雷神技術公司 (RTX) 2004 Q4 法說會逐字稿

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

On call today are Jim Geisler, Vice President Finance, Greg Hayes, Vice President Accounting and Control, David Porter, Director Investor Relations and George David, Chairman and Chief Executive Officer.

This call is being carried live over 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 risk and uncertainty.

UTC's SEC's filings and reports, 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 statement.

Please go ahead, Mr. Porter.

Okay.

Thank you, Devon.

And good morning, all.

Today we will cover fourth-quarter results for UTC and our full-year performance as well.

Together with the outlook for 2005.

And then as is our custom, allow time for your questions.

Before we take you through the results, George David is here to provide a few comments.

George?

Okay.

Thank you.

And good morning.

As you have all seen in the release, the fourth quarter was another very, very good one for UTC.

I think it brought to a close what has been for us an exceptional year in 2004.

EPS net income for the year were both up 18 percent.

Our revenue is 21 percent higher at about $37.5 billion.

Cash flow was our usual robust performance of 104 percent of net income, even after a good-sized drag from pension contributions in the range of $900 million.

I think bottom line, these are as good numbers as I have ever seen, and I feel our momentum looks very good for more in 2005.

The fuel in all this thing is organic revenue growth at 8 percent for the year.

That is the highest we have seen in a very long time.

It came out of good conditions and I think more importantly came out favorable market share trends in many of our businesses around the world.

Acquisitions including the MTU gain added another nine points of growth and foreign exchange added 3 points.

Now all the segments had OP profit increases as you have seen in the release in double digits except for Sikorsky, and obviously Sikorsky had the Comanche termination situation to work through this year.

Otis OP profit was up an exceptional 20 percent on revenue growth and another strong increase in OP margin of 90 basis points.

That must be after five years or so of steadily creating OP increases as you know.

I think exceptionally and the big news from Otis is new equipment orders worldwide were up 16 percent in value and 14 percent in units and I have been in the elevator business for a long time and I have never seen that.

That is amazing, and I have to believe that is significant market share increase coming on the back of Gen2 plus our big presence in China.

Carrier revenues you were were up 9 percent organically for the year, Op income up 15 percent, even after $120 million in commodity cost headwinds which you do the math, is more than a percentage point of margin in commodity cost headwind alone.

Pratt was up 14 percent in Op income, Hamilton Sundstrand 15 percent, and both of those were obviously the Commercial Arrow aftermarket and that, in turn, on top of the underlying 13 percent growth in RPMs for airlines worldwide, which finally got us back to the 2000 baseline, that is ahead of September 11, 2001.

Chubbs op margin was about level for the year, and that reflected the back office investments and project costs, which we have talked about over the course of last year which are obviously not classifiable as restructuring.

We do expect Chubb to break out in 2005 with an margin increase in the range of 120 to 150 basis points.

Cost reductions gave us their usual boost.

They are fundamental to UTC's performance year after year after year, and they were essential to overcoming some tough headwinds we had in 2004.

We also had some help from the Commercial Arrow aftermarket, and those two things together, that is the cost reductions and Arrow aftermarket let us overcome headwinds first commodity cost increases, more than $200 million for UTC across the board.

Pension and healthcare cost increases, more than $100 million across the board.

Higher R&D on program timing, about 230 million on year on year impact, and obviously the roll-in impact of the lower margin Chubb and Linde acquisitions.

In the net of all that segment Op income increased 18 precent in '04, and obviously EPS and net income also up 18 percent.

And frankly, we like the runway reset we get with lower margin acquisitions like Chubb and Linde, because we expect our usual disciplines on cost and productivity to run their results up materially in the years ahead.

So the outlook for us looks very good for 2005, and I would say that is across the board for UTC and around the world.

We are affirming today the 10 percent to 15 percent EPS growth guidance I gave you in December on revenues that will come in around $40 billion.

Those revenues exclude the [Kiday] acquisition that is almost certain to close the first quarter and will add another $1.5 billion for the $40 billion before Kiday.

The big deal moves coming up for us is obviously the Marine One decision, that is expected a week from this afternoon at 5:00 from the Pentagon.

You heard me make very strong statements about that and how important that contract win is for us, and let us say that I feel exactly the same way today, just a week out from decision.

So all together, I feel like 2004 was about as good a year as I have ever seen at UTC.

We are looking for more in 2005, and with real good confidence around that.

Jim.

All right.

Thanks, George.

I am going to start today with an overview of the fourth-quarter results and then review the individual segment performance.

Greg will take you through additional items including cash flow details and corporate disclosure items.

As George detailed, another solid quarter at UTC.

Fourth-quarter revenues were up 15 percent and EPS was up 11 percent.

I think that reflects some really good performance in the businesses, and in a generally favorable market environment.

I should also note that similar to the third quarter, fourth-quarter results included a net restructuring drag of almost $60 million or about $0.08 a share.

For the year, we had $632 million of restructuring cost, and that exceeded one-time gains of $600 million, as we invest for the future and deliver in the current period.

We continue to have the benefit of currency again this quarter contributing $0.04 to reported EPS and $0.18 for the full year.

And as we told you in December, we have assumed a Euro rate of $1.27 for 2005.

So the current spot rate today there is not really much benefit in 2005 from currency.

Free cash flow or cash flow from operations less CapEx for the quarter was $514 million.

That includes well over $300 million of global pension contribution, capping a really solid year of free cash flow at 104 percent of net income.

On numbers, $2.9 billion of cash after more than $900 million of pension.

Before I review the segment performance, I will mention that, and as you have probably already seen in our press release this morning, we decided to split apart the flight reporting segment.

In this quarter, we are reporting Hamilton Sundstrand and Sikorsky separately, and all that is to do, is to provide with you greater visibility to these operations.

On slide 4 now, and this is with restructuring added back as we usually do, Otis' operating profit was up 17 percent on 13 percent higher revenue, resulting in further margin expansion in the quarter.

At constant currency, revenue increased 7 percent, and operating profit was up double digits.

For the year, Otis delivered 14 percent revenue growth and 20 percent operating profit growth.

And constant foreign currency.

Profit increased double digits.

All this resulted in operating margin improvement of nearly 1 point.

For 2005, we continue to expect Otis to grow revenues mid-single digits while generating operating profit growth again of more than 10 percent.

We entered 2005 with strong new equipment orders at Otis as George mentioned, increasing double digits again here in the fourth quarter, led by North America and Asia.

In Asia, orders showed softness in Korea, but in China, order growth was strong again this quarter after a slower third quarter.

Overall, China continues to be a good new story for UTC.

We had double digit revenue growth this year at the Commercial companies and double-digit margins as well.

China like any other emerging market will move around from quarter-to-quarter, and we have even seen seen that this year, but the long-term growth prospects are superb.

We talked about the urbanization phenomenon in presentations and previous calls, so we envision China growing significantly from the 4 percent of UTC revenues that it is today.

On Slide 5, we'll talk Carrier.

Revenues increased 23 percent in the quarter, and finished the year up 15 percent .

All business segments reported revenue growth in the quarter, up 7 percent organically, driven by double-digit growth in Asia and high single-digit growth in North America HVAC.

Europe revenues were helped by the Linde acquisition and favorable currency translation.

Operating profit improved 5 percent in the quarter and finished up 15 percent for the year.

Margins in the quarter were down, reflecting two key elements, margin drag from the inclusion of Linde, and the impact of higher commodity costs.

Linde contributed quarter of a billion dollars of revenue, but no profits.

That is a lot of margin runway for the future.

And then three things more than offset the $50 million of commodity cost increases, one, higher volumes.

Two, double-digit performance in transport refrigeration, and three, favorable currency benefit.

Looking ahead to 2005, we expect restructuring and price increases to offset the continued headwind from commodities.

Carrier's should generate operating profit and revenue growth of more than 10 percent in 2005, but a note of caution about the first half, Carrier set a high bar with 20 percent operating profit growth in the first half of 2004, and we also are integrating Linde, which has a traditionally slower first half.

Operating profit growth at Chubb increased 3 percent in the quarter.

Revenues grew 7 percent driven by foreign exchange.

Growth in the fire security business was offset by the disposition of Chubb Korea.

Margins at 4.7 percent were slightly lower than this year's run rate and last year's fourth quarter.

This reflects a discreet fourth-quarter cost of more than 100 basis points to initiate some outsourcing of many of Chubbs' back office administrative functions.

That will begin to provide benefit in the second half of '05.

Underlying operating profit was up doubled digits in all regions except North America, as cost reduction activities began to gain traction across Chubb.

For the year margins of 4.8 percent are consistent with previous guidance, and for 2005 as George mentioned, we expect Chubb revenues to grow low-to-mid single digits and operating profit up over 30 percent , resulting in margin improvement of 120 to 150 basis points, even with continued investment and cost reduction in 2005.

On the next slide, I am going to turn to aerospace now and start by reiterating our 2005 guidance for the aero companies.

As we said in December, we expect mid single digit revenue increases and operating profit improvement of more than 10 percent .

Now for Pratt, the good performance continued.

Revenues were up 10 percent from aftermarket growth and Pratt Canada, which shipped more than 40 percent more engines then in the year-ago period.

Operating profit was up 13 percent , even with the nearly $70 million increase in company-funded R&D.

For the year, Pratt's revenues were up 11 percent with operating profits up 14 percent .

Reflecting good performance of Pratt Canada and the aftermarket business, including spare parts.

Commercial spare part orders for the quarter were up low single digits, with orders up double digits for the year, led by a strong first half.

You will recall we had an easy compare in the first half of 2004 given what happened in the first half of 2003.

During the quarter, Pratt passed the significant 'fan blade out' test for the A3 8S GP7000 engine, one of the toughest steps in gaining FAA clearance.

And also during the quarter Pratt Canada PW600 engine successfully completed its first flight on the Eclipse 500 light jet.

We are excited about the opportunity that this jet taxi market offers, and we will continue working closely with Eclipse as we move towards certification in 2006.

Let's move on to Hamilton now.

Hamilton's revenues were up 10 percent for the quarter, about half organic and the remainder from acquisition and favorable currency impact.

Growth in the aerospace OEM business, single digit Commercial aftermarket growth and the industrial businesses were muted by lower military spares.

Lower military spares phenomenon we have seen over the course of the year, given the nature of War in Iraq.

Operating profits were up 8 percent driven by the volume growth in aerospace OEM and the industrial businesses.

For the year, operating profits were up 15 percent on 9 percent higher revenues reflecting strong volume improvements in Commercial aerospace, as well as in the industrial companies.

Now in the quarter, you probably already have seen the announcement, Hamilton is continuing its efforts to eliminate excess capacity and improve it's cost profile, accordingly announced several facility closures here in the United States.

On slide 9, Sikorsky, revenues were up 4 percent in the quarter with operating profits flat.

This reflects revenue and profit reductions associated with the Comanche termination program.

The Comanche decline was offset by higher aftermarket revenues and increased helicopter deliveries.

Sikorsky shipped 37 helicopters in the quarter, that's 16 more than last year and it includes 13 Schweizer units from an acquisition, that are smaller and lower priced than legacy Sikorsky helicopters.

For the year, Sikorsky reported 9 percent higher operating profit on 15 percent higher revenues.

As in the fourth quarter, the full-year impact of the Comanche termination and the S-92 startup costs, partially offset higher helicopter revenues and worldwide after market results.

The S-92 continues to gain traction in the marketplace, including the 28 aircraft on order from the Canadian government.

Sikorsky has received nearly 60 orders for the S-92 to date, making it a very successful Commercial helicopter launch.

Also in the quarter, we had several S-92 orders for head-of-state transportation, and we hope to have another one soon, to be exact in about a week.

So I think in sum, UTC had a very, very strong fourth-quarter and concluded a very solid 2004.

We had generally good markets, and our businesses are performing very well.

We have full confidence in our ability to generate 10 percent to 15 percent earnings per share growth for 2005.

With that, I'll turn it over to Greg.

Thanks, Jim.

Those of you following along on the webcast we are on slide number 10.

Free cash flow for the year was $2.9 billion, which as we mentioned before was 104 percent of net income.

And again this year, we were able to cover significant voluntary pension contributions and still deliver cash flow in excess of net income.

Fourth-quarter cash flow of $514 million was also very strong, and they included $347 million of voluntary contributions to our global pension plans, and capital expenditures of $344 million.

For the year, CapEx was $795 million, which was $265 million higher than '03.

As we initiated a number of strategic investments, including the [SEER] 13 program at Carrier.

While capital expenditures in '04 were about equal to depreciation levels, we expect CapEx to increase modestly in 2005 and exceed depreciation levels.

For the year, voluntary pension contributions totaled $906 million.

For 2005, we expect the contributions to be closer to $500 million, as our pension plans move closer to a fully-funded status.

Cash flow guidance for 2005 is our usual standard, free cash flow equal to net income before pension contributions.

And as in the past, we'll try to meet this high standard of covering pension contributions.

As mentioned in December, there are a few incremental cash headwinds in 2005.

Higher restructuring spending, which we expect to increase about 20 percent over '04 levels, spending against purchase accounting reserves at Chubb, and higher CapEx associated with the SEER 13 product line.

Despite these headwinds, we are still confident in our overall cash guidance of free cash flow equal to income before pension.

And we like the ability of UTC businesses to generate strong cash flows.

Working capital was $190 million source of cash in the quarter.

Mainly attributable to strong fourth-quarter collections and continued inventory turn improvements.

Acquisition activity in the quarter was $916 million, including about $200 million of assumed debt.

We closed on both the Linde and Hamilton Sundstrand's [Haskell] Acquisitions.

And we also continued to purchase shares in Kiday.

As of year end we own just under 20 percent of outstanding shares of Kiday, and we plan to continue to acquire Kiday shares during the tender period.

Since year end we have increased our holdings slightly in Kiday.

For all of 2004 we expect -- sorry, acquisition spending was $1.3 billion, again including about $200 million of assumed debt.

For 2005 we anticipate acquisition spending to increase to $4 billion.

This includes purchasing the remaining Kiday shares for about 2.5 billion, and a 1.5 billion dollar placeholder for other potential deals.

In the quarter, share repurchase was $304 million use of cash, bringing total year repurchases to just under $1 billion.

For 2005, we continue to hold the $600 million placeholder in our plan.

And we would expect these repurchases to be toward the back half of the year.

A couple of other topics to cover briefly.

Restructuring cash outflow in the quarter was about $66 million, slightly higher than the third quarter, and for the full year, cash respending -- cash spending on restructuring was $230 million.

We are making good progress on restructuring.

This quarter's restructuring charges of $159 million, included $110 million of charges related to new actions, and $49 million for actions launched in previous quarters.

The fourth-quarter actions continued to focus on reducing both our manufacturing footprint, as well as targeted G&A actions around the entire organization.

Partially offsetting these costs were two gains in the quarter totaling about $100 million.

These included transaction we completed to divest a minority interest in a joint venture which resulted in a $60 million gain, and we also finalized a settlement with the IRS associated with some prior tax years, which resulted in a $40 million favorable interest adjustment.

These gains are recorded outside the segments and are included in Elims and others in the fourth quarter.

Full-year charges for cost reduction actions exceeded this year's favorable items by about $30 million.

Once fully implemented, we expect to realize savings of over $450 million annually from the restructuring actions initiated in late '03 and during '04.

For 2005, we expect trailing costs associated with previously announced programs of about $100 million.

And we began to anticipate covering these costs with small gains during the course of the year.

We like this model of utilizing one-time gains to invest in our future.

It has worked well for us over the past years, fueling margin expansion across the business and providing continued earnings momentum for the Company.

Finally, on stock option expensing on slide number 12, the FASB recently issued a statement requiring the expensing of options beginning in '05.

Our plan is to begin effective January 1, 2005 and consistent with our prior guidance, we expect 2005 expense to be similar to the -- to the 23 cent per share cost of options we saw for 2004.

You have seen amounts similar to these in our prior 10-Q and 10-K financial footnotes, the table on slide 20 of the webcast presentation, we have detailed the 2004 option impact by business.

Back on slide 12, you can see we will restate prior reporting periods for comparability.

So with option expense included in 2004, our EPS will be $5.29 a share.

Off of this $5.29 per share base, we continue to expect EPS increases of between 10 percent and 15 percent for 2005, which equates to a new range of 5.85 to 6.10 per share.

Or $0.20 lower than the guidance we provided in December as a result of the $0.23 per share accounting change.

With that, let me open up the call for questions.

Okay, Devon.

We are ready for the audience's questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Joseph Campbell with Lehman Brothers.

Good morning, all.

I have a question about FX, which is if the currency would stay today where it is through the course of 2005, could you tell us what the FX implications would be for the Company as a whole and perhaps for Otis and Carrier, the ones that have the -- and maybe the others that have the exposure to the currencies that seem like they change the most.

$1.30 today, and last year's rate was $1.24.

So there would be a little benefit to that, obviously to UTC's EPS a couple of cents.

It is a big EPS base, so just one of many factors in the number.

We have also got to continue -- today's spot rate is 1 -- around $1.30 as I said and it is January 21.

We have a long way to go and just in the last ten days the euro has moved down -- it has moved down 4 euros.

So again benefit clearly to the corporation and could help out via a small net positive where it is today, but we still have a ways to go in the year, so I wouldn't take it to the bank yet.

Jim, just one other small thing.

I noticed that -- I have been watching for a filing on the EU for Kiday.

When do you think that will file?

And I gather from the March 1 closing date that we don't anticipate any, you know, any big second requests or whatever they call it.

The closing date is more likely going to be towards the end of March, and that is just the time table in the UK.

Each deal moves to its own time table, Joe.

And, you know, these businesses obviously regulatory issues aren't up to us, but these businesses were once together in the same company, so we would be optimistic here that we will get through this deal without any hurdles or trouble, and we will have a good end-of-the-quarter close.

Thank you very much and congratulations on a good year.

Thanks Joe.

Your next question comes from Steve Binder, Bear Stearns.

Yes, good morning.

A few things.

One was -- with respect to Carrier, you touched on the higher commodity prices being offset by mainly volume and better mix.

Any pricing benefit in the quarter to partially offset the commodity headwind?

Steve, a little pricing benefit in the quarter.

We put through a pricing increase and in [Res] on selected products late in the summer and we got that benefit in the fourth quarter, that pricing held in Res.

We announced a big price increase in October effective January 1.

So I think the pricing benefit is to come and that's why you will see growth in operating profit next year, in Carrier with price offsetting the commodity headwind.

With respect to the acquisition, the cash flow statement, the 714 million, obviously part of that is Linde.

Can you maybe break out what else is in there because the investment of Kiday is there as well.

How much ex--Kiday spending is there, about $400 million.

The big pieces of the acquisition spending for the year are Linde which is just over $300 million.

There is $200 million of debt associated with that which is not on the cash flow statement.

Also the Haskell acquisition at Hamilton, and then about $500 million of shares in Kiday.

I am trying to reconcile just fourth quarter loan, Greg.

Because fourth quarter including debt was $900 million, and you mentioned Kiday was $500 million.

Actually it was $400 million.

You had half a billion dollars of essentially acquisition spend in the quarter ex--Kiday, right?

Primarily Linde.

Remember we close on Linde October 1st, the beginning of the fourth quarter.

Because if you look at the balance sheet -- I am just trying to reconcile your goodwill and intangibles rose roughly $650 million from Q3 to Q4.

Is that some of that coming from prior acquisitions?

There were two pieces.

Some adjustment in the goodwill related to the Chubb acquisition, and we also settled some open tax years that we had from Sundstrand acquisition, and the reversal of some reserves we had established actually flowed into goodwill in the quarter.

Steve, it is Dave.

I think the other lion's share of that, the other really big slug relates to FX.

Right.

These are foreign acquisitions, and when you re-- you know, reestablish or translate the goodwill at today's FX rates, we got a good lift on the balance sheet because of that.

A couple of last things, cash taxes in the quarter?

Yes, about $300 million, Steve, and that's predominantly foreign taxes paid in the quarter.

Okay.

And lastly, R&D, you kind of obviously highlighted Pratt year-over-year being the bulk of it.

Sequentially, a $43 million increase of the Company, is that mainly Pratt and some at Hamilton?

That's right, Steve.

Aerospace had very good incremental performance both sequentially and year-over-year, I gather.

In the quarter.

Is there anything -- I am wondering Pratt in particular, you mentioned increase in aftermarket, but the incremental pre R&D margins look like about 55 percent or so.

Is there something in there at all or just favorable mix, good performance, can you just provide a little bit more color?

I would say it was all that.

Good performance in the businesses, favorable mix within that.

You know we continue to see just good improvement in the aerospace businesses from the -- from the time of Iraq and Iraq war and SARS.

Okay.

Good.

Thanks very much.

Your next question comes from Nicole Parent with Credit Suisse.

Good morning, guys.

Good morning.

You painted a pretty solid picture on the global economic landscape.

One place we didn't hear much about is Europe.

I was wondering what you were seeing there across the businesses particularly in December and January.

Europe is steady as she goes.

We had good performance at Otis in Europe and we talked about Carrier.

Saw some growth in Europe.

So I don't think we have seen any big change on the European landscape.

It has typically grown slower than the states and I don't think we are going to revise that today.

Great.

I think also could you characterize the nonresidential -- kind of Commercial construction market as you see it in terms of orders.

Any signs of life there in what you guys are thinking as we move through 2005?

That market seems to have a little bit of volume in it.

The Commercial HVAC market, but pricing is still pretty tough there.

You have got competitors that want to fill their factories, and you got a lot of commodity costs in that business right now.

These products use a lot of steel.

The market may recover a bit, but the market overall in terms of the competitive landscape remain very tough.

Okay.

I guess just one last one that you alluded to in kind of your comments as we look into 2005, could you just update us on how we should think about Chubb margins and the Linde integration as we go throughout 2005?

Well, as we said earlier, we like Chubb margins up 120 to 150 basis points as we have some good traction on the cost side, and I think that's independent of what happens with Kiday.

I think we will come back to you a little later in the year with perhaps in March, with our integration plans and what we think about the business.

Thank you.

Thank you, Nicole.

Your next question comes from Heidi Wood with Morgan Stanley.

Yeah, actually I just wanted -- before I go to my questions, key off something that Nicole asked about that Chubb.

When you talk about the 120 to 150 basis point increase, that is obviously a net number of increases you see offset by plan spending, are you pretty much done with the investments that you were going to make in Chubb based on what you did in '04?

Or do you see some more into '05.

I think productivity and cost reduction are a way of life at UTC.

I think what you are seeing is the pump being primed here.

We made some investment in '04 because we are a big company and we could afford it and it was the right thing to do for the business, and you will see some -- you will see the benefit next year, more toward the later part of the year than in the earlier part of the year, but you will get benefit and they will be ongoing spending.

Okay.

And on -- on R&D and Hamilton -- Hamilton Sundstrand, the 77 spending, can you give us a sense as to how that will be ramping up into '05 and when does R&D spending peak there?

We've already started Heidi, the 77 spending from winning all these good programs.

But you will be in a pretty good ramp which makes me wonder what the margin profile is going to look like as we get into the next four quarters.

That's fair.

I will have Dave talk more about that, but hit the nail in the head.

We won a lot of 77 content at Hamilton, and you look probably see a little bit of margin impact there, and you will get a business like Pratt that doesn't have the big 77 investment to go, and maybe you see a little bit better out of that, but I don't want to -- I want to leave a little bit for the President to say in March, so we will talk about that more than.

All right, last question.

You talked about China being 4 percent of sales today.

When you look at the backlog that you [veted], and you talked about particularly stunning results at Otis, what percentage of sales at Otis are in China today, and given the bookings you have in hand, what does that look like in '05 and can you give us some runway or sense of where you see that expanding over the next couple of years?

Well, Heidi, as important a market China is to us, it is only about 10 percent of Otis's sales today.

And obviously like for all of UTC, it is a growth market and we will want to see that number go up, and it will.

Okay.

Great.

Thanks a lot.

Your next question comes from Tony Boase with AG Edwards.

Thanks.

Just a question on Carrier, you mentioned price increases.

And it was a substantial price increase that went into affect the beginning of January.

Do you think there was much of a pre-buy impact on Carrier due to that announced increase?

Tony, we knew there might have been a little bit of a pre-buy of the volumes in the fourth quarter, and, again, that has benefits for the fourth quarter and also makes us -- adds to our confidence that the price is going to stick.

People might have bought ahead of it.

Okay.

And last quarter you talked about there being inventory at distributors for Carrier.

Is that still a problem do you think as you go over the first half of '05?

I don't think there is really any change there, Tony.

You know we had a slow down at the end of the summer in demand and that left some inventory in the field, and people don't buy anything today in Hartford, it is supposed to get to 12.

I am hoping it will get warmer in other places in our nation, but now is not the season or time that people typically buy air conditioning.

So I think we saw the inventory channel back up a little bit in the third quarter and won't expect it to bleed off until we get into the first half of next year.

Nothing new there.

And lastly, does the recent announcement on program cuts, military programs, what does that do to your future expectations on the defense side?

Tony, it's Greg.

As we look at the proposed cuts that we have seen come out of the Pentagon, they are really talking about programs in '09 and later.

They focus a little bit on the F-22 program.

But we still think it is a long way to go with that program in terms of continued congressional support.

As you know they really didn't touch the JSF program.

We actually feel pretty confident about the military outlook as we go forward.

Thanks a lot.

Thanks, Tony.

Your next question comes from Howard Rubel with Jefferies.

Thank you, good morning, gentlemen.

A couple of things.

First, could you just provide us with a little bit of the engine delivery schedules and clearly your Pratt Canada numbers were stunning, and can you talk a little bit about the tone in the market there?

Sure, Howard.

Starting with Canada, I think Jim mentioned the deliveries in the quarter were off 40 percent year-over-year and that is across the product line.

The number is -- is 500 engines shipped this quarter out of Pratt Canada, very, very strong out of last year as we noted.

In the large Commercial engine business, good growth there as well, 81 shipments on very, very good V-25 100 volume.

The military business about flat, reflecting both F-117 and F-119 shipments in the quarter, and I think you heard Jim talk about helicopter deliveries up year-over-year in the quarter.

So good -- good shipments this quarter.

Thank you.

I saw you had some ITT orders.

Is there -- and some of the other companies were talking to indicate a little bit of an improvement in the market.

Could you address that for a moment, please.

Again, I haven't seen lots of lift there, particularly in the quarter, Howard, but I don't -- I don't know if there is much new to report.

And then last to talk about the industrial businesses at Hamilton Sundstrand.

While some of this is clearly FX-driven, it also looks like it is some of the offset to the commodities cost you are seeing otherwise.

The commodities world is starting to use some of your products.

What is the backlog there and what are you doing to expand the business a little bit further?

I think we saw a really strong year for the industrials as the commodity price increases actually drove volume, especially at Faulk, and strong growth in the backlog across the industrial businesses.

Margins were impacted as you would expect by commodity prices at those businesses as well, as steel is a big component of all their products.

But the businesses are actually performing very well and they have recovered along with the economy this year.

You mean their backlogs ended '04 higher than they were '03 and we should probably continue -- maybe not quite the same rate of growth, but still high single digit or low double digit?

These are not high-growth businesses as you know, but they will continue to grow, we believe, at least along with the GDP, but perhaps a little higher.

Thank you, Greg, I am done.

Thanks, Howard.

Your next question comes from Jeff Hammond with Keybanc Capital Markets.

Hi, good morning.

Follow-on question on Carrier.

Can you give us or remind us what you are counting on in terms of your '05 forecast for price realization, and maybe particularly hit on what you are looking for from Commercial HVAC?

Jeff, we -- we have put in price increases and hope to pick up about 1 percent of sales or about $100 million in price benefit this year, which will offset all -- not offset -- not offset all, but will offset most of the commodities headwind we see right now.

The majority will have to come off the residential side, because Commercial is just a tougher market right now.

Okay, can you maybe -- you said the trailer -- refrigerator trailer business is still pretty strong.

Can you give us your visibility for that to continue into '05 and maybe touch on containers as well?

You know containers has had a great run over the last three or four years.

We have had good share.

We have had good volume.

I will want to say up 40 percent in three years and we have got some tough compares there, and I think that speaks for itself.

On the truck and trailer side, that business continues to grow, particularly in Europe, and that's what helped balance out the performance in that segment, and give us good profit growth there this quarter.

For the '05 outlook again, I think it is pretty good.

I think it is probably best to defer to Geraud Darnis, because I know he will want to talk to you about that in March.

Okay, great, thanks.

Your next question comes from Joe Nadol with J.P. Morgan.

Thanks, good morning.

First question is back to Carrier.

I was wondering if you could -- you already addressed the commodity price increases.

I was wondering if you could tell us what you are seeing among the component suppliers in terms of pricing.

That is going up as well.

As you would expect, we see in these basic commodities that are used by us, tier one and tier two suppliers, so they are also raising prices and, again, it is inflation in the channel passed on to us, so we have to pass it on to our end customer.

But across the board.

Right, okay.

Secondly, you know, airbus is talking now about a larger overrun on the A-380 development, and at least one of your competitors has been talking about one of their systems, in terms of an overrun.

Can you, I guess, address where you are in A-380s specifically, narrowing sort of the end point in the development process, and how do things look in terms of being on budget and on time?

I think Pratt has run a nice development program, and I think the plane will be very successful, and we still have a little while before we enter service, but it is a good plan and it will have a good engine.

Okay.

And Hamilton?

I think Hamilton, it is a similar story.

We are on schedule for our programs.

We are on budget for the most part with all the programs, and, again, we see it as a very -- it is going to be a very successful aircraft.

Okay.

Then just finally looking at your anticipated restructuring in '05.

I think you are starting out with sort of $100 million sort of placeholder there.

Where do you see that falling among the segments, if you can comment on that.

Do you expect, you know, like '04 to see a lot of it falling into Carrier?

I guess as we look at the $100 million, this really relates to programs that we initiated throughout 2004.

A big piece of of that will hit at Hamilton, as a result of some of the plant closures we talked about.

We will see continuing spending at Carrier on some of their plant consolidations, and at Pratt.

Okay, thank you.

George, David.

A question please.

Who is the competitor with the overrun?

We can maybe talk offline about that, but the accusation system for the A-380 is running a bit high according to Goodrich.

Just looking for news.

Okay. [ LAUGHTER ]

We like to learn on these calls too, so --

Okay, thank you.

Bye.

Your next question comes from George Shapiro with Smith Barney.

Good morning.

Back to Pratt for a minute.

Sequentially, what were the spare parts sales?

You mention spares orders were up sequentially, but how about the outright spares themselves?

Yeah, I think -- I think in line, George, you know, we've seen -- we haven't seen book-to-bills move in any dramatic fashion from quarter-to-quarter sequentially, so in line.

Okay.

And how about military spares.

Are they flattish or down a little bit in the quarter at Pratt?

We have seen soft -- we've seen soft military aftermarket sales in the -- in the fixed wing business post the war because the air war in Iraq last lasted not six months but about six hours or six minutes, I suppose, how you count it.

So we've seen signs of weakness there, because we had a buy in ramp-up to the war.

And the counter to that is at Sikorsky where, you know, the helicopters are being used a great deal there, and we have seen good aftermarket there as a result of the war.

So one of the marvelous things about UTC as you get a little weakness in one place, a little bit of goodness in another.

Then at Sikorsky, what were Comanche sales for the year?

Did you still book around $100 million?

So is that some headwind for next year as well, you didn't really book much in '04?

Joe, we -- we had sales through the first quarter and then we had, I believe, the termination booked later in the year so you will get a couple 200 to $300 million of sales in total at Sikorsky this year.

And that creates some headwind for '05, but recall, Steve Finger's talked about doubling the Sikorsky business by 2008, and that goal and his plans to do that continue despite the Comanche cancellation.

So, Jim, I missed it.

You had $200 to $300 million of Comanche sales in '04?

That's right.

Okay.

And then in terms of the -- the further definition with repatriation of any funds that you have overseas, have you made any further decision on whether you will bring anything back?

Or do you have enough foreign business and with Kiday, you just leave all the money there.

George, this is Greg.

We have obviously been looking at this since the law was passed late last year and just last Friday the Treasury finally issued some regulations on the repatriation, and we are continuing to study it.

Obviously we have a lot of cash and a lot of that cash is in international locations.

We are interested in potential repatriation, but at this point we haven't made a firm decision on what cash to bring back and how much, and we will get back to you probably towards the end of the first quarter or early in the second quarter with the decision on that.

And last, what is your outlook for R&D this year?

I assume it probably goes up somewhat more, but how much more?

George, it will be up a little bit more in 2005 as we've got, you know, a little higher spending at Carrier on SEER 13 product line and also in Arrow businesses, but nowhere near the $200 million plus it was up in 2004.

Does it go up as a percentage of sales in '05 then, or stays flat?

It probably stays flat or even drifts down a little bit because, again, we have pretty good growth outlook in the commercial businesses, and those tend to be a little less R&D intensive in the aerospace businesses.

Thanks a lot.

I think what you want to focus on is the absolute level of spend and we spend a truckload on R&D at UTC, and we'll spend even a little bit more than a truckload in 2005.

Okay, thanks a lot.

Your next question comes from Cai Von Rumohr with SG Cowan.

Yes, thank you.

While you delivered 37 helicopters in the fourth quarter, I wasn't looking for those 13.

I don't think those were in the plan, the ones from Schweizer, so it looks like you missed your plan at Sikorsky, ex-Schweizer by about 10 or 15 helicopters, is that correct?

And if so, will that be caught up plus some in '05?

Cai, you are right, there were Schweizer deliveries in the quarter and if you look to some expectations earlier in the year, some fairly aggressive expectations with S-92, we feel really good about the backlog that has been developed there and feel real good about aircraft deliveries in '05 at Sikorsky.

But where did you miss -- where did the miss come in '04 in the fourth quarter?

It's -- again, Cai, it is Commercial helicopters, predominantly the S-92 against what I would characterize as a fairly aggressive hard-charging S-92 plan, that's a launch aircraft as you know with a backlog of good book of business, and on track.

Were there any kind of catch-up profits from the Comanche closeout?

No, there was -- Cai, there wasn't really significant revenue reported in the quarter or catchup.

We expect termination to be complete sometime in '05, but I think the big revenue and catch-up that we saw in the third quarter is not going to repeat again.

Okay.

And are you expecting at Sikorsky any dollars in the supplemental and could you comment on this plan the Army has, to kind of instead of remanning, I think, 1200 going with 1200 new Blackhawks?

Yeah, we will talk a little bit more about that in March with -- with Steve Finger, but, you know, we -- we like delivering new aircraft at Sikorsky.

Last question.

You look for 10 percent plus profit growth at Carrier, and presumably Linde is going to be low margin.

Are you assuming any margin at Linde, and if not, what gets you there, because that looks kind of aggressive unless Linde starts kicking in some.

Linde will kick-in some operating profits in 2005.

It didn't make any money in 2004, but we will integrate it and do all the things that we typically do at UTC, like ace, to take a low-margin business and start to grow it into a high-margin business.

But it will hurt margins next June and you will see that particularly in the first half.

Thank you.

Your next question comes from Byron Callan with Merrill Lynch.

Yes, good morning, gentlemen.

A couple of things.

First, is there any rule of thumb you can provide on sensitivity of EBIT to Euro swings now that Linde is in place?

I had an older metric, but just curious how that might have changed with Linde.

Again, Linde is not terribly profitable, so it won't do much on the EBIT line.

If you just look back over the past year, we had $0.18 of benefit from foreign exchange and most of that is Euro, and the Euro, I think, on an average basis, moved $0.10 or $0.12.

So you can kind of get a rough guess there, but, again, I caution people that it is one currently and we have got 344 days left in the year.

Okay.

Second, you mentioned, I think, in the comments that -- that there -- you talked about the share buyback guidance but that will come towards the back end of the year you will probably be more active.

Can you go a little bit more into that statement?

Yeah, I think, Byron, it's Greg.

As we look at the cash requirements throughout 2005, we see some heavy acquisition spending here in Q1, specifically the Kiday acquisition and we are also looking at cash flow from operations which looks very strong, but with a large $2.5 billion outflow from Kiday in the first quarter, cash will be tighter than it has been and we would expect that normal share repurchses probably won't pick up until the second half again.

Okay, good.

On aftermarket, particularly in the United States, given that we have seen this round of fare wars, are you changing any of your near-term assumptions regarding traffic growth?

No people -- Byron, people -- they may pay a different price for airline tickets, but if they are going to go from A to B on an airplane, they will need to have their plane maintenanced.

So --

I was thinking more of this as an upper, if -- you know kind of the consensus seems to be this is maybe a 5 percent to 6 percent global aftermarket growth, but if you will cut prices you may stimulate traffic and may even see a benefit in -- well, particularly in the first part of the year.

I think the airlines are really trying to drive toward yield so we don't anticipate a big capacity addition this year.

I think what they are trying to do is fill up the planes with some of these lower -- or say reduced-fare structures that they have got out there.

Okay.

Last thing.

Is there any variability in the Sikorsky outlook now that has been broken out separately.

If you do win VXX, there's -- there's no real change in -- in R&D-related to that.

Whatever you might do will be covered by the terms of the contract, is that the assumption?

Well, Byron.

I think what you'll -- what you'll see is Sikorsky two big slugs of business are obviously the aftermarket, as well as, you know, new aircraft, and obviously R&D programs, the timing of those.

They move costs around from quarter to quarter.

But we will let -- we will let Steve Finger in March take you through '05 in a little bit more detail.

Just a point on VXX.

It is a very important win for us strategically, but financially not a big impact in 2005.

It will be a cost-type contract.

There may be some small investments on the part of Sikorsky during the course of '05 but will not drive financial performance one way or another.

That's fine.

I was looking if it would even move.

Thanks, Byron.

I think Devon, we have time for maybe one more question if one is out there

Yes, sir.

And your final question comes from Don MacDougall with Banc of America Securities.

Good morning, gentlemen.

Good morning, Don.

Question on Pratt and the aftermarket.

Can you give a sense for what your expectations are with respect to maybe the number of planes still to come out the desert.

Are we mostly finished there or is there still more to go, and just how much of the aftermarket growth if it is possible has been contributed from getting some of those planes back into service for -- for Pratt.

You know, while help -- while planes coming out of the desert is helpful, we are talking about couple hundred planes and maybe more a few more planes to go and as Greg talked about capacity, maybe there be a couple more planes to go back in the desert, but we have thousands of aircraft flying around the world powered by Pratt and Whitney engines, or operating Hamilton Sundstrand systems.

This aircraft in the desert is on the margin.

Jumping over to Otis, most of the talk around raw materials ends up focusing on Carrier, but Otis is obviously also a fairly large buyer of steel.

Have we seen most of the steel headwinds in the numbers or is there something in 2005 that's -- that's also something you have to contend with, and has there been any pricing to offset that at Otis?

You are right, Don.

You know Otis uses a lot of steel in their products too, and they have done just a marvelous job this year of navigating through that.

And there is more to come in 2005 from these commodity price increases and they have also raised prices in certain places because that is the natural offset of this commodity headwind.

So net-net though, likely to be somewhat of a pressure and has been, I guess?

It has been and will continue to be a pressure.

One final one, Jim, just with respect to the acquisition budget for this year.

I think I heard $4 billion, 2.5 for Kiday.

The remaining 1.5 billion, anything specific in mind where will we be likely to see these -- these bolt-ons or additions as you look across the portfolio?

You know the billion five is kind of a placeover.

We have seen it be higher and lower in the year because you do deals when you have the opportunity.

And our deals will be in the core.

We always want to add to the core.

Thank you.

All right.

I think with that, we will -- we'll conclude today's call and we thank you for joining us.

Maybe just -- maybe just a final comment to keep in mind before we go.

I want to divide thoughts on 2005 into two camps: The first being page 12 where you have got this changed EPS, but it is not operational.

And we've got some lines on there that will show you what the basis are for next year compares, $1.08 in the first quarter, $1.62.

You can see those numbers, and we make that change because there is finally a standard issue for stock-option expensing.

I think one the more important elements to remember that growth is the same, the operations of the Company continue to have momentum.

And we are confident in earnings per share growth of 10 percent to 15 percent next year.

And it is January 21st.

So don't run it up yet.

Yeah, I think Jim has given you some code in all those words there, which is that the stock option expensing is an accounting change in the ordinary usual course, and there are things like that that happen from time to time, and we are treating it as an accounting change, and some of you might have some temptation just because UTC is a powerful performer.

You might be a little tempted to let some of that stuff leak into higher estimates, and as always, we encourage you to be prudent and thoughtful and so forth.

We try to give you thoroughly accurate outlooks for us.

We feel that the outlook is solid and really, really good, and we all feel good about the year and so forth, but don't take that as an occasion to run around and push everything way up.

I think that is a good exclamation point on today's call.

So with that --

Great, thank you, all.

This concludes today's conference call.

You may now disconnect.