雷神技術公司 (RTX) 2005 Q4 法說會逐字稿

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

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

Ken Parks, Director, Investor Relations; and Greg Hayes, Vice President Accounting and Control.

This call is being recorded and carried live on the Internet.

There is a presentation available for download from the UTC's homepage at www.UTC.com.

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

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

At this time, I would like to turn the conference over to Mr. Geisler.

Please go ahead, sir.

All right.

Thank you, Jamie, and good morning, all.

Simply put, this year's results demonstrate the sustained power of UTC's growth model.

Full-year earnings per share of $3.12 are up 18% and $0.02 more than the $3.10 we told you about in December.

Fourth-quarter EPS of $0.71 increased 16% year-over-year, despite $0.02 of FX drag and restructuring in excess of our third-quarter forecast.

Free cash flow ended the year at 108% of net income, even with sizable pension contributions.

I should add that all the numbers that we will talk about this morning will be before the fourth-quarter adoption of FIN 47, Accounting for Conditional Asset Retirement Obligations.

The FASB-required accounting change, which we discussed with you at our December dinner, had a $95 million non-cash impact on 2005 results.

For 2006, there is no change to the guidance we gave you in December.

We expect earnings per share of $3.40 to $3.55, and free cash flow equal to net income.

The world is good, UTC performs.

In 2005, we had revenue growth, margin expansion, and free cash flow redeployment successes, all supporting our double-digit growth model.

For the second year in a row, we have seen organic revenue growth well in excess of GDP levels.

In 2004, organic revenue growth was 8%, and in 2005 organic revenue growth remains strong at 7%.

A good economy, as well as new products like Gen 2 and significant presence in high-growth emerging markets like China have been key contributors to the growth.

New products like SEER 13 and Hamilton 787 wins and acquisitions outside the US give us more revenue fuel for the future.

Beyond revenues, you know that we continually work on expanding margins.

We have process improvement disciplines like ACE, which many of you have seen in our factories, and we continually restructure.

We invested nearly $270 million in restructuring during 2005.

Savings from these actions will provide margin expansion into 2006, and continue into 2007.

Now a few points about the businesses.

We told you at the beginning of the year that the Chubb business would improve margins 120 to 150 basis points.

Total-year margin increase was at the high end of that range, 150 basis points.

UTC Fire & Security overall ended the year at 6% margins, a solid step towards achieving 10% margins in 2008.

Now fourth-quarter '05 margins were 8.1%, and while we like the movement towards the 10% goal, we do not like this fourth-quarter calendarization.

We expect the progress on calendarization will take a couple years to fix.

Carrier posted solid second-half improvements, consistent with what we told you during the second-quarter earnings conference call.

Profit was up 25% in Carrier in the second half of the year, and margin expansion in the fourth quarter was 130 basis points.

Restructuring at Carrier, including our work at Linde, is beginning to bear fruit.

This along with price recovery and [tower] commodity costs gives us confidence heading into 2006 that Carrier is back on the margin expansion path.

Otis, a great year.

Another full point of margin improvement.

Importantly, the underlying product and field service initiatives that have been going on for the past several years continue to generate solid margin expansion, and we exited the year with a strong new equipment backlog.

Currency looks to be a headwind for Otis right now and will impact reported results next year, particularly in the first half.

Finally, the aero companies all performed well in 2005.

Profits at Pratt and Sikorsky were up more than 20% versus 2004.

Hamilton Sundstrand's margins grew even as they made significant investments in the 787 program.

The final point we talk about in our growth model is solid cash generation and redeployment.

A healthy 60% of this year's $3.4 billion in free cash flow was returned to shareowners.

We increased our dividend rate 26% during 2005, and also bought back nearly $1.2 billion of our own stock, a record level for us.

In addition, we also invested $4.6 billion in acquisitions, strengthening our market-leading businesses.

For 2006, we hold our standard placeholder of $2 billion in acquisitions.

Now along with dividends and approximately $1.5 billion in share purchase for 2005, we expect to return about 70% of free cash flow to owners.

Now before handing off to Ken to review the businesses in greater detail and to Greg to review cash, a final comment.

We were pleased with 2005 performance and hope that you are as well.

This year's strong performance is a credit to the 220,000 people of UTC.

And with these good people, and this good momentum, we are confident of continued strong performance in 2006.

So with that, Ken?

Okay, thanks.

I'm going to start on page 3 of the webcast.

Revenues grew 14% in the quarter, reaching over $11 billion.

All businesses contributed to the 9% organic growth revenue growth during the quarter, with the strongest coming from Sikorsky deliveries and the timing of aerospace OEM shipments.

Acquisitions, primarily Kidde and Rocketdyne, contributed most of the remaining growth.

Earnings per share at $0.71 were up 16% in the quarter, with profit improvement in all businesses.

We incurred restructuring charges of $97 million, which is about $0.02 per share more than earlier guidance.

These charges more than offset the remainder of the net gain [over] restructure benefit which flowed through our second-quarter results.

In total, restructuring charges of $267 million for the year slightly exceeded onetime favorable items as we invest for the future and deliver in the prior period.

I will note that for the first time in a few years, FX provided no benefit to full-year results.

Tailwind during the first two quarters of the year turned into a headwind by year end and reduced fourth-quarter EPS by $0.02.

As we look to 2006 we anticipate continued headwind, particularly in the first half, given today's Euro spot rate.

Moving on to page 4 -- and before I begin, let me remind you that I will talk to segment results with restructuring added back, as we usually do.

Otis had another strong quarter, with margin expansion of more than a point.

Q4 profits were 9%, or 13% at constant currency, and revenues were up 3%, or 5% at constant currency.

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

For the year, Otis delivered 13% operating profit growth on 7% revenue growth, resulting in another full point of margin expansion and lifting operating margins to 18.4% for the year.

Otis enters 2006 after another solid year of new equipment order growth.

Strong orders in Europe and China were somewhat offset by continued softness in Korea and Japan during the year.

We expect 2006 to be another solid year for Otis with mid single digit revenue growth and 80 to 100 basis points of margin expansion.

FX is expected to continue to present headwind, with the toughest compares in the first quarter where the average Euro rate was $1.31 in 1Q 2005, compared to today's spot rate of $1.23.

At Carrier, operating profit for the quarter increased 38% on 13% higher revenues.

Carrier resumed margin expansion in the fourth quarter, delivering 130 basis points of improvement.

Organic revenue growth was strong at 10%, led by continued strength in North America residential, and included some additional 10 SEER volume in advance of the new minimum efficiency standard.

The transport refrigeration business was essentially flat year-over-year as higher truck trailer revenues were offset by lower container revenues.

Profits at Carrier grew nearly $60 million in the quarter, and as anticipated Carrier benefited from a seasonally strong quarter at Linde.

In addition, results were driven by strong residential HVAC volumes, along with benefits from recent restructuring actions.

Price increases were slightly more than commodity costs, although we have seen continued appreciation in copper and aluminum prices so far in 2006.

For the year, Carrier revenues grew 18% and earnings grew 11%.

The second-half margins expanded on revenue and profit growth of 19% and 25% respectively, as Jim said.

We're currently shipping our new 13 SEER air conditioners and initial pricing is in line with expectations.

As mentioned, we have some prebuy in 2005 which impacted inventories and will closely watch how this evolves over the next few quarters.

With improving performance at Linde, additional benefits from recently completing restructuring, and the expected benefits from our new 13 SEER platform, we reiterate our guidance of mid single digit revenue growth and a point of margin expansion in 2006.

Now, at UTC Fire & Security and the legacy Chubb business, profits grew more than 50% on relatively flat revenues, with operating margins improving by around 250 basis points in the quarter.

Operational efficiency improvements and the absence of about $10 million of outsourcing-related costs that were incurred in the prior year drove the margin growth.

For the full year, legacy Chubb margins expanded approximately 150 basis points to 6%, the high end of our earlier Chubb stand-alone guidance.

Consistent with expectations and history, Kidde had a seasonally strong quarter, with revenues of more than $425 million.

As a result, full-year Fire & Security revenues were up about 50% and profit about doubled, taking operating margins to 6% for the overall business.

Continued benefits from restructuring and integration activity previously initiated, as well as future cost reduction opportunities, will fuel future growth in this business.

We continue to feel confident in our 2006 guidance of more than 10% revenue growth and 100 to 120 basis points of margin improvement.

Now to Pratt.

Revenues increased more than $400 million in the quarter or 20%.

New engine deliveries and aftermarket revenues, including both spare parts and services, were up double-digits in the large engine business.

Pratt Canada sales increased around 20%, primarily reflecting higher new engine volumes.

Rocketdyne contributed about one-third of the quarter's revenue increase.

Operating profit growth of 15% reflects the strong year-over-year commercial spare parts and services performance, as well as the higher volumes at Pratt Canada.

Results also include higher year-over-year R&D spending, reflecting the timing of investments made in connection with the GP7000 program, which did receive FAA flight certification late last year, along with a number of new engine programs at Pratt Canada.

Pratt operating margins were down in the quarter, reflecting the 150 basis point year-over-year impact of higher R&D investments.

For the year, Pratt's profits grew 20% on 12% higher revenues.

Based on this strong 2005 performance and continued strength in commercial aerospace, we anticipate Pratt will grow 2006 revenues in the high single digit range, with 70 to 90 basis points of margin expansion.

Turning to Hamilton, revenues were up 7% with operating profit up 5%.

Legacy Hamilton revenues were up low single digits, primarily from strength in the industrial business.

OEM and aftermarket revenues were essentially flat in the quarter.

Kidde's aerospace fire and suppression business contributed about $65 million in revenue for the quarter, along with solid operating margins.

Legacy operating profit was lower, reflecting higher R&D spending, primarily for the 787 programs.

The higher R&D spending in the quarter impacted operating margins by over 150 basis points.

For the year, Hamilton Sundstrand revenues grew 12% and operating profit increased 13%.

As a result, operating margins expanded 20 basis points to reach 16.9% for the year.

With strength in the commercial aerospace business, we expect Hamilton to grow revenues in the high single digit range, with 70 to 90 basis points of margin improvement in 2006.

At Sikorsky, operating profit grew 37% on a 33% increase in revenues, and margin expanded in the quarter.

The revenue increase was driven by both commercial aircraft deliveries, including the S-92 and aftermarket volumes.

For the year, operating margin grew 70 basis points as a result of 21% profit growth on 12% higher revenue, including a loss of more than $200 million of Comanche revenues recognized in the prior year.

Sikorsky delivered 34 large aircraft in the quarter and a total of 100 large aircraft for the year, up more than 25%.

We reaffirm our 2006 guidance for Sikorsky of mid-teens revenue growth and 70 to 90 basis points of margin expansion as Sikorsky continues to progress toward the UTC minimum of 10% operating margins.

Now with that, let me turn it over to Greg to take us through a few corporate and balance sheet items.

Thanks, Ken, and good morning.

Turning to page 10, I want to go over a couple of the corporate items outside of segment results.

Elims and other for the quarter were essentially flat with last year's fourth quarter, after we adjust out last year's gains associated with the fuel cell joint venture disposition, as well as the finalization of our 86 to 93 open tax years.

Those two transactions benefited last year's fourth quarter by about $100 million.

As you noted, R&D spending in the quarter was up, as anticipated.

The approximately $80 million increase in spending as compared to last year's fourth quarter was largely from increases at the aerospace businesses.

As Ken mentioned earlier, Pratt had higher spending on the GP7000 program, as well as on numerous Pratt Canada small engine programs.

Hamilton's increases primarily related to the 787 program; and Sikorsky had higher spending on the S-76D as well as the Canadian maritime H-92 program which we won in 2004.

For restructuring, you recall in the second quarter that we had about $120 million of gains in excess of the restructuring.

We indicated that that would be offset by additional restructuring activity in the third and fourth quarter.

We did slightly more than that, incurring 97 million of restructuring charges in the fourth quarter on top of 15 million from charges in the third quarter.

In the fourth quarter, about $47 million of the charges were related to new actions.

The most significant actions were the initiation of a Hamilton Sundstrand Rockford manufacturing consolidation, as well as some G&A actions inside of Otis's Germany business.

The remaining $50 million in costs were associated with previously-initiated actions.

So for the year, as we have noted, restructuring charges of $267 million more than offset the favorable items reported in the first half of the year.

Now for 2006, we see trailing costs around $60 million associated with the action we have already initiated.

These will once again be offset by the benefit of favorable items, similar to what we have seen in both 2004 and 2005.

To the extent we have some additional gains we will, as always, offset these with additional restructuring actions.

A word on cash flow.

As you have heard, free cash flow was strong once again, $800 million or 111% net income for the quarter.

For the year, free cash flow of 3.4 billion was well in excess of net income at 108%.

And this including cash contributions to our pension plans in the quarter of 298 million and for the year of 663 million.

2006, we remain comfortable with our current guidance of free cash flow equal to net income.

Moving on to acquisitions, spending in the quarter was just shy of $500 million.

As we noted in the third-quarter call, we purchased the remaining minority ownership interest in Otis LG, and we also closed on the Keystone Helicopter business.

Acquisition spending for the year was 4.6 million, a significant year of spending for us at UTC.

We added some solid businesses to the portfolio including Kidde, Lenel, and Rocketdyne.

Finally on share repurchase for the quarter, we repurchased $421 million of UTC shares for a total of just under $1.2 billion for the year.

Even at the current price, we believe UTC's stock continues to be a good investment for us.

Therefore, we will be increasing the share buyback level in 2006 to around $1.5 billion.

Finally, on page 11, in summary, as you have heard throughout the call, 2005 was another outstanding year -- 14% revenue growth with a full 7% coming from organic growth.

EPS for the year was up 18% to $3.12. 3.4 billion of free cash flow, with $2 billion returned to investors in the form of dividends and share repurchase.

For 2006, we see earnings in the range of $3.40 to $3.55 per share, with free cash flow again equal to net income.

With that, it seems like a good place to stop and open up the call for Q&A.

So with that, let's take the first call if we could, Jamie.

(OPERATOR INSTRUCTIONS) Joe Campbell of Lehman Brothers.

I wondered if I could ask a question about the share repurchase and the dilution that comes from the option expense.

I think this year's share repurchase has not quite offset the dilution that came from presumably benefit awards.

I wondered if you could give us a sense of, with the stepped-up share repurchase to 1.5 billion, whether we should be thinking that the outstanding shares by the end of the year will remain about the same, or go down?

Or would we even see dilution because the 1.5 might not quite offset the issuances?

Joe, the 1.5 will more than offset the equity issued through to employees in compensation programs.

I think what you have seen since the second quarter this year is that we are seeing the share count step down.

Recall in the first quarter we didn't do much share repurchase.

Now that we have taken the level up to $400 million per quarter, as we did in the third and fourth quarter, the number is coming down.

By the time we get to the end of '06, you will see a lower number than the number we have today.

Thanks, Jim.

Just one more quick thing.

Can you give us a sense of the kinds of things you already know that we might be seeing for restructurings?

Last year, we had the restructurings in terms of the onetime benefits and the restructuring expenditures a bit out of phase.

How do you see 2006 going, both in terms of what we might see in volume and when we might see it, vis-a-vis the onetime gains?

Thanks very much.

Joe, this is Greg.

Let me take that one.

Unfortunately, the timing of the gains is not always easy to predict and it always doesn't match what we're going to do from restructuring.

What we see today is a couple of small gains, perhaps in the first half of the year, which should offset the restructuring carryover costs from 2005.

Today I can't tell you that there is anything specific on the plate for 2006 restructuring.

But I can assure you there are some potential gains out there, and we will use those gains as we have done in the last couple of years, to offset restructuring.

As we understand the timing of this, we will obviously keep you guys informed.

But today, can't really tell you there is any one big gain out there or what the timing of that might be.

Thanks, Greg.

Heidi Wood with Morgan Stanley.

Can you guys give us the numbers for the unit engine shipments and the helicopter shipments, both in the fourth quarter as well as the year?

Sure.

Commercial engine shipments in the fourth quarter, 129; for the year, 410.

Military 38 -- I'm sorry, 44 in the quarter; 157 for the year.

Then helicopters were 34 in the quarter, taking it to 100 for the year.

Can you talk about, with the trends you guys are seeing in the military aftermarket both at Pratt, Sikorsky, and Hamilton Sundstrand, how has '05 looked versus '04?

Heidi, the trend is, as we have seen over the course of the year, and we saw in the quarter as well, and that is that we have seen weakness in military aftermarket in both Pratt and Hamilton, and strength at Sikorsky with good growth there.

(inaudible) all is owed to the nature of the war in Iraq.

The air war, as it was, was six minutes, not six months.

So as the government procured for a longer air war, they now have parts that they are bleeding off.

However, Sikorsky, again given the nature of the war -- that is how people move around the country, by helicopter -- it is still seeing good demand for spare parts in military aftermarket.

Okay, then final question.

That Hamilton Sundstrand, you talked about OEM and aftermarket flat.

I was wondering if you could break it down further for us and give us what was happening with the commercial OE and aftermarket, and then military OE and aftermarket?

Let me take that.

The commercial aftermarket was actually up about double digits, and commercial OEM was up -- actually up mid single digits.

However, that was offset by the military aftermarket being down double digits.

Military OEM was up, significantly up, above 30%, actually.

Military OEM was up 30%, you said?

Yes.

And what was the key?

What were the biggest drivers to that?

Actually the biggest driver is going to be the acquisition of Kidde in there.

If you take Kidde out, that revenue growth would be more like 9 or 10%.

Okay.

Great.

I will let someone else ask questions.

Thanks a lot.

Steve Binder of Bear Stearns.

A couple things, one with respect to Carrier.

I was wondering if you look at, to kind of reconcile the roughly $60 million year-over-year profit increase, would you say most of that came out of Linde and the savings on McMinnville, as well as a little bit of a benefit on the price versus commodity cost issue?

Yes, out of the $60 million, probably about half of that came out of Linde.

Then we also did recover the commodity cost through pricing, and slightly more than offset that number.

We are starting to see savings flow through; but as always there are still ramp-up issues as we go.

Those savings will continue to get better from the restructuring savings.

I guess my question is, what happened to the organic growth in the quarter?

When you think about the profit improvement?

Because it looks like it came out of those three items.

Yes, you have got organic growth at Carrier of around 10% in the quarter.

During the quarter, keep in mind we also had the issue of preparing for SEER 13 where we ramped down all of the North American cooling factory and ramped it back up.

So there was some cost attributable to that.

But that was all within our look for the quarter.

How much of the CapEx for the year came out of Carrier?

The CapEx increase?

Yes.

About 12, $13 million of the total UTC increase came out of Carrier.

All right.

If you go back to Pratt, it looks like they had pre-R&D some pretty good performance sequentially from the third to fourth quarter.

Just wonder, if you look at the revenue increase of roughly $180 million sequentially, I know part of that is coming out of Rocketdyne.

I imagine roughly half of that sequentially is Rocketdyne.

But how much -- was the balance pretty much aftermarket?

Because it looks like the incremental margin performance was quite strong.

Aftermarket was a big contributor to the sequential improvement, Steve.

Okay.

Lastly, can you maybe just touch on book-to-bill in Q4 for Pratt large commercial engine parts, as well as Hamilton?

It was a little bit better than 1, Steve, at Pratt.

That is a departure.

A little bit better, I said.

All right, thanks very much.

Howard Rubel, Jefferies & Company.

A couple questions.

To go back, first, to pension, you talked about a slightly larger contribution this year.

What are you targeting for next year?

This is Greg.

Actually what we have targeted for this year is about a $500 million pension contribution, which would actually be slightly down from 2005 levels.

You will see when we publish the 10-K that we're actually fairly well funded today in our pension plans.

In fact we're 100% funded on an ABO basis for our US plans, and we're 96% funded on our international plans.

So the need to continue to do a lot of pension funding we think is behind us, at least for the time being.

No, I had misspoke.

I mean last year, your number came in a little bit high.

You'd put in a little bit more money at the balance of the year.

But --

We did.

The second thing is working capital, I think, year-on-year wasn't quite as strong in the fourth quarter as you had done previously.

Also, I think other in working capital, in your fund flow statement, other was fairly strong.

Could you just characterize those particular items?

Let me start with on the other on the statement of cash flows.

You will see about a $300 million change from fourth quarter last year to this here.

Really that is two things.

One is the non-cash impact of adopting FIN 47; so that flows through on that line.

The other piece is the non-cash pension cost, which has increased just under $100 million year over year.

If you go back and look at working capital, you're right.

Working capital was not as strong this year as it has been in previous years.

We have had good news, I think on inventory across most of the businesses.

A little bit higher at Sikorsky, but that has really been offset by advances.

I think probably the bigger issue we have seen is Accounts Receivable.

Our days outstanding has actually increased year over year.

Part of that is just the timing of some of the Carrier shipments, as well as some issues at Fire & Security with the integration between Kidde and Chubb.

Then my final question is, could you talk a little bit more about the environment at Otis?

And whether you -- you indicated a couple of markets were strong and a couple were a little bit disappointing.

Could you give us a little more characterization for that, both in terms of OE -- excuse me; in terms of orders and also service?

Sure.

In the quarter, we saw growth basically, as I said, in all the regions.

If I kind of give you a look around, China was still very strong at around 20%, maybe even a little bit higher than 20% in the quarter on the sales side.

Asia before China was flattish, and the reason for that was Japan being down while the rest of Asia was strong.

Europe is still strong.

But keep in mind we also have the FX impact in the quarter, that we did have headwind in the quarter.

So when you see European sales numbers at an actual FX basis they're a little bit weaker than they would be at constant currency; but still good growth there.

North America ticking up a little bit.

So strength in all the regions, and China especially strong as we continue to talk about each quarter.

Orders would not be dissimilar to that pattern.

Thank you, gentlemen.

George Shapiro of Citigroup.

A couple of things.

You gave deliveries, but you didn't give Pratt Canada deliveries; or if you did, I missed it.

I did not give it, but I will.

Pratt Canada in the fourth quarter, 591; and for the year, 2,061.

Okay, and if I ask about Otis, you had extraordinarily strong incremental margins.

It looks like 60% or so.

Part of that is probably currency depressing revenues.

But if you can walk through any unique things that are going on there or why Otis is able to continue to do so well?

I think it has just been continued strength of the model there in the aftermarket and the service portfolio, and continues to be a key part of the Otis equation.

So if you looked at Otis revenue growth, new equipment versus aftermarket, in the quarter, how much was each up?

New equipment was -- basically I think they were relatively in line with each other this quarter.

I think we saw a little bit more new equipment last quarter than we had seen in the previous.

But this quarter they are relatively in line with each other.

Okay.

If you go to Pratt & Whitney, did you mention commercial spares were particularly strong?

Did you give a specific number for how strong?

I think you said double-digit, but is it closer to 10% or closer to 20?

That is actually closer to 20%.

Okay.

And if you taking look at the R&D that you showed in the fourth quarter, is that higher level going to continue for the Corporation in '06?

Or with the certification of the 7000 that is going to come down?

Yes, I think, George, what is going to happen is you are going to see that it is going to return to a more normal level.

We had some big payments in the fourth quarter, some timing issues on some of the spending.

We will see R&D spending up next year about another $100 million, just like you saw in 2005.

But I don't think you're going to see the big spike like you did.

It won't continue at the fourth-quarter run rate, certainly.

If you could just break out, in the commercial helicopter deliveries at Sikorsky, how much was S-92 versus S-76?

S-92 was -- there were seven helicopters delivered in the fourth quarter of S-92s; 10 for the S-76.

The 34 total helicopters are split evenly, 17 and 17; and I just broke down the commercial piece.

Okay, so the little weaker margin at Sikorsky is also maybe due to probably low margins on the S-92 as well as a little bit higher R&D that you mentioned?

Yes (multiple speakers).

Okay, thanks very much.

Don MacDougall, Banc of America Securities.

A couple questions on Carrier.

First, I think from the December presentation, George had said that you're looking for potentially a 15% volume decline, because of elasticity, prebuy, and maybe even some seasonality.

Can you confirm that the guidance that you have given, up about a percentage point on margin and kind of mid single digits, reflects that kind of a number?

Yes.

Okay.

You had also said in the remarks that pricing, so far, appears to be in line with your assumptions.

I think you were talking about 13 SEER.

What is that assumption?

I think George quoted the number upper teens in December; and that is relative.

I mean, that is what we are seeing now.

So when you say upper teens -- ?

17, 18% higher.

Okay, you are talking over -- are you talking across the entire residential business?

Or are you looking at 10 SEER versus 13 SEER?

10 SEER versus 13 SEER.

Okay.

Then just a final one, you had mentioned commodity costs as another factor.

I guess we see copper and a lot of these metals making new highs almost daily.

Is there some point this year where you start to think about higher price points for these new products, even though there is already a substantial price increase on the table, to reflect that commodity inflation?

Yes, that is exactly right, Don.

I think that was the strategy you see in the last 18 months, as there are higher input costs offset that with higher price. (inaudible) metals continue to go higher, obviously that is a risk, but we look to offset at a minimum a big piece of that with higher price.

Okay, then one more, just jumping over to security.

We did see a nice step up in the fourth quarter from the rate that we had seen earlier this year.

As we look into 2006, should we look at that as a starting point?

Or is there some seasonality that would lead us to expect that margin to drop significantly here in the first quarter?

Margin will drop in the first quarter from the fourth-quarter rate.

But in our guidance of margin expansion of 100 to 120 basis points, you should see margin improvement in every quarter of next year.

Thank you, guys.

Cai Von Rumohr with SG Cowen.

Follow-up on the R&D question.

If your R&D is up 100 million, it looks like it is going to be about level as a percent of sales.

Could you tell us where it is going to be up specifically?

Hamilton Sundstrand probably had a pretty good step, and given that you are really getting into the 787 is that going to continue to build?

Whereas I assume at Pratt, now that the GP7000 is behind you, that might ease off.

This is Greg.

I think what you are going to see is exactly that.

You are going to continued additional spending on the 787 in Hamilton, and next year is really going to be probably the highest year we see for spending on the 787 program.

Pratt, you're right on the GP7000 and PW6000.

Those programs are starting on the downward trend.

Maybe offsetting that a little bit, though, is the continued investments we are making at Pratt Canada on the small engine business.

So it won't be up significantly, but there will be some upward pressure in there.

The other piece is Sikorsky too.

Again, they are making investments on the S-76D, that will continue; as well as the Canadian maritime.

So I think the trend that you saw here is going to be the same next year.

A little bit higher but certainly not at this fourth-quarter run rate.

Could you comment?

These are numbers are before the recovery from the Canadian government at Pratt Canada?

The numbers we are quoting are actual spending.

So again, to the extent that there might be some aid or some grant from the Canadian government, that is really contemplated in these numbers that we're giving you here.

Okay.

Could you give us, at Carrier, how much was your US res business up in the fourth quarter, given that there was a prebuy?

Around 20 to 25, 25% or so, right around that number.

Okay, so you -- I haven't seen the December number, but that would assume that you were up kind of probably a little bit less than the overall industry average, but mainly because of the pattern of who decided to kind of prebuy?

Two things on that.

That is lower than some of the industry numbers you have probably seen.

But I would also remind you that this res business, although important to us, is only about 20% of Carrier overall.

Ken talked earlier to the trends, and cold was flat, and we still see a Europe that is not growing very much.

So although this is a very good piece of revenue growth in the business, it's only about a fifth or so of the entire Carrier portfolio.

Okay, but I mean I guess what I am getting at -- is the reason that your distributors chose not to prebuy may be because you have a more attractive 13 SEER product?

Is the product transition an issue as opposed to straight market share?

I think changes in share in North American HVAC are very hard to come by.

Right now we are working through a transition on SEER 13, so I would not read anything into the quarter's results, or even for the next quarter results on share in North America.

I think when we get this SEER 13 transition completed, and everybody has got their new SEER 13 product out there, and we see what distributors and customers like, then maybe there will be some share change.

But I don't think there's any going on right now that is not related to SEER 13.

Great.

Last one.

In constant currency, can you give us Otis's book-to-bill with some regional color?

In constant currency, I will give you directionally.

North America increased book-to-bill in the quarter.

I would say Europe, Asia excluding Japan, were close to 1.

And China would be a little stronger than that.

Thank you very much.

Tony Boase with A.G. Edwards.

Just on Carrier, is your experience tracking to the expectation you had in mid-December as far as 4,000 excess units at the distributor level?

Is that what you think you're at now?

Or is that what you think is going to happen?

And do you think you are tracking to that?

Again, the season continued to be strong throughout the year.

But I think what we're seeing is relatively in line with what we saw, what we anticipated to see.

No significant changes.

All anticipated within the discussion that we had a couple of weeks ago, a few weeks ago in December.

So we are right on track.

Then also, you mentioned acquisitions.

You made almost $500 million of acquisitions in the quarter.

What is the revenue and operating profit impact from those acquisitions in '06?

I think as you look at with the two large acquisitions, one was the remaining minority interest in Otis LG, where we're simply picking up the remaining 20% of that business. (inaudible) not going to see a significant gain there.

Otis already was reporting those revenues and earnings in its reported results on a 100% basis.

So a little change down in minority interest; but not significant.

Again, offset by the additional interest expense.

I think the same will be true at Sikorsky related to the Keystone helicopter acquisition.

Again, not a big driver for 2006 results after offsetting interest expense.

Also, you mentioned Hamilton Sundstrand's aftermarket was flat.

But what were commercial spares for Hamilton?

They were up in the quarter.

They were up double-digits.

Okay, thanks a lot.

Joe Nadol, JPMorgan.

First question is on the R&D, again, not to kick a dead horse.

But it looks like your R&D was up about 30 basis points for the Company from last year's Q4.

But in all three aero businesses we're talking about over 100 basis points of impact.

So are we to conclude that in Otis and Carrier you had significant decline?

No, I would not say a significant decline.

I think what you see is that the Otis business is about flat;

Carrier up slightly with some additional R&D spending on the SEER 13.

You also see a little bit of an increase at Fire & Security related to the Kidde business.

But on a percentage of sales basis you are not going to a big change there, as the higher R&D is offset by more commercial sales in the quarter.

I'm just tried to dig into it.

I guess the aero margin is a little bit more, because you cite R&D as being kind of a big impediment for both Pratt and Hamilton (inaudible) quarter.

But R&D was really only up 30 basis points.

So what (inaudible) am I missing?

You may want to take the math off-line.

I think we said that Pratt was -- the R&D increase accounted for about 150 basis points, and the same at Hamilton.

So that acted as a restraint on margins, partially offset by very good growth in spare parts in the quarter.

But we can take you off-line (multiple speakers) reconciliation.

Sure.

Just one more on Carrier, since there are so many puts and takes in Q1 and possibly Q2 here, given the prebuy and the elasticity in pricing.

Just wondering if you could give a little more guidance as to what you're expecting in terms of margins or (technical difficulty) Carrier in the early part of the year?

I think we will probably tell you the same kind of thing as what we said on Fire & Security, where the calendarization would be typical of what Carrier would have.

So you will see more absolute margins at different points throughout the year.

But we would like to see margin expansion in each of the quarters.

Okay, thank you.

Nicole Parent with Credit Suisse.

Just I guess to follow up on the 13 SEER question, not to beat a dead horse, but I guess how would you characterize 13 SEER inventory at your distributors?

And how would you characterize it within the industry?

I will talk about our distributors.

We think it is probably a little bit higher than industry.

But you know, as we have talked all the way along, even before SEER 13, Carrier distributors typically carry a little bit more than the industry.

And we think that is a strength in the business, the availability of the product to the customer.

So a little bit higher than the industry.

I guess I would say in the last -- I haven't seen December numbers, but October and November ARA data would indicate that the industry is ticking up also in relationship to the SEER 13 transition.

But nothing outside of, again, what we talked about (inaudible).

Okay, then also, I guess within Carrier, what did you see on the commercial portion of the business?

We saw good revenue growth there, Nicole, up above 10%.

Really off an easy -- frankly off an easy compare there.

Private side, we need to have higher margins in that business.

That is why we have done some restructuring.

We need to continue to get better at making products out of the new places now that McMinnville is closed.

So I think we will look for margin expansion in that business going forward.

I guess just a follow-up on the other swing in the cash flow.

It looks like the footnotes indicate 95 million tied to FIN 47.

So the remaining 200 is largely the non-cash pension?

No, Nicole, actually about half of that is the non-cash pension.

There's a couple of other things going on.

There's some reclasses, as you always see quarter-to-quarter, related to the timing.

There's some environmental payments, as well as some reclasses related to some warranty costs.

Not a big driver really year-over-year.

I guess when we think about that line for 2006, are there any large puts and takes we should be thinking about, given what we saw in '05?

I think what you are going to see is about the same run rate on pension expenses.

Pension expense will actually be going up.

Next year is a bit of a headwind.

So the number will go up slightly, but probably not the big driver we saw this year.

Okay, lastly, just -- you indicated legacy Chubb revenues were flat in the quarter.

Could you give us some color on why?

Macro level electronic security saw a little bit of an uptick in the quarter, so revenues there up a bit in the Americas primarily, Canada, in fact, and Europe.

While the Fire Safety side of the business was flat and down a little bit in some markets, but flattish.

Okay, great.

Thank you.

Ron Epstein with Merrill Lynch.

Just a couple more questions for you.

When you look at the outlook for helicopter production, what sort of trend are you seeing both from military and commercial?

We see a trend upward for both commercial and military.

We don't have a hard number for you today on shipments in 2006, because Steve Finger is going to want to give you that himself here in about a month at our annual analysts meeting.

All right.

Just on the commercial side, what do you see as a key driver there?

Is it offshore oil or what is the driver on the commercial side of the business?

Offshore oil is a good driver.

Corporate profits are as well.

I also would add in there that we think we have a pretty good product in the marketplace that people want.

Okay.

Now moving on to a little different question here.

When we look into 2006 and potential acquisitions, I know you guys can't give any details on specific things.

But just kind of broadly speaking, is there more interest in the aerospace side of the house or the industrial side of the house?

I think there is interest throughout the core portfolio of UTC, which is both commercial and aero.

George mentioned at the December dinner that he saw some good assets in the queue for the pipeline, and I would confirm that today.

I think that is still the case.

But we do deals at UTC for value.

And deals are binary; you win or you don't win, and you pay or you don't pay.

So I'd confirm that the portfolio remains robust, and we will ultimately see what happens with the spending.

Okay, I guess what I'm driving at, though, is are you guys comfortable with the current aerospace-industrial balance?

Or is there any side of the house that you would like to see more of?

We like the current split between commercial and aero.

Again, we would like to acquire on both sides and grow on both sides of the house.

I can't imagine really going back above 50% for aerospace, to be more than 50% of the portfolio.

But we like the current 60/40 split.

We will just see how the portfolio evolves, driven of course by value and where deals can be done for value.

Okay, but you guys are open to more than the 40% for aerospace?

For the right deal, yes.

Okay.

Then back to a comment, I think it was you said.

You said there was increased R&D investment in the small engine business in Pratt Canada.

Was that the PW6000, the really, really small engine business?

Or can you just give us a little more color on where that investment is being made?

I wouldn't call it the really, really small engine business.

I think the guys at Pratt Canada say they are real jet engines.

But yes, it's primarily on the Pratt 600 series of engines.

There are (inaudible) various applications including the very light jets and the jet taxis.

But it's that whole product family up there.

Has much investment been made on a potential engine for the C series for Bombardier?

We make generic investment in narrow body technology.

So we have been investing over the last several years in that.

If we launched a C series, because we believed there were good launch customers and a good market, and it was a share owner friendly, then we could do that.

But most of the spending has really not been dedicated towards an application, as opposed to technology development.

Just one final question for you.

Fire & Security, I think obviously had pretty good improvement in the quarter in operations.

Can you give us a little more detail on where that was coming from, instead of the generic better execution?

Better execution is I think the biggest piece, as we are focused on the cost side.

Just to go through some of the markets, I think we saw again in Europe --.

European security, American security.

We also see a little bit, as this back office outsourcing reaches completion, we see more of those benefits flow through.

That flows to the efficiency concept.

So was the key driver the back office outsourcing?

On the individual items related to operational efficiency, that would be a big item; plus you have also got some outsourcing.

We are working on multiple fronts here in terms of outsourcing fire extinguishers out of Europe into China; back office outsourcing; supply management; putting Kidde and Chubb into our programs here at UTC, where we do bulk buy.

So it really is, as Ken says, (indiscernible) to focus on cost, that is where you spend 80 to 90% of our time in [reviews] with them, and to drive margins higher.

Okay, thank you very much.

Mindful of time here, so why don't we take just one more question today.

Myles Walton with CIBC World Markets.

Could you drill a bit into the commodity energy assumptions for '06?

We know it is $200 million growth headwind.

But if you can just break it up a little bit more, maybe by energy, titanium, steel, copper, and then perhaps a little bit more color by segment as well.

The 200 I would say is on a macro level basis probably about 150 or so of the commodity [gross] headwind.

Then you have got around $50 million, as best as we can estimate, for the energy piece of the equation.

(technical difficulty) the commodity down below that, I think I would just take you to the trend of where we see continuing pricing.

You see copper continuing to tick up;

I think it is over $2.00 last time I saw it.

Aluminum.

Then you have also got on the aerospace side of the business some of the specialty metals.

So titanium, things such as that would be a key, core part of the (indiscernible).

Pricing assumption is that we recover about half of that through pricing actions in 2006.

We also, as Jim spoke to earlier on the Carrier question, (inaudible) at the beginning of the year and then we are done with them; we look at pricing throughout the year as these commodities continue to impact us.

About how much of the 200 million do you see through Carrier as opposed to others?

Is titanium realistically affecting Pratt?

I would say it is more on the aerospace side than on the commercial side.

Which would be a break from the past, okay.

Then finally, on Transicold, your outlook there for '06?

Obviously a higher margin business, has had nice growth in the past, seeing flatness here in the fourth quarter.

I guess is this just temporal?

What is the outlook for '06 there?

That business has been on an uptick for the last three or four years consecutively.

It does go through cycles.

Container we have talked about for the last couple of quarters, that the order rate and therefore the backlog has been decreasing a bit.

We see continued strength in North America truck trailer as we look into 2006.

We would expect that container would be flatter as we go into 2006.

Okay, great.

Thanks.

All right.

Okay, I want to thank everybody for joining us on the call today covering the fourth-quarter results and some particularly good detail on SEER 13 and R&D, I thought.

In addition, a reminder that we will be having our annual analysts meeting in New York City on the afternoon of February 28, and we hope that you will be able to join us for that.

So thank you.

Once again, ladies and gentlemen, that concludes today's call.

Thank you for your participation.

You may disconnect at this time.