like double-digit earnings model of revenue growth both organically and from acquisition coupled with market expansion.

As we look into '05, we particularly like the things that we control.

The businesses are executing and performing really well and we have full expectations that this will continue and you will see some savings next year out of this year's restructuring program and our markets do seem to feel pretty good.

But there are some factors that we don't control.

Discount rates are lower this year than last year, adding to pension expense headwind potentially, and higher commodity prices continue to work their way through the supply chain.

Now this year the Euro has provided us some nice tailwind, adding 14 cents to year-to-date results, but none of us can be sure what benefit if any will be provided by foreign currency in 2005.

In 2004 as well EPS grew in the teens in an extremely favorable environment making for a more difficult compare in 2005.

Now all that is the raw material that goes into 2005 and we will put it all together for you and have a more detailed discussion in December, but right now we feel very good about performance next year in double-digit earnings growth of 10 percent or more.

Now I am going to turn to the segments.

I am on slide 4 and for this discussion I will add back restructuring.

Otis' operating profit was up a very strong 20 percent in the quarter on 16 percent higher revenue growth resulting in further margin expansion.

Organic revenue growth at constant currency was 9 percent and was particularly strong in Asia and North America, and is great growth is attributable to new equipment sales which were up in the high teens in the quarter on a constant currency basis.

We like the new equipment growth as an elevator can generate a highly profitable service stream, as you know, for generations.

This trend of good new equipment volume continues with new equipment orders up in the quarter and backlog each at around 10 percent.

Service revenues continue to grow as well, up mid single digits.

Excluding the benefit of foreign currency, operating profit growth was in the teens consistent with previous quarter's double-digit growth.

As well foreign currency accounted for about 30 percent of the revenue growth.

So in total Otis continues to perform very well and we have this nice development of additional new equipment revenue.

We reported revenue growth of 15 percent and operating profit growth of 21 percent to date, so we are well on track for another solid year at Otis with margin expansion.

A quick comment on China.

Overall China remains a good market for UTC, continuing to provide double-digit revenue growth to the commercial companies.

We also continue to generate double-digit margins in this fast-growing market.

Orders have softened a little bit here in the third quarter particularly late in the quarter but for the year, up over 20 percent and the long-term growth prospects in this market and in Asia overall are phenomenal as we have talked before as we expect over 900 million people to urbanize over the next 25 years.

And this will all help China grow in the current 4 percent of UTC, which is what it is today.

Moving on to Carrier, as George mentioned Carrier revenues were up 9 percent in the quarter.

All business segments reported some revenue growth with Asia up double digits.

Volume growth in Carrier's high margin North America HVAC business did slow in the quarter to mid single digits.

While a lower growth rate was expected given the robust first half growth, cooler weather during the summer selling season particularly in some of the weather sensitive areas of the U.S. held demand to lower than anticipated level and has left some inventory in the channel.

The trucks and trailer segment of commercial refrigeration continued its recent growth while containers were about flat, reflecting the slowing market year-over-year.

The weaker U.S. dollar contributed about 2 points to this quarter's reported revenue increase.

Operating profit was also up 9 percent in the quarter and is up 17 percent year-to-date.

Quarterly performance was led by double-digit operating profit growth in the transport refrigeration business and was helped by currency translation, which added 3 points to reported profit.

During the quarter cost controls and the benefits of volume and productivity were offset by increasingly higher commodity costs particularly in the North America HVAC business.

Volume growth in the first half of the year helped offset the higher metals cost, but lower volume growth here in the third quarter provided a more limited offset.

Margins did not expand this quarter and we expect they will continue to be under pressure for some time, reflecting the higher inventories in the channel and the continuing escalation of costs for steel, aluminum, copper, and energy, which increased to their highest levels in over a decade and about double what they were a year ago.

But however, and let's be clear on this point.

Jerome (ph) runs the carrier business for long-terms operating profit growth and margin expansion.

If we continue on that and the price increases that we have announced will here next year.

Also on a note for Carrier in the quarter, the Carrier completed the acquisition of Linde's commercial refrigeration.

We like this acquisition a lot.

Linde gives us great products and is the European market leader in commercial refrigeration.

I think the combination of Linde and Carrier makes us by a wide margin the world leader in commercial refrigeration.

We feel really good about our ability to integrate with UTC's disciplines and restructuring into this billion dollar business to help improve bottomline performance which is essentially at zero today.

For the full year excluding the acquisition of Linde, we continue to expect Carrier revenues to be up about 10 percent with operating profit improvement in the low teens.

Operating profit at Chubb was $35 million in the quarter on revenues of $697 million.

Margins were at 5 percent, which is in line with the first half.

Remember third-quarter results for 2003 reflected only 2 month’s worth of activity following the July, 2003 acquisition by UTC.

So we looked sequentially where sales and profit improvements in the UK and Australia were offset by declines in Continental Europe, based on seasonally low volumes, essentially the vacation time in Europe.

For the full year we continue to expect Chubb to generate approximately $2.8 billion in revenues with operating margin in line with last year to our expectations.

Now in third quarter, Chubb announced several margin expansion actions including the closure of its fire extinguisher production plant in Wales as well as a smaller facility in Australia with production moving to Chinese suppliers in 2005.

Now move over to aerospace now, on Slide 7 you can see we continued to have good performance at Pratt & Whitney.

Revenues were up 13 percent led by large commercial engine aftermarket growth and continuing improvements in Pratt & Whitney Canada.

Operating profit was up 21 percent including increased Company funded R&D in the quarter.

Commercial spare parts orders continued to grow as compared to the year ago quarter when we first began to see the recovery in traffic but are up less than they were in second quarter year-over-year simply thanks to a tougher compare.

Year-to-date spares orders are up over 20 percent.

During the quarter Pratt received a $500 million order from Korean Airlines for 31 PW4000 engines with deliveries beginning in 2005.

And as you have also seen, we have been announced as 1 of the 2 possible engine choices for Bombardier's new commercial aircraft program.

We continue working with Bombardier and our IE partners to discuss the technical requirements of the engine as well as the business case for this 100 seater passenger aircraft.

And our decision to participate on this program ultimately we made as it has been for all other engine campaigns and that is on the business case.

On a year-to-date basis Pratt revenues are up 11 percent and profits are up 14 percent, putting Pratt clearly on track to deliver double-digit returns for the year.

In the Flight segment on Slide 8, operating profit was up 15 percent on 16 percent higher revenues, reflecting improved aerospace and industrial results at Hamilton as well as increased helicopter shipments after market and Comanche revenues at Sikorsky.

Hamilton Sundstrand revenues were up 11 percent with strong volume improvement in commercial aerospace and military OEM as well as in the industrial companies.

This was partially offset by lower military aftermarket revenues reflecting the nature of the conflict in Iraq.

At Sikorsky revenues were up 23 percent with roughly two-thirds of this increase coming from Comanche termination revenues, which carry a relatively low margin.

It also reflected higher U.S. military and commercial helicopter sales and increased aftermarket volume.

Sikorsky shipped 17 helicopters in the quarter, 1 fewer than last year, which resulted in a slightly less profitable aircraft mix including the higher value launch of the S92 aircraft.

We are proud to announce that in September Sikorsky delivered its first production S92 aircraft which will be used for offshore oil transport and also in the quarter the Canadian Government selected Sikorsky to provide 28 H92s -- that is essentially the military version of the S92 to Canadian maritime helicopter program with a value of over $3 billion.

So I think this is all part of what is making for wonderful launch of the S and the H92.

I guess before moving out of Flight segment just a special word of thanks to Ron McKenna where I saw the announcement a couple weeks ago about a change in management there.

Ron has done a wonderful job in the past 5 years bringing Hamilton Standard and Sundstrand together.

If you think about it all the content that we won on the 77 is really a culmination of those 2 companies coming together under Ron's leadership.

So we thank him for that.

It has been a great 5 years.

The new president who you will meet, Dave Hess, will continue to work on that and bring 25 years of Hamilton and Sundstrand experience to the President's role.

With year-to-date revenues up 13 percent and operating profits up over 16 percent, the Flight segment is on track to provide double-digit returns as anticipated.

With that wrap up of the segments, I'm going to turn the call over to Greg to cover some additional items.

Greg?

Thanks, Jim.

Moving to Slide 10, as Jim noted, free cash flow in the quarter was $770 million or 107 percent of net income.

And just under 2.4 billion year-to-date is 112 percent net income.

In the quarter we made voluntary contributions of $201 million to our pension plans globally bringing year-to-date contributions of more than 550 million.

We expect to make further contributions in the fourth quarter and we now see total contributions for the year of at least $700 million.

Given the increased pension contributions we still expect a strong cash flow year and we expect cash flow to be in line with net income for the year.

Working capital was at 204 million use of cash in the quarter mainly attributable to higher inventory levels at Otis as well as an expected inventory build within the Flight segment. (inaudible) to a ramp up since Sikorsky has 92 deliveries.

Capital expenditures were 180 million in the quarter, an increase of $54 million from the year ago third quarter and $129 million higher than 2003 on a year-to-date basis.

For the full year we now expect total CapEx spending to be roughly 90 percent at current year depreciation levels.

In the quarter share repurchases were $208 million use of cash bringing year-to-date repurchases to $688 million.

For the full year we now expect at least $900 million in share repurchases.

Acquisition activity in the quarter was $132 million, all individually small transactions with the most notable being the purchase by Sikorsky of the Schweitzer Helicopter Company which is based in upstate New York.

Year-to-date spending is approximately $341 million.

As Jim noted we closed on the purchase of Linde on October 1 and if we add the Linde acquisition to the year-to-date spending, we are now at about $725 today.

As we said in the past, while the M&A pipeline remains fairly robust yields are very event specific.

Given that it is unlikely that any large M&A deals will close by December 31, it appears we will fall short of our $2 billion placeholder but for the full year we now expect roughly $1 billion in acquisition spending (ph).

We are okay with that.

As I just mentioned, we are increasing both pension and share repurchases in the fourth quarter above guidance levels we provided last quarter.

We see both as good uses of our strong cash flow providing value to our shareholders.

A couple of other topics to cover briefly.

Company funded R&D spending was $296 million in the third-quarter, up $36 million from the third quarter last year and up just over $140 million year-to-date.

The majority of the increase is at the aerospace companies with the GP 7000 program at Pratt and small engine development programs at Pratt Canada and at Hamilton for the 77 programs.

As we said last quarter we expect (technical difficulty) full year R&D spending to be up approximately $200 million over last year as we continue to invest in the business for future growth.

Eliminations and other includes the results from a number of corporate managed entities and although essentially flat year-over-year this quarter includes a charge of about $35 million for estimated costs related to an ongoing legal matter.

This was substantially offset by the favorable resolution with the EPA of an environmental matter in a discontinued operation.

We also finalized the Chubb purchase accounting during the quarter including finalizing cost estimates for facility closure and relocation plans.

These plans bring total job restructuring costs since the acquisition last July to approximately $160 million.

These costs are primarily for factory consolidation and overhead consolidation projects and are expected to be substantially completed during 2005 providing benefits in 2006 and beyond.

Restructuring cash outflow in the quarter was about $48 million, slightly lower than second quarter and for the full year we expect spending for restructuring programs to roughly offset cash for favorable first half items.

We're making good progress on the restructuring programs previously announced.

This quarter's restructuring charges included $58 million for trailing costs related to those actions launched in previous quarters.

The costs are primarily at Carrier and Pratt & Whitney and resulted in a charge of 8 cents a share.

For the full year we expect charges for cost reduction actions will exceed the favorable impact of the second-quarter tax settlement and the first quarter contract related gain.

As previously noted, once fully implemented we expect to realize savings of over $300 million annually for these restructuring actions.

We're starting to see some benefit already.

The savings benefit will be ramping up over the next 5 quarters.

As we look at the fourth quarter we're working on a relatively small divestiture that has structured the result of a small gain.

We will let you know as this transaction firms up.

And as in the past if we are able to close the transaction, we will likely initiate additional restructuring actions in the fourth quarter.

We like this model of utilizing one-time gains to the best of our future.

It worked well for us over the years doing margin expansion across the business and providing continued earnings momentum for the Company.

A quick comment on the recent tax bill, HR 4528 more commonly called the American Jobs Creation Act.

As you know the bill repeals the ETI credit and for us, ETI contributes about 2 points to our effective tax rate.

For 2004 we will still get 100 percent of the benefit but beginning next year the benefit will phase out.

We will lose 20 percent in '05, 40 percent in '06, and the full benefit will be gone in '07.

So this will clearly put upward pressure on the effective tax rate for the coming years but we're working on strategies to mitigate the impact.

We will have more to say about the '05 rate when we meet in December but for now we like the 28 percent.

We will also take a look at the bill's incentive to bring back previously on unrepatrioted foreign earnings which could provide some additional flexibility for us and we will be looking at other provisions of the bill to try and mitigate the ETI impact.

Lastly on the topic of stock option expensing which you are probably aware last Wednesday the Financial Accounting Standards Board set the effective date mandatory expensing of options for midyear 2005.

We're currently evaluating a proposed standard and formulating our plan for adoption including timing.

As you know we disclosed the pro forma effects of expensing options in the footnotes into our quarterly and annual financial statements.

We will look to update you on the plans for adoption at the December investor meeting, assuming we have a final standard at that point.

With that, I'd like to open the call up for questions.

Joseph Campbell.

Good morning.

I have some of couple nits.

What will happen with regard to the outstanding shares if we purchase on a going rate $900 million worth of stock?

This is Jim Geisler.

Joe, you would see if we purchased $900 million worth of shock that the share count will drift down a little bit over time.

It didn't change at all from the second quarter to the third quarter so it did come down in the first to second and I'm just wondering whether if we complete program we should expect any further declines?

You'd see a small decline.

You would see, again -- that computation is not only shares outstanding but also stock option exercise and that is why the number didn't move very much.

I wondered if you could flesh out the Bombardier decision a bit.

Is this -- it's a joint project with IAE, that's the way you're going to proceed and what are the decision dates, when would it get launched?

When would it be done?

How much R&D are we talking about?

Those sort of issues.

We worked with Bombardier on this program through our IAE partners primarily Rolls-Royce and I think you would see maybe something -- again it is their timetable but towards the end of the year or early next year and is again like you've seen in previous campaigns, I think technically there won't be any issue or problem and it will all come down to the business case.

But when would this plane theoretically be delivered?

If you were successful or chose to win, however you want to say it, what would we be looking at for Pratt's share of a program?

If we chose to win, it would be an IE type split -- somewhere probably between 30 and 50 percent and the plane again -- it is a Bombardier schedule, selection maybe early next year and EIS 4 years after that.

Joe, George David.

A couple of comments -- let me go back to the share repurchase first of all.

I think it's better to look at share repurchase over a longer time period and basically our share count is down 10 percent over the last 5, 6, 7 years, something like that, and we like a pattern where we do have a declining share count, that is where purchases are bigger than shares issued for equity acquisitions.

Sundstrand was the big one for us in 1999 and also share repurchase was big enough to wash out option dilution.

That is very good.

I think on the Bombardier Airplane, we ought to note a couple of things.

One is its narrow body.

Narrow body is the better part of the business and secondly it is I would say almost certainly in fact I think we can say it is certain that that will be a sole source placement.

This -- the engine business doesn't work when you have 2, let alone 3 engines on wait, and that was a big piece of our decision on the 77 and I think historically we've had single-engine company placements with Bombardier, and that is likely to continue.

Steve Binder of Bear Stearns.

George, you touched on the strength in new equipment orders at Otis.

And some of your competition in Europe has talked about lower margins on the new equipment side in 2004.

How would you characterize the quality of the orders you're seeing this year for as far as profitability compared to a year ago?

Good.

Good -- meaning better?

Yes, I think we have time -- we have slightly better margins.

The elevator business works that you do a place equipment at positive margins above cost of sales and if you do some full cost allocation maybe it around breakeven and you have this very long aftermarket tail but our new equipment trends in Otis are good.

Volume and rate.

And secondly as far as Carrier is concerned, George you touched on price.

You haven't seen much of a price benefit from the increases you passed through.

Can you quantify either you or Jim on how much of a benefit you did see in the quarter from price?

The benefit was very small, not like it is going to be in the future.

So the 100 basis points of headwind from commodity costs, if I heard that correctly is kind of free and clear?

There's no net offset?

Right.

So when you look at Carrier as a whole -- you look like you've got very good -- when you back at the commodity cost pressure, it looks like you had very good incremental margins prior to restructuring charges and commodity costs of mid-20s kind of percent range.

Is that pretty well balanced across the board?

Or you touched on the strength in Transicold but are you seeing a lot of the benefit from the restructuring actions or would you characterize the benefit to be broad-based?

We are seeing good benefit from productivity and restructuring and you are right that the leader in the profit increase was in Transicold.

And two last things; one at Pratt, you talked about year-to-date increase of 20 percent in spare orders.

How much of that is actually coming -- what percent growth are you seeing or how much of that increase is coming from the Legacy Carriers in the United States?

The increased in orders is broad-based around the world.

It includes both the U.S. majors but also airlines outside the states.

There is not in the orders any difference by region.

You're fairly narrowly focused when you look at your customer mix around the world.

Those Legacy Carriers in the U.S. are a pretty good chunk of your business.

I am wondering are you seeing any big gains in any particular ones or do you really think it's well-balanced?

Across Pratt's customer base it’s fairly well-balanced.

Lastly, the increase in accrued liability -- short-term accrued of about 350 million.

Can you maybe touch on that in the quarter, Jim?

Steve, its Dave.

It's a couple of things.

Some of the restructuring charges that I think Greg had talked about.

There are also some customer advances that run that number up too.

Those are the 2 most significant elements that are driving year-over-year with the addition of an increase in the pension liability.

As you know we break out the pension funding separately but the liability for the cost increase is the third big thing that drives year-over-year.

Okay, thanks very much.

Howard Rubel with Schwab SoundView.

Could you give us some performance metrics at Chubb in terms of customer turnover ratios and some of the other things you are doing in the way of headcount reduction to give us a sense of how you're doing?

A little on both those fronts.

You saw -- or we actually talked on the call a little bit about finishing off the purchase accounting and within that you've got it as a restructuring program, over $100 million.

And that restructuring program margin expansion actions and if they will occur largely over the next 12 months as they are executed, but it involves essentially 10 percent of the pre-acquisition workforce.

So that will be very good I think margin expansion fuel in the future.

The team is also working very hard on attrition, measurement and action plans to make that go down and we're starting to see little bit of traction in some parts of the world like the UK.

Can you be a little more specific?

If you're taking 10 percent of the workforce out, Jim, does that mean that's 200 basis point improvement in margins and then with respect to attrition -- I know the old benchmark was sort of 14 which you clearly said was unacceptable and whether you have been able to -- I know it is only just barely a year, but what are you looking at for some targets?

I think it will be best for Oliver to give you some of the targets.

You've hit on the 2 primary elements that are going to take margins from 5 percent to 10 percent and then you start to see traction in that next year.

Thank you and then one other question is a year ago you were pretty prescient with respect to talking about new products that were energy-efficient at Carrier.

Could you bring us up-to-date on how they are doing and what they could do to offset some of the standard products you have maybe to make Carrier more of a price leader?

The big initiative in North America is the SEER 13 which we are going to be ready for in 2006.

I think that's going to be a tremendous product for us.

I think we will have a smaller machine than anybody else in the marketplace and there ought to be some benefits out of that.

But that is all in the year after this, 2006, and we will make the investment and further the development in 2005.

All right, thank you very much.

Nicole Parent of CSFB.

Good morning.

I guess I was just wondering if you could elaborate a little bit more on any pickup or signs of life in non-res construction in the Carrier portion of the business?

The commercial business at Carrier was up a little bit in the quarter easy compare and I'm not sure we are quite ready to call a recovery in that market yet.

At least that would be our own view.

I guess just following up on the higher inventory that you saw in that business on the residential side, how do you see that playing out over the next couple of quarters?

The underlying demand I think is still fundamentally good and by that I mean the economy is still fine so we had a little bit of a weather bump, built some channel in the inventory -- I think normal economic activity draws that down over the next couple of quarters.

Okay and I guess on the Pratt Hamilton Sundstrand side you give have given it to us and I just missed it -- kind of the split between commercial military deliveries as well as their portion -- are you seeing a slowdown in the defense side of the business?

That is a good multipart question.

Let me take pieces of it.

I think military being fairly flat right now.

As we talked before development is ramping down because we've reached the high point of JSF but we had greater OEM shipments, so I think the outlook for military is as we described is roughly flat.

As Faris (ph) as we've talked about has been up in both businesses, Hamilton and Sundstrand, again off somewhat of an easy compare in the third quarter and we are seeing OEM benefit at Pratt & Whitney Canada and also in -- basically the smaller end of the jet market, not the large commercial engine piece.

Of the backlog, look at Pratt & Whitney Canada?

It is good.

It is in good shape.

Nicole, its Dave.

Why don't I comment, just put little specifics behind Jim's comment around the strong OE performance.

Engine shipments in particular a very, very good performance at what I will Big Pratt, our large commercial engine shipments up over prior quarter pretty nicely, 82 this quarter versus 72 last.

At Pratt Canada, as Jim mentioned, very, very strong performance.

George mentioned that as well, up over 60 percent from the year ago period, 436 engines and real strong performance on the military side coming out of the F119s in particular.

So very good OE performance in the quarter on the aerospace side.

Great and I guess just one last follow up to Howard's question.

On the migration at 13 SEER, do you see the market evolving sooner or later in terms of adopting it or is it just more nonevent for the industry as we look in the next 12 to 18 months?

Nicole, its Greg.

Actually the requirement is that all in conditioners sold after 1/1/06 will have the SEER 13 requirement so it will be an automatic adoption by the market at that point.

I'm just thinking over the next 12 months -- you hear some of your suppliers talking about there could be a push to have customers try and adopt it early but obviously there are pricing impacts or constraints if all participants don't act in the same fashion.

Nicole, realize that SEER 13 products are in the marketplace already.

You can buy right now. (multiple speakers) We've sold it for a long time.

What we're talking about here is our new product launch which is going to I think get SEER 13 at better economics and better Q. The way to get higher SEER products in air-conditioning is just add more heat exchanger and that gets bulkier and more costly so you don't want to do that.

And the answer is make it better and our SEER 13 product will be bigger than SEER 10 product but it is not anywhere near as big as Current or as costly as Current SEER 13 products and that is what you see for us with shipments.

Actually the effective date for this standard is January 23, 2006 and we're going to meet that and we're going to be shipping hundreds and hundreds of thousands of the SEER 13 product.

This is an earthquake in this business and I think we're going to do real well in the earthquake.

Thank you.

Tony Boase with A.G. Edwards.

Thanks, just a couple of questions on Carrier.

First can you quantify what the cold weather impact was on the business?

And also you mentioned in your opening remarks something about not being able to get some increased pricing or getting that pricing to stick.

I know you talked about the economy being okay, but doesn't that signal something that maybe the demand is not that strong if you can't get your pricing to stick?

It's tough, Tony, to quantify to the dollar what the cold weather impact was, but you went from a situation in the first half of the year where the market was growing in the teens to moving down to the single digits and yet the economy didn't change very much over that period time.

So I think we write most of that off to seasonality and the weather.

Price did not stick because of that hiccup, but now with the commodity prices rising and coming through that suppliers are passing us, the price has to stick.

And you will see it stick.

Okay, and then when we think about what the implied numbers are for the fourth quarter, is the differential really -- is that a raw material price gap that you are implying is being what drives a range there?

For Carrier margins, yes.

What about for UTX overall?

I think although 90 days is not a very long period time, we always have a range.

There are things that can move us around within that: Carrier, FX.

It is still very, very good growth overall for the year with earnings up 16 or 17 percent, so I don't think we feel at all uncomfortable with the outlook for the year or the little range that we've got.

Okay, and lastly what were actual military engine shipments?

You said what they were up by, but I don't think you said the actual number.

You are paying attention very well, Tony.

They were 52 in the quarter against 33 last year.

Great, thanks a lot.

Jeff Hammond of Key Banc Capital.

Good morning.

I guess I wanted to get little more color on the Otis orders.

I think you said the orders up 10 percent in the quarter.

Maybe flesh that out a little bit with respect to the different regions and maybe comment in a little more color on that moderation and growth in China towards the end of the quarter.

Sure.

Otis orders were very good in the quarter, really led by North America.

Europe continued to show good growth.

I would put Asia trailing those two other regions, and again that is a function of I think some attempt on behalf of the Chinese authority to slow the economy there.

But again over the longer secular term, that market is going to be phenomenal for us.

It is already the world's largest elevator market and we have leading share there.

So the fact that for a quarter or even for some period of time it may slow, it is all digestible within the fact that China is 4 percent of UTC and there will be growth there at levels much higher than in the West in the future for China.

Moving over to commercial spares, I think you said up 20 percent year-to-date.

Can you give us a sense of in the quarter if we saw that comparison accelerate or is it stable at a higher level?

Maybe a little more color there.

The comparison gets more difficult over time.

The easiest compare of all was in the second quarter of 2004, where you compared back to a time, second quarter 2003, which had the SARS and war impact.

So you are going to see a tougher compare in spares than in Aero overall, but the growth is still good there, as you see in the results.

Okay, thanks.

George Shapiro of Citigroup.

Good morning.

Jim I guess you are reluctant to give but I will push again how much was spares up in the quarter at Pratt and then also at Hamilton Sundstrand and how much was it up or what was the comparison on a sequential basis?

Faris (ph) -- all right, George.

Spares are up double-digit as I think we've indicated.

They couldn't be up year-to-date 20 percent without being up double-digits in the third quarter so they are up double-digits in the third quarter.

And the same is true at Mr. Hamilton as well.

They are relatively flat on a sequential basis but that level of activity is fairly robust and supports our outlook.

And the book-to-bill ratio in the quarter?

It was around 1.

Okay, different question.

A general one.

The '05 guidance of double-digit growth that you gave, does that include any tax rate change next year as well as the option expensing?

It includes lots of moving parts.

I take it it includes all of those things?

We will get together with a lot more detail in December.

Okay and then is there any expectation that we see a restructuring charge associated with the closing of Linde in the fourth quarter?

This is Greg.

In fact, the restructuring actions at Linde will take several years to implement.

We're working with the unions there right now trying to understand which facilities will be closed in the future and what actions we are going to need to take.

Most of those restructuring charges will end up in purchase accounting; it will end up as part of the acquisition price.

Okay, so we would not expect to see you having an additional charge in the quarter associated with Linde?

No.

That's it for me.

Thanks.

Good quarter.

Cai Von Rumohr of SG Cowen.

Flight, your margins were down a little bit.

You alluded to the low margin Comanche payment pass-through and your shipments were little bit light at Sikorsky.

Could you comment;

A, how big was the Comanche payment and secondly, what happened to margins at Hamilton Sundstrand?

Presumably they were up -- how much were they up in quarter year-over-year?

Let me start with the issue on Comanche.

As you know we are in a joint venture with Boeing, a 50-50 joint venture on the Comanche program and Boeing, Sikorsky and the U.S.

Army entered into an agreement in the third quarter to provide for it not to exceed funding on the Comanche termination costs and we did that in order to free up funding for the Army to spend on other aviation programs.

As a result of that agreement however, we were able to accrue or record revenue associated with the termination costs that we have estimated today.

We don't see any risk on the program itself from a margin standpoint or from a costs standpoint, but we were able to record about $100 millions of revenue at about a 10 percent margin.

Just on your question on Hamilton margins were up in the quarter thanks to aerospace aftermarket and that's even with increase in R&D in part from the 77.

And presumably we should be looking for a big margin bounce sequentially at Flight because we have a lot more deliveries and at Sikorsky in the final quarter and Hamilton also should be relatively healthy?

Is that--?

You're going to see more helicopter shipments as we mentioned at Sikorsky but again, some of those are S92 the first ones coming off the line, not high margins.

The program is going to last for 20 years so some of the margin is still to come.

What I think you will see is good operating profit growth for certain in the Flight in the fourth quarter.

Carrier, one of your competitors mentioned the impact of the inventory buildup in the second quarter and therefore the liquidation of field stocks resulting in a timing impact of negative on their sales.

Could you comment where were your field stocks at the end of the quarter?

How much were they down sequentially and how do they compare year-over-year?

U.S. Res.

Field stocks were up for Carrier in the industry double-digit.

We were in line with them.

I think that bleeds off over the next 2 or 3 quarters and it puts a little bit of pressure on the business at Carrier in this productline, but again it is (multiple speakers)

You are in line with the industry?

Yes, on field stocks.

Moving back to spares, can you give us any color -- what are you seeing as a result of higher oil prices?

Are we likely to see -- presumably we are going to see some deceleration in ASM growth, but what are you seeing?

Are you seeing any slowdown in that business?

Any catch-up buying or anything?

Give us some color.

Aftermarket again as we talked before, it had a good level of activity.

Clearly we worry about oil prices like everybody else does.

The customer is not in good shape.

He has been sick for some period of time and that is always a concern but as people fly, airlines need to maintain equipment.

We continue to see RPM growth and ASM growth off the low base, so we are always cautious as you know from knowing us about the outlook for the airline industry but we continue to see good activity in the aftermarket arena.

Last question, cash reemployment clearly you are well shy of your acquisition target and you have made some of it up with stocks and with pension.

At what point do you decide to get more aggressive on either stock or pension?

Because the balance sheet continues to improve.

Of course the thing we have to watch out for Cai, or pay attention to is the potential for cash acquisitions.

You heard before, it is event specific.

It is lumpy and so this year comes in at a billion as Greg suggested but you can never tell when something might come around and you've got -- one of the placeholders for next year of 2 billion again and you can't tell when these things are going to happen.

So we obviously manage and watch that but you have seen share repurchase float up over the course of the year and you've seen our pension contributions float up over the course of the year and that is in the category of tuning and we will continue to tune.

Thank you very much.

Byron Callan with Merrill Lynch.

George, I wonder if you can comment a little bit more about China.

You mentioned the softness in the third quarter.

Has that extended into what you've seen so far in the fourth quarter and also can you characterize it by geographic region?

Is it a financing issue per project?

What is going on?

Byron, this is Jim.

As much as we watch all of these businesses closely, I hate to draw any conclusion off maybe 3 weeks of data.

So we saw it slow in the quarter more towards the end than the beginning which is a pretty fine measure on that.

We read and hear the same things you do so perhaps this will continue, but if it does not that concerning at all to the UTC picture and again we only look to grow in China over time.

How -- the government does a variety of things but I think financing is clearly one element at their disposal to slow the growth a little bit.

Okay.

Second issue -- I recognize and appreciate no comment on specific figures for 2005 but I wondered can you give us any sensitivity on pension assumptions?

In other words if the discount rate drops 25 basis points, what that might mean from an earnings per share standpoint or anything you might help us out on that front as we think through 2005?

A drop in the discount rate clearly adds to the pension headwind but there are a lot of other assumptions that go into that including the return of the plan which we are not yet done with.

And the discount rates not set on November 30, so clearly a lower discount rate adds a little bit to the headwind, but I would be reluctant to pick one single element and kind of pull it out as a yardstick.

All in, I think we feel very good about the outlook for '05 and we will talk a lot more about it in December.

Okay, a lot of other questions were answered.

I will leave it at that.

David Bluestein of UBS.

It is late so real quick.

The China comments -- was the slowdown was that a deceleration or was that a year-over-year decline in the orders?

It slowed down to be relatively flat.

That is one whole quarter of data in what is going to be for us a very, very powerful market going forward.

Understood and commercial spares in Q4, what are your thought processes on perhaps commercials shares spare shipments in Q4?

I tend to think about the whole and I don't want to give any specific guidance for the fourth quarter but the level of activity is good that we see in the business and we have high confidence in their guidance.

Fair enough, thanks.

A follow-up from Joseph Campbell with Lehman Brothers.

I wanted to ask about -- you give us some numbers on the commodity pricing and the pressures that they presented for the year.

I wondered if as we look forward are we talking about simply a continuation of rising commodity prices that you're thinking about or is this simply the full year impact of the commodity prices that we see today versus what they were earlier in the year so we can guarantee and calculate a headwind going into '05?

And I just wondered if you could remind us of -- I think you told us it was $150 million -- is that year-to-date or expected for the year?

Just so we can make a swing at it.

I know you're not going to tell us too much about '05 yet.

I think the comment was its $150 million for the year now because of the way these commodity prices move the spot rate does not in up in your P&L today, so we didn't see much impact say in the first quarter so that rolls in and we are taking action to make sure it doesn't roll all the way into you with price increases and things like that for '05.

But if we were to think of -- we had $150 million of pricing pressure we had to deal with in '04, based on what has already happened without action, does that mean we have another 150 to go as the carryforward in '05 that you would have to somehow or other work through based on what one knows today?

We would have a headwind like that to work through.

On the other hand, though, Joe, we don't know where commodity prices are going to go in the course of the next year.

That is a starting point I assume.

That is something that maybe you all know better than we do.

I doubt it.

Thanks very much again.

Maybe to end up here for a second.

George, did you want to make any closing comment or two?

I think just a closing sentence or two.

This is a very solid really good quarter and feels really good and it is right on top of a very strong 2004 and we feel good about the 2005 outlook as Jim suggested to you and as I said up in my opening comments.

And that is on the back of a good economy and good restructure gains on our part, a bunch of good new products and the business just feels good.

It has got momentum and it all looks great.

I also think it is wise to also just note headwinds in passing and there are headwinds for every company in America looking ahead to next year.

We got pension headwinds.

You are going to hear about that in December.

We got healthcare headwinds and we're not unusual -- this is the whole world.

We've got options expensing to deal with and we have to, as Greg said, go through the recently issued FAS-B opinion and decide what to do about that.

Obviously we studied it to death and we are were ready for a decision but the fact they give us a July 1 implementation date make things a little bit more complicated for most companies.

We got the tax issue that is EPI phase out commodity pricing.

So the world is not without trouble and I think what you've got here is a high momentum Company, great organization, and we will manage these headwinds, but in fact if there are headwinds and I guess if you want to take all of this and put all these words into code the code is don't run up your estimates for next year.

Okay, thanks all very much.

Thank you, George, and thanks for those of you who participated.

Myself and the rest of the IR team will be here for the remainder of the day, so thank you.

This concludes today's conference call.

You may now disconnect.