雷神技術公司 (RTX) 2005 Q3 法說會逐字稿

Good morning.

Welcome to the United Technologies third-quarter conference call.

On the call today are Jim Geisler, Vice President, Finance, Ken Parks (ph), Director, Investor Relations, and Greg Hayes, Vice President, Accounting and Control.

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

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

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

Please go ahead, Mr. Geisler.

Thank you and good morning, everyone.

UTC's third-quarter performance again demonstrated the strength of our growth model.

We had 17% revenue growth, including 6 points of organic growth, continuing to outpace world GDP for the second year.

EPS grew 19%, with all six of our business segments up more than 10% in operating profit in the quarter.

Otis achieved 13% profit growth on mid-single digit revenue growth, leading to 120 basis points of margin expansion.

New equipment backlog continues to grow and is up approximately 10% since the same period last year.

Pratt had another strong quarter as well, with profits and revenues up double digits.

The aero companies in aggregate at UTC grew earnings 18% on 10% revenue growth as a result of continuing strength in commercial aerospace.

Also in the third quarter, Carrier posted a 25% increase in revenues, 11 points of that organic, and a 19% increase in operating profit.

As you know, we had a flat first-half at Carrier, and during our second-quarter call we spelled out the three building blocks to Carrier's upper-teens earnings growth in the second half.

One, easier year-over-year compares in North American HVAC market, including pricing recovery against commodity costs.

Two, Linde's seasonally-stronger second half.

And three, we are beginning to see incremental restructuring savings, including the closure of our 1 million square foot McMinnville, Tennessee facility, which was completed in the quarter.

These three building blocks are in place with the third-quarter performance and Carrier has performed to second-half guidance.

Now, margins are down in the quarter and this is the result of Linde -- although improved, remains dilutive to margins, continued weakness in European HVAC and investments in the business in plant closures and (indiscernible) 13.

Fire & Security profits doubled, adding 110 basis points of margin improvement.

Legacy Chubb grew 30%.

The improvement comes from a focus on the cost side and integration, with benefits starting to flow from back-office consolidation and the outsourcing that we started a year ago.

To date we have eliminated about 500 indirect positions through this effort.

We are also working on integrating Kidde.

Now, acquisitions may not add much initially, but businesses are not bought at UTC for current-period accretion.

Kidde has about 40 manufacturing facilities for just under $2 billion in sales, so factory rationalization represents a significant opportunity for us over the next several years.

Frankly, Kidde seems a lot like UTC of the mid 1990s.

As in the first half, free cash flow was strong in the third quarter, above net income even with pension contributions.

Year-to-date, free cash flow was 107% of net income, and this includes $365 million worth of pension contributions.

We continue with our free cash flow guidance for the year to be free cash flow equal to net income, including our standard placeholder of $500 million in cash pension contributions.

Now, we've covered $500 million in pension contributions in each of the last three years, and so we're on track to do that again in 2005.

Also in line with earlier guidance, we will redeploy $4.5 billion back into the businesses this year through acquisitions focused on growing the core.

While doing this, we told you in July that we were stepping up our share repurchase levels to $1 billion.

We now expect to come in a little bit higher than that for the year, reflecting our confidence in the business and the value of the stock.

(technical difficulty) that is well below last year's fourth-quarter rate of $1.29, creating headwind that we didn't have in the third quarter.

With good visibility to the end of 2005, we are increasingly turning our efforts to make for a good 2006.

As we look into 2006, we particularly like the things that we control.

The businesses are executing and our global markets are robust.

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

Discount rates are lower again this year than they were last year, adding to pension expense headwind, and inflation from things like energy-related costs are still unknown.

Foreign exchange primarily Euro-driven would provide a headwind in 2006 if -- again, if the spot rate held today, which would be a change from what we have seen over the last four years.

And if George was here today, he would say that's a pretty good reason alone not to get ahead of ourselves in 2006.

Now, all that said, we have confidence in 2006 double-digit earnings growth from revenue growth, both organically and from acquisition, coupled with margin expansion -- our usual UTC growth model.

So, with that I'm going to turn it over to Ken to walk you through the businesses.

Good morning and thanks.

I will start on page three of the Webcast.

As Jim mentioned, revenues grew 17% in the quarter to reach almost $11 billion.

Five of our six businesses contributed to the 6 points of organic growth, with the strongest coming from Commercial Aerospace and from Carrier.

Acquisitions, principally Kidde and Linde, contributed most of the remaining growth.

Now, earnings per share at $0.81 were up 19% in the quarter, with double-digit operating profit improvement in all six of our businesses.

As expected, we incurred restructuring charges of $50 million in the quarter, and these charges partially offset the net gain of a restructure benefit which flowed through our second-quarter results.

FX translation contributed little to revenue or earnings in the quarter, with the average Euro rate essentially at parity year-over-year.

The current Euro spot rate of $1.19, if it were to stay at that level, would be a headwind to us in the fourth quarter, but this is all within our revised guidance.

At Otis, operating profit was up 13% on 6% higher revenues.

This resulted in further margin expansion of 120 basis points in the quarter.

And I will remind you that I'm going to talk to the segment results with restructuring added back, as we usually do.

Revenues at Otis were up in all regions and operating profit growth reflected both volume increases, as well as margin expansion from field efficiency improvements, product cost reductions and effective management of overhead costs.

New equipment orders increased mid-single digits in the quarter, led by strong growth in China.

Otis continues to perform very well.

Year-to-date, revenues have grown 9% and operating profit has grown 15%, resulting in margin expansion of 90 basis points.

So, with all this, we are well on track for another solid year at Otis.

At Carrier, operating profit increased $60 million year-over-year on 25% higher revenues.

While Linde contributed about $330 million of the revenue growth, organic revenue growth was strong at 11%, led by a rebound in North America residential HVAC, continuing solid transport refrigeration volumes, and improvements in North America commercial HVAC, albeit off of a low base.

As in the first half, continuing cool weather resulted in a poor European selling season, and HVAC revenues there slightly declined year-over-year.

Now, Carrier's profit improvement of 19% reflected the second-half building blocks detailed in our second-quarter conference call.

As Jim mentioned, first of all, Linde contributed approximately $25 million of profits to the quarter.

In addition, compares were better as a result of growth in North America residential HVAC and transport refrigeration volumes, as well as further price realization which roughly offset about $50 million of commodity cost headwind in the quarter.

And finally, benefits from recent restructuring actions began to flow through.

Partially offsetting these improvements was a double-digit decline in European HVAC profits as a result of the lower volumes there.

Looking ahead, we expect continued strong earnings performance at Carrier in the fourth quarter, fueled by additional restructuring benefits from previous actions and from Linde performance.

Also as we saw in Q3, price realization and commodity costs should continue to offset.

We feel good about the current guidance for Carrier of high-single digit profit growth and greater than 10% revenue growth.

Moving to Fire & Security, revenues grew 61% and operating profit was up 97% in the quarter.

In the legacy Chubb business, profits grew 30%, which is on track with earlier Chubb stand-alone guidance.

Operating margins at Chubb improved over 100 basis points in the quarter, which reflected the good cost traction improvement we have continued to see since late 2004.

All geographic regions showed organic revenue growth.

Kidde revenues in the quarter were a little less than $400 million with mid-single digit operating margin.

As with Chubb, the immediate effort here is on integration and cost reduction.

Through early efforts we have already been able to consolidate the headquarters functions and to make significant progress in consolidating some of the operations in Europe, where both Chubb and Kidde are present in fire safety.

The structure of Kidde, which includes about 40 manufacturing facilities, provides significant margin runway for the Company.

With the typically stronger Q4 ahead of us, Fire & Security is well-positioned against our 90% earnings growth guidance.

Now, at Pratt & Whitney, revenues were up 15% in the quarter, led by high-teens growth in the large commercial engine shipments and aftermarket, as well as Pratt Canada.

The results also include Rocketdyne.

Operating profit growth of 18% reflects the strong performance at both commercial and Pratt Canada.

And Pratt operating margins were up 40 basis points year-over-year, which included a slight dilution from the Rocketdyne acquisition.

Results for the quarter also include the favorable impact of a long-term contract completion adjustment, offset by a charge for commercial aerospace customer exposures.

On a year-to-date basis, revenues have grown 9% and profits have grown 23%, then 17% adjusted for collaboration charges in 2004, which puts Pratt clearly on track for strong double-digit full-year returns.

Hamilton Sundstrand revenues were up 10% with operating profit up 18%, including the impact of acquisitions and divestitures.

Legacy Hamilton revenues were up mid-single digits and operating profits were up high-single digits, consistent with first-half results and with pre-Kidde guidance.

Commercial growth was partially offset by lower military business.

Kidde's aerospace fire suppression business contributed about $60 million of revenue to the quarter, along with solid operating margins.

Operating profit improvement at legacy Hamilton was driven by a solid performance in both the industrial and commercial businesses, primarily as the result of higher volumes.

Partially offsetting these increases were lower military spares and higher 787 R&D spending.

Sikorsky operating profit grew 19% on slightly lower revenues in the quarter.

Solid aircraft deliveries and aftermarket volumes were more than offset by the loss of more than $100 million of Comanche termination revenues which were recognized in the prior-year 3Q.

Profit improvements reflect the higher aircraft volumes and strong aftermarket performance.

Sikorsky delivered 32 aircraft in the quarter, including 12 Schweizer light helicopters, and both military and commercial orders remained strong.

Now I will turn it over to Greg to take us through a few corporate and balance sheet items.

Thanks, Ken, and good morning.

For those of you following along on the Webcast, we are now on page 10.

Let me walk you through some of these corporate items and a couple of other disclosure issues that we have here in the quarter. (indiscernible) and other includes the results from a number of corporate-managed entities, and although essentially flat year-over-year, the quarter's results do include a charge of about $0.02 a share for costs related to an ongoing legal matter.

A similar charge was recognized in last year's third quarter.

Looking at the effective tax rate for the quarter, the effective rate was 28.5%, or about 50 basis points higher than our normal run rate.

This was due to the recognition of a discrete expense item in the quarter, but for the fourth quarter we expect the rate to be back around 28%.

We have also decided not to take advantage of the repatriation provisions of the American Jobs Creation Act.

Based on the final regulations and our own internal analysis, we really didn't see any advantage in repatriating any of the foreign cash at this time.

A couple of words on restructuring.

As we mentioned in the second-quarter conference call, the good news we saw from the investment gains and the tax settlements in Q2 would be offset by additional restructuring activity in the third and fourth quarters.

In line with that guidance, we incurred 50 million of restructuring charges in the third quarter.

About 25 million of these charges were related to new actions in the quarter, the most significant new action being work force reductions at Carrier's Italian manufacturing facility at Villasante (ph).

The remaining $25 million of costs were restructuring period costs associated with previously initiated actions.

For the fourth quarter, we now see restructuring spending of at least $70 million, which when coupled with this quarter's expenses, will offset the net benefit we saw in the second quarter.

Including first-quarter restructuring actions, we expect that full-year restructuring costs will exceed the favorable items, just as it did in 2004.

Also, let me give you an update on the investigation into Otis by the European Commission.

Last week, we finally received the formal Statement of Objections on this matter.

The Statement of Objections is the next step in a process that began with the Commission's initial investigations back in January of 2004.

As anticipated, the Statement of Objections confirms that the allegations of infringement of EU competition rules were confined to the Benelux countries and Germany.

We are currently reviewing the Statement of Objections and will respond timely to the Commission.

As we have said in the past, it's still too early to make a determination of the fine which we may ultimately pay.

So, for now, we're just going to continue to cooperate with the Commission as we have from the start.

Given the normal timetable for this process, we would not expect the matter to be concluded until sometime in 2006.

Cash flow.

As Jim mentioned, free cash flow continues to be strong at 906 million, or 110% of net income in the third quarter.

Cash contributions to our pension plans in the quarter totaled 200 million.

Quarterly free cash flow also included $90 million of spending for restructuring and purchase accounting actions, along with higher capital expenditures that are reflecting continued investment by Carrier in the new SEER 13 product line.

Year-to-date cash flow of 2.6 billion is 107% of net income, including slightly more than 200 million of restructuring and purchase accounting spending.

Cash contributions to our pension plans were 365 million through the end of the third quarter, and we're still very comfortable with our current guidance of free cash flow equal to net income, including a 500 million placeholder for pension contributions.

Moving on to acquisitions, spending in the quarter was about $900 million.

As we mentioned earlier, the Rocketdyne acquisition closed in August.

Also in the quarter, we increased our ownership position In Nippon Otis, our elevator joint venture in Japan, bringing acquisition spending for the year to just about $4 billion.

As Jim mentioned, our full-year guidance remains unchanged at 4.5 billion, and this includes the anticipated fourth-quarter purchase of the remaining minority ownership in Otis LG, our Korean elevator manufacturer.

The joint venture with LG formed at the end of 1999 has been a great success.

Revenues have nearly doubled and operating profits more than doubled since the venture began in 1999.

And we always like the opportunity to increase our ownership in these successful ventures.

Lastly, on share repurchase, for the quarter we repurchased $385 million of our shares for a total of 760 million to date.

In the second-quarter call, we moved up our guidance on share repurchase to about 1 billion for the year.

And as Jim noted, we'll likely come in slightly higher than that $1 billion guidance, based upon our current repurchase run rate.

We think the stock is a very good buy right now, with current-year earnings growth of 17% and a multiple of 16 on 2005 earnings, and a multiple of less than 15 on your consensus estimates for next year's earnings.

Finally on page 11, in summary, another great year for UTC, with revenues up this year 15%, 6% organic.

For the full year, we now see earnings up a very strong 17% with EPS in the range of 3.08 to 3.10.

And although it is still early in our planning process, as we look ahead to 2006, we see another very good year starting to shape up, with earnings again up double digits.

We'll have a lot more to say about that in December.

That seems like a good place to stop.

So, with that, let's open up the call for questions.

(OPERATOR INSTRUCTIONS).

Joe Campbell.

You had a lot of restructuring this year which was offset by some onetime gains with MTU and Snecma and the usual tax stuff.

I wondered if you could talk about your expected ability going forward to do more restructuring, just as sort of what volume we might be able to do as a run rate over the next, say, 18 to 24 months.

And what are the high priority areas, either in terms of the operating entities, the locations?

And maybe some color about whether the spending is to the new companies that you have acquired.

You mentioned a couple of times the numerous manufacturing facilities at Kidde.

And maybe sort of contrasting that to what is still left to do in the old core.

We also did an awful lot of that in the last 18 months.

And I noticed you're going to spend more in the fourth quarter; 70 million is a pretty good clip -- whether that's kind of a reasonable rate or that's the cleanup for this year and we'll have to think about next year separately.

Anyway, anything you could say that would be of help, thank you.

Okay, Joe; lots of parts to that question.

You know, I look over the last -- let me start with this.

Restructuring funding is the gasoline in the tank for UTC.

That's what drives margin expansion and that's the way the businesses have been run for the last decade.

The focus, I think, if you look over the last seven years, we have probably averaged 200 to $300 million a year in restructuring spending.

And although that's not a hard forecast, I would say that, obviously, with a good payback, helped profit grow in subsequent years, whereas the focus you have seen the last couple of years has been on manufacturing.

You have seen that across all our businesses, both commercial and aero, and also in acquisitions.

We have had a series of lower-margin acquisitions that we've purchased, like Linde.

And the story there is plant restructuring, rationalization and reducing the cost structure.

So, I think you'll see more of that as we move into the future.

It's been a wonderful success for UTC in the past 10 years.

And with 50 square million feet of manufacturing space still in UTC, there's lots more to do.

Heidi Wood, Morgan Stanley.

Nice quarter, guys.

Jim, a question about the share buyback you have announced.

It is great that you are talking about moving up that rate to about the third-quarter rate, but when are we going to see enough share buyback to offset this share creep?

I mean, when you look at it, share count is up 10 million in two years.

Heidi, you're right; we have had a little less share repurchase in the past because we have been building our Fire & Security business.

If you look over the last six months, we haven't had nearly as much acquisition activity.

And so, we've put more of our free cash flow towards share repurchase.

And I believe you see in this quarter the share count is down slightly, and we like that trend.

Overall you saw it back in the late '90s -- had a little holiday from that.

But I think you should look forward to share count ticking down slightly as we move forward.

A question on Pratt.

The sales were up 6% sequentially, but EBIT was up 3%, even when you account for the restructuring.

Can you talk about how much of that was due to large commercial aircraft shipments and versus the amount of contribution from Rocketdyne in the quarter?

Heidi, this is Ken.

Engine shipments were up both in commercial as well as at Pratt Canada.

There was dilution quarter-to-quarter from the Rocketdyne impact.

We had -- I think the number is somewhere between 70 and $75 million of Rocketdyne revenues flowing through to the quarter, which accounted for probably about 40 basis points of dilution.

They are a profit contributor, but at a lower rate than Pratt.

Did I hear you correctly that the large OE shipments were up by double digits, though?

I mean, that would dilute the mix as well, right?

They were up right at double digits.

Can you give us the unit shipment at Pratt?

Sure.

Commercial engine shipments in the quarter were 90 and military engine shipments were 38 engines, and Pratt Canada was 513.

Howard Rubel, Jefferies.

A couple of things.

When you talk about -- you know you were going to get this anyhow -- you know you talk about double-digit increase next year; how might you want to characterize that, Jim?

I'd characterize it as double digits, with confidence.

I don't (multiple speakers) and if I said anything more today, we wouldn't have anything to talk about in December.

Okay?

Two other items and then I will be done.

One is, could you address Chubb a little bit?

There was another $9 million in restructuring there.

And one would think at some -- I realize at some point it's never done, but you just sort of did a fair amount of restructuring.

And one would have thought you would have encompassed a lot of that in the purchase accounting.

Why -- A., it's fairly large when you think about the revenue base.

And why do you continue to have to take such action?

Howard, we did a lot under purchase accounting in terms of restructuring.

And we do more because there are always more things to do in a business that has margins that aren't anywhere near where we want them to be at.

So, I think you're going to see like in all UTC businesses, even the ones in the teens we continue to restructure.

And we will continue to restructure Chubb until those margins are much, much higher.

And then last, I noticed minority interests were relatively strong, which means that it was either -- I don't know whether it was Otis or Carrier where we saw some fairly dramatic improvement in some of the nonconsolidated businesses.

Could you comment on that, or was it Pratt for that matter?

There were a couple of nonconsolidated businesses.

Maybe you'd give us some color on that, please, because it's fairly notable and (indiscernible).

Howard, I think all the businesses had higher income outside the States than they did a year or so ago, and that is just flowing through and in minority interests where we have partners.

I think it's just all a testament to the fact that UTC is not only growing in the States in its markets and in aero right now, but also growing very healthfully outside the States.

So, really most of the restructuring was -- other than this Italian thing, most of the restructuring was still U.S.-based then?

Yes.

Steve Binder, Bear Stearns.

I just want to tackle Carrier for a second.

Just backing out Linde, it looks like the 11% year-over-year organic growth you got, kind of incremental margins of around 12%.

And American Standard reported 20% incremental margins year-over-year.

You touched, I think, Jim, on some negative headwinds like SEER 13 expenses and plant inefficiencies.

Can you maybe quantify what the drags were?

You have talked about the pluses.

But what were the drags?

We had a bit of -- I will let Jim address it -- but manufacturing, in the sense of as we transition the factories over for SEER 13, when we talked about in the second quarter call that we would be closing the Collierville facility for a longer period in the second quarter than we typically -- in the third quarter than we typically would.

I think we were closed a little more than three weeks to our typical two weeks.

In addition to that, McMinnville in the restructuring program there closed at the end of August.

So, we had some operating efficiency inefficiencies for the first couple of months of the quarter, and then not contributing a lot from a savings viewpoint from a restructuring perspective in the quarter that we should anticipate to see in quarters going forward.

But, yes, there was some manufacturing efficiency both through the SEER 13 transition, as well as the restructuring program, and the big one being McMinnville.

And then in Fire & Security, Kidde in particular, it looks like margins were just nominally better in Q3 than Q2.

And you didn't have, I don't think, the inventory charge, and sales were lighter.

I was just wondering can you maybe peel the onion a little bit on Kidde in the quarter?

I think Kidde again has just been in the portfolio about two quarters.

So, we are working, as Ken mentioned, on investing in the business to make it stronger two or three years out.

And you saw -- frankly, that was the model with Chubb.

In the first year there wasn't much operating profit growth as we invested in things like back-office outsourcing.

And now you see this year that you get very healthy growth at Chubb.

So, Kidde is new to the portfolio.

We like it a lot.

Again, it has long-term potential with more than 40 plants.

And you'll see it grow in the future.

So, were the integration costs actually higher in the third quarter than the second quarter?

About the same.

Lastly, you know, Otis had a great quarter from a profit standpoint.

I think from a year-over-year standpoint, it was the best incremental margins since the fourth quarter of O2, and your sales are down sequentially and profit is up.

Was there -- can you maybe touch geographically, or what were the factors that kind of contributed that extra strength?

The last several quarters we have seen original equipment sales be higher or grow faster than service sales.

And original equipment doesn't have the same margins that service does, although we love the fact that we're going to see new elevators in the field that throw off a maintenance stream for 50 years.

And in this quarter, we saw the same growth, the same rate of growth in both service and OE.

So, you saw good margin expansion, and since there wasn't an unfavorable margin mix.

I think that's a little bit of timing.

Again, the backlog, as I mentioned, is still up on original equipment very healthy.

So, you may see in subsequent quarters based on timing margins be a little bit lower.

But what you get in quarters with margins more than 100 basis points and in margins of less than 100 basis points is you get good underlying constant currency operating profit growth of 10% or a little bit better.

Greg, just one other thing.

You touched on restructuring and purchase accounting actions being, I think, 90 million a quarter.

It was 120 for the first half.

You talked about being 400 million for the year.

Is that 400 million number still appropriate?

Yes, I think it is, Steve.

Cai von Rumohr, SG Cowen.

Actually, the large engines at Pratt look like they are down 4%.

Would you comment on the percentage growth you saw in commercial spares and overhaul separately?

And secondly, could you provide some more color on those two adjustments, the plus and the minus ones?

Let's start with the second part of the question there first, Cai.

Two adjustments we saw.

One, obviously, everyone's heard of the Delta and Northwest bankruptcies that happened towards the end of the third quarter.

As a result of those bankruptcies we reevaluated our exposures and we took a charge of just under about $0.02 a share related to that.

There was another good news item.

We had a long-term contract with the U.S.

Air Force on C-17s.

That contract was completed and there was a follow-on option exercise at the completion of that first phase of the contract.

There was some good news in the final margins on that.

And as a result of that, about $0.02 of good news flowed through.

So, in total for Pratt, really two entries that both offset.

Going back to spares orders growth, about 10% for the quarter, and book-to-bill still about one.

And if I kind of do the math right, it looks like the Nippon Otis was 200 million and the LG will be 500 to 600 million.

Are those numbers correct?

And could you give us some color on what did you increase your percentage ownership by in those entities, and essentially what was the price to EBITDA you paid?

Let's start with the first one, which is Nippon Otis.

We increased our ownership there by about 16% buying our shares back from Mashusta (ph) as well as Sumitomo.

Total spending on that was just a little over $300 million.

That's on Otis LG.

I'm sorry; that's Otis LG I was looking at.

So, for Otis LG, again, we're going to buy the remaining 20% that we don't already own.

And that will be about $300 million.

I'm sorry; the number on Otis is about $120 million.

There are always, Cai, some little fill-in deals that we will do, 5 and $10 million worth of stuff.

But we always try to (indiscernible) the bigger deals for you.

And we particularly like these deals because we love to buy elevator companies, particularly minority interest in successful elevator companies around the world.

The second part of that question was can you give us some color on what the price to EBITDA was?

And going forward, clearly you passed on York (ph).

Give us some color in terms of how you see the M&A prospects.

I'll take both of those.

I think the multiples on the elevator deals are good and generate value for UTC.

And I'll leave it at that.

Yes, we passed on York.

That -- pieces of that would have been a good fit for UTC, but there were probably risks associated with the deal with UTC that there weren't with other parties.

And we have a controls business as well ourselves, so I don't think we saw a strategic need.

And I think we are fine with the competitive landscape.

And as you know, Cai, Carrier is the world's largest HVAC Company, and I think it has a very bright future.

And in terms of other potentials on the M&A front, are you seeing good opportunities or (technical difficulty) opportunities?

I just look at the -- core assets are available, we've seen over the past year.

But frankly, Cai, you look at the economic environment and there aren't that many distressed sellers out there right now.

And there are lots of bidders, strategic and financial.

I just look at the last six months of UTC and say -- what have we mostly done?

The big deals we just talked about, which were minority interest buyouts, which we love and are low risk.

But, clearly, it's a competitive M&A environment out there with high valuations.

Glenn Engel, Goldman Sachs.

A couple of questions on Sikorsky please.

One is that if I look at your forecast for the full year, that would imply about 25% sales growth in the fourth quarter for Sikorsky.

Is that reasonable?

Two is the margins were up 200 basis points, and I guess how much of that had to do really with Comanche and how much is underlying improvements?

And three, we're still waiting to hear about the requirements on that big Air Force helicopter contract (technical difficulty) serious whether -- whether you have been able to move the needle on that or not yet.

Glenn, it's Greg.

Let me take that on Sikorsky.

Yes, I think your numbers for the fourth-quarter revenue growth look about right.

Sikorsky -- I'm sorry -- thinking about Comanche in the third quarter, there's about $150 million of revenue with, say, high-single digit margin on that revenue last year.

So, you back that out, and we see really good sequential margin growth at Sikorsky, both in the third and the fourth quarters.

Thinking about the Sesar (ph) contract, (indiscernible) the requirements of the final RFP did finally come out.

I think it was earlier this month.

And as we look at the requirements today -- much more competitive;

I think the playing field has been leveled, in our mind.

We think we've got a very competitive aircraft in the H-92.

We think it is safer.

We think it will fly further and faster.

And I think the real benefit of the H-92 versus what we see from the competition is the cost of ownership.

And unlike the presidential helicopter, I think cost of ownership to the Air Force is going to be very critical in the decision-making process.

So, although we probably won't hear about an award until next May, we're very, very comfortable with the offering that we have with the H-92 and think it stacks up very well against the requirements as they have been defined.

Can you expand upon why the margins are up so much at Sikorsky?

I guess a couple of things.

One, we see our overall aftermarket business picking up there, really particularly on the commercial side of the business through our Derco and through HSI businesses; also, again, higher volumes going through the factory, and just overall good news on cost control down at Sikorsky.

Joe Nadol.

First question is on Carrier.

You mentioned the European HVAC profits were down double-digit.

Just wondering if you could give a little more color there?

How big is that now as a percentage of Carrier and what is going on, and what is the outlook?

European -- as we said, European profits were down double digits.

We saw in the market this year even some of the markets down like France almost 40% in HVAC volumes for the year, while some of the Southern European markets held up just a little bit more.

But overall, the revenue were basically flat year-over-year after we took in some higher inventory from the end of last year the season never kicked off.

As far as the size of Europe now, if you take out -- you've got to kind of take out Linde, because Linde makes Europe a much bigger number.

It is probably on an annual basis about 10% of carrier's revenue.

And are you -- is it the markets that are declining or are you losing market share, or is it a combination?

It's markets.

Markets were very soft this year.

The season never kicked off.

And we saw, especially in the middle of the region and up, basically no market pull.

So, it's market softness.

Secondly, just on the Fire & Security and the integration costs.

I realize it was still single digit this quarter, but you are seeing more opportunity as you dig in and get your hands dirty with the integration.

Just wondering in terms of an outlook what you can say about future integration costs.

Joe, we're still putting those plans together.

I also think it's best that Olivieri (ph) talk to you all about his integration plans for Kidde, in the same way that he talked to you about them for child at our annual analyst meeting.

So, I want him to come forward with his plans.

But (indiscernible) I will tell you that the focus is going to be very much on the manufacturing side, because again, so many plants both in the States and abroad, for such a modest amount of revenues.

Just finally on -- it looks like the legacy Chubb revenues were up only, I think, very low-single digits, if our math is right.

Just wondering what -- I guess what you're seeing there, if that's just a blip this quarter or things are slowing a little bit.

Organic revenue growth at Chubb, although we saw it in all regions, was relatively light at just a couple of points.

Again, Joe, I would say that when we sit in operating reviews with George David and the team and talk about Chubb, we spend most of our time on the cost side.

Because until the cost side of Chubb is in line, I don't think there's a big purpose to focus on the topline.

Because without your cost line, you're always going to be chasing the topline without profit.

So, once we get the cost in better shape, I think we'll be a more competitive entity and that will help topline growth.

But, clearly, right now the focus for a 5%-plus margin business is on margin expansion and cost.

George Shapiro, Smith Barney.

A couple of different things.

At Linde, if I can just get a feel for the seasonality.

I mean, from what you are saying this quarter was 330 million revenues and made 25 million, and the second quarter was like 230 million and lost a little bit of money.

What causes that dramatic difference in revenues?

Linde is -- we're kind of going through this seasonality the first time ourselves.

It is a carve-out business from Linde AG, and we kind of have estimates of how the seasonality works.

What we do that now is the second half is stronger than the first half, tied to the capital expenditure cycle of our customers in a lot of places as they gear up for the end of the year, and selling seasons in retail, and things such as that.

So, we knew that the second half would be stronger than the first half.

The third quarter is a little bit stronger than maybe we expected, all expected.

But, again, everything looks like it's on track with Linde and we will probably see a strong -- we should see a strong fourth quarter also.

But I mean, the difference of 100 million in revenues between Q2 and Q3 is kind of a normal thing?

The increase is normal.

The increase is normal and we'll watch the amounts over time.

But, clearly, we've talked before on previous calls that we've been very pleased with the Linde acquisition.

Again, to buy a company for about $400 million in revenues that was not profitable, and then to have it within a year you start to see some of the good profit, or even margin that we saw in this quarter, I think, is very good progress on the front.

And as Ken said, I think we will see, again, operating profits and margin in the fourth quarter -- obviously, below the Carrier rate.

But we like this acquisition a lot.

Jim, is the fourth quarter going to be bigger revenues than the third quarter then?

No, I wouldn't say that.

At Pratt, military spares -- you mentioned they were down at Sundstrand.

What were they at Pratt?

Military spares at Pratt were down slightly.

And then, you mentioned that Rocketdyne added about 75 million in revenues.

I thought you bought it like the first couple of days of August.

And if it would add two months to revenues I would have thought would have been something over 100 million.

Is there anything -- why you just don't prorate the revenues for the year?

George, there's a little piece of this at Hamilton that has rolled over (indiscernible).

So, I think, with that, then your number is not too far off.

Then on the cash flow, there's 370 million of other net, which is a pretty sizable piece of the cash flow.

If you can just go through what that is.

I knew someone was going to ask that, George.

A couple of things.

And again, it's always a little messy down at other net.

I think the biggest piece of that is the higher pension expense year-over-year.

That accounts for about a third of that growth.

There's also some pieces of deferred revenue that are flowing through.

There's some higher deferred revenue at Pratt.

And lastly, we had a couple of re-classes between other net and working capital as we finalized some of the acquisition accounting on Kidde during the quarter.

So, what kind of run rate -- there is no way to predict what that number is?

No.

You heard Greg talk about re-classes between net and working capital.

I think the run rate to really think about is free cash flow equal to net income.

Last one.

At Hamilton Sundstrand, the margin was up a lot, clearly due to -- a lot of it, I'm sure, due to the Kidde piece that has extraordinarily high margins.

Ex that Kidde piece, it looks like the margin would have still been up a little bit.

Is that correct?

Yes, we were up high-single digit operating profit on the mid-single digit revenue growth, so we would have seen a little margin accretion ex Kidde.

Ron Epstein, Merrill Lynch.

Just a couple of more details to walk through.

Can you give us some more color on how commodity costs impact each business unit in the quarter?

Well, the biggest piece is at Carrier.

And that's consistent with what we've talked about throughout the last few months. $50 million is the Carrier piece, and that is probably 80 to 85% of the total piece for the Corporation.

But as we said for Carrier, pricing recovery basically got us back to recovery of commodity cost.

And I would say that's the same story for UTC overall.

We talked about for the full year about $300 million of commodity headwind for the Corporation -- we still think that's about the right number -- with $200 million of that being at Carrier alone.

At Otis, can you talk about during the quarter what regions the sales came from?

We had growth in all regions in the quarter and strength specifically in Asia and strength in Europe in the quarter.

But all regions showed revenue growth.

About what percentage of sales was Asia?

As far as growth rate?

Yes.

We saw it tick up double digits in the quarter.

Sam Pearlstein, Wachovia Securities.

I was wondering first if you can just talk with Rocketdyne closed and any allocation of intangibles, if the depreciation and amortization of 265 million we saw in this quarter is the right number to go forward?

Because it was only two months worth of Rocketdyne in the quarter.

Sam, it's Greg.

Again, the Rocketdyne amortization won't be a significant add.

We did make an estimate, obviously, for the quarter, but it's only got a little less than two quarters of the results.

But again, some of the amortization on the Kidde and Chubb acquisitions will also be rolling off.

So, it's a good run rate, I would say, going forward.

, Okay.

And then the 1.5 billion that you ended the quarter with in terms of short-term debt, which I assume is when you closed Rocketdyne, are you planning to keep that in short-term or is that going to shift into any long-term that might impact the interest expense line on a going-forward basis?

Right now, Sam, there's no current plan to issue additional debt.

We've got a shelf out there of 2 billion.

We've got the flexibility to do it if the rates look attractive.

Right now with the strong cash flows for the rest of the year, and even going into next year, I assume that that commercial paper balance will continue to come down.

And really no other plans on the debt front right now.

Lastly, on the pension -- with plans for $500 million in contributions this year, certainly we've seen rates bounce up in the last few months.

And I guess if I assume that you get to the same discount rate at the end of November when your plan year ends, what does the pension number look like in '06 versus '05, if we assume there's no change in your discount rate?

That number would look a lot better than it would have in the last three or four months.

But there are lots of assumptions that go into the pension number, obviously -- the discount rate, return on assets, mortality tables, things like that.

But, clearly, that would -- if we ended up with the same rate, it would reduce the headwind.

But there would still be headwind, because we smoothed the gains and losses over a five-year period.

And we'd have some losses going back to the earlier part of the decade.

But, clearly, that would be good news, and we'll have that number when we snap the line on the pension plan assumptions November 30.

Where do you stand plan year-to-date, in terms of the return on the plan?

We are on target for our 8.5% return.

Being mindful of time, I recognize today is a busy day for earnings releases.

Why don't we just take one more question.

Myles Walton, CIBC World Markets.

Thanks for taking the question.

Does your 500 million pension voluntary contribution -- is that the maximum allowable under your tax deductibility, or is there more room to go up from that in the fourth quarter?

There is clearly more room in our taxable income.

The 500 million -- really, some of that is international, some of that is domestic.

But there is more room if we decided to fund pensions.

But, really, as we look at our funding levels, there's not a great need beyond the 500 million this year to take additional funding actions.

On Sikorsky deliveries, I think Steve was talking about 100 for the year.

And that would imply a pretty robust fourth quarter, stronger than what we have seen in quite a few years.

Is that still about the target?

I mean, we are at 66, excluding the Schweizer helicopters, year-to-date.

And we're still working towards the original target.

Finally on Carrier.

The $40 million pickup in R&D year-over-year -- could you attribute how much that was to Carrier?

Carrier is actually a fairly small piece of the increase.

The two bigger pieces of the increase were at Hamilton, where we saw additional spending on the 787, as well as from the Kidde acquisition.

And then in the Fire & Security segment, about 25% of that growth came from the acquisition of Kidde and their fire security spending on the ENB (ph).

I think that about wraps up the UTX third-quarter earnings call.

Ken Parks and the rest of the IR staff will be available through the day and into the rest of the week and the weeks to answer any of your questions.

And on behalf of Greg and myself and Ken, I want to thank you for being on our call today.

Thanks.

Thank you.