Annual Shareowners Meeting

Good morning and welcome. This Philadelphia location continues our practice of bringing this meeting to different cities of importance to UTC and shareowners. A little less than 10 million shares, almost a billion dollars worth, are held in the Philadelphia area.

UTC also has a longtime commercial presence in Philadelphia. Centrifugal chillers #3, 4 and 5 sold by Carrier Corporation in 1923 to Whitman & Sons Candy Company in this city, and Otis was a proud exhibitor at the Centennial Exposition in Philadelphia in 1876.

Carrier today provides air conditioning at both Villanova University and the University of Pennsylvania, at manufacturing locations for Merck and for Boeing, and at Corestates Center, home of the Flyers and 76ers.

We were also as pleased as can be when Mayor Rendell declared Jan. 28, 1997, as Carrier Corporation Day in this city, in conjunction with the opening of the ASHRAE industry show here and in honor of the 75th anniversary of Willis Carrier’s invention of the centrifugal chiller.

This is also Otis territory. Otis has supplied the elevators for eleven of the fifteen largest commercial construction projects here since 1979. We find Otis equipment at 1 Liberty Place, Philadelphia’s tallest building, in another six of the city’s ten tallest buildings, and of course inside this Four Seasons hotel.

We had another year of excellent results in 1997, our fifth in a row. Earnings per share increased 21%, and return on equity reached 24.5%, the highest in decades. But, based on stock price performance, total returns to shareholders did lag the S&P 400, as they did for our peers too. The S&P 400 was up 29%, and our peers and we were up 10% and 12%, respectively.

The lag for us happened in the second half of the year, with stock market concerns over two issues: Asia and a potential top in the aerospace cycle. But we saw this as a clear buying opportunity for our stock, accelerating repurchase in the fourth quarter to 4.2 million shares for $309 million (average price $74.46).

With Asia concerns having subsided somewhat, and seeing our fourth quarter ‘97 and first quarter ‘98 results confirm our ability to perform even in the face of Asia adversity, we have way outperformed indices in 1998: up 33% for UTC, while peers are up 15% and the S&P up 14%.

Longer term, UTC stock price appreciation since 1994 has likewise outperformed benchmarks: 212% for UTC, as compared with 123% for peers and 136% for the S&P; and I am confident in your company’s abilities to continue to generate these above benchmark returns.

Shareholders should especially recognize Pratt & Whitney’s outstanding performance last year. Operating profits at Pratt jumped 28% and are now more than five times higher than in 1992.

The team led by Karl Krapek, president of Pratt & Whitney and a candidate today for reelection as a director of UTC, is remaking Pratt into a world class organization, and to their credit Karl and his team have now set new performance targets that are higher still.

Operating income rose to nearly $2.2 billion, and reached 8.8% of total revenues. Steady gains in this operating income to revenues ratio, continued in 1997, are at the heart of and the driver for our recent, excellent returns to shareholders.

But while we note these operating income gains, we remind ourselves every day that we are still below the average operating income to sales performance of our peers. We have every reason to expect to be well above average and keeping this fact in front of us is why we face our futures with great confidence.

We should note especially available cash flow performance. This is cash left over after every UTC expenditure, including dividends. We generated $1.3 billion in available cash flow last year, our third consecutive year above $1 billion.

Available cash flow for us is high absolutely and also relative to net income. On this relative measure, we can also rank ourselves against peers, and show here best in class and by a wide margin.

Using the cash, share repurchases accelerated to $849 million last year, and acquisitions increased to $642 million. We expect both of these uses to exceed $500 million each for the foreseeable future, evidenced by Hamilton Standard’s first quarter acquisition of Ratier-Figeac, a French aerospace systems manufacturer, and by the repurchase of another million shares of UTC stock, also in the first quarter.

The board of directors last increased dividends on our common stock, by 13%, in February 1997, 15 months ago. I am delighted to report that your board just this morning voted another 16% boost to the dividend. The new dividend, effective in June, will be $0.36 per share per quarter, five cents higher than the prior rate and 64% higher than it was in 1994.

We released our first quarter results last week. Earnings per share of $1.04 were slightly ahead of Wall Street’s expectations, notwithstanding restructuring charges at Otis and Carrier and adverse foreign currency translations, which collectively more than offset a one time gain in settling a contract dispute with our Government.

The current Wall Street consensus is for UTC to earn about $4.90 this year and $5.62 next. This consensus for 1998 is 16% above 1997s actual earnings per share, and the 1999 consensus is another 15% increased. Management is comfortable with these expectations.

There were some business achievements during 1997 warranting mention today.

Especially of note:

Pratt & Whitney acquisitions of overhaul and repair businesses that will increase service revenues to $1 billion in 1998, tripling such revenues in five years.

Carrier acquisitions in commercial refrigeration that have now built one of the six largest companies in this $12 billion global industry.

Otis’ $49 million contract for additional equipment for the Singapore mass transit system, part of $1 billion in new equipment sales for Otis in Asia. Otis ended 1997 with an Asian order book that was larger than that of the rest of the world combined.

UT Automotive’s improved results with operating profit margin increases, continuing to date in 1998.

Sikorsky’s new Comanche aircraft, for the US Army, is hitting its demanding specifications remarkably well, including flight at speeds of 170 knots forward, 75 knots sideways and 70 knots backward. The first S-92, a larger commercial helicopter, is in final assembly in Connecticut now and flies later in the year.

And Hamilton Standard won environmental control systems for the extended range Boeing 767-400, giving Hamilton exclusive placements on all Boeing widebody aircraft.

More generally across the corporation, we reduced the incidence of lost time injuries by another 19% worldwide. We also cut the amount of hazardous waste we produce in the US by 23%. Taking a longer term perspective, we have reduced badness on these two measures by the remarkable amounts of 82% and 83%, respectively, since the 1988 base year.

Also across UTC, I’m exceptionally proud of our Employee Scholar Program, which has nearly tripled to 16% the portion of our US work force enrolled in higher education. This augmented program began only 2½ years ago; it provides incentives to encourage employee enrollment: prepayment of tuition and other costs; no restrictions on fields of study; up to three paid hours/week away from work for study; and, most significantly, 100 shares of UTC common stock (worth today just a little under $10,000) on degree attainment.

We awarded 82,000 shares of stock to graduates in 1997, and with the extension of the program internationally and continuing US enrollment gains, that number will likely double in the next two years.

A few comments on our future, and why we face this with confidence.

Our most important effort to strengthen performance over the next several years will be in supply management. Looking back over the last five years, what has so steadily improved our results has been our process re-engineering (or kaizen) efforts. But here we have been working on our own costs (our own value added), which is about 40% of our revenues.

Now we are going after an even larger portion of our costs, purchases totalling over $14 billion out of our revenues of $25 billion. The techniques are classic: concentration of the vendor population, partnering with these continuing vendors and more tightly integrating their activities with ours, and requiring their own process re-engineering and quality assurance programs, mirroring ours which have been so successful.

The results will be powerful. We have announced $750 million in cumulative annual and recurring savings by the year 2000, and $200 million this year alone, and we expect now to exceed those targets comfortably.

A second reason for confidence is our expanding global presence. We have 57% of our sales outside the United States, and 60% of our employees, high proportions indeed and built up over decades with care and attention and overcoming no small obstacles on which many others have stumbled.

And while we suffered from Wall Street’s anxiety in the wake of Asia’s crisis last summer and fall, I would not trade our global positions with our peer companies for one instant.

Recall the Otis figures cited earlier: $1 billion in new equipment orders in Asia in 1997 alone, and a backlog in Asia that’s larger than the rest of the world combined. But Asia’s $7 billion elevator market is on its way to $18 billion in twenty years, a size that will be more than triple Europe’s market and six times larger than North and South America combined.

Carrier faces the same: a $15 billion air conditioning market in Asia now that rises to more than $50 billion by 2018, 60% of the world’s total.

And over that same time airline revenue passenger miles in Asia will grow from 422 billion to 1.7 trillion, or three times the current North American level.

We are restructuring in Asia in the short term, working to protect profit margins in tough environments. Specifically, we expect UTC’s Asian revenues to fall by 15% to a little over $4 billion in 1998, remain flat in 1999, and begin to rise again in 2000. Remember also that we have been growing in Asia for years in the 20% per annum range, until this present and almost assuredly short term interruption.

In the meantime I confirm, as others have noted, that this is a significant buying opportunity for mergers and acquisitions in Asia.

The third reason for optimism is harder to measure, but equally important: your company is ever more confident of its performance, quarter by quarter, year by year.

Our results in 1997: record return on equity, huge cash flow and increasing profitability against the headwinds of Asia, adverse foreign exchange, cool summers in the US and Europe, strikes at major automotive customers and in one of our own plants, and restructuring charges at Otis.

If you had asked our management group even a few years ago, few would have anticipated that we could increase earnings at double digit rates and so easily against these obstacles.

And yet poll that same group today, and you will find them excited and confident about making today’s records fall by the wayside, and decisively so, in the years to come, adversity or no.

We have demonstrated -- to ourselves and to investors -- that we can and do eliminate costs, do develop better products and manufacture these at ever higher levels of quality, making UTC continuously a more competitive enterprise both absolutely and relative to peers, and that’s how we assure returns to you, our shareholders.

Thank you.