雷神技術公司 (RTX) 2006 Q4 法說會逐字稿

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

On the call today are Greg Hayes, Vice President, Accounting and Finance;

Jim Geisler, Vice President, Finance; and Ken Parks, Director, Investor Relations.

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

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

UTC's SEC filings, 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.

Please go ahead, Mr. Hayes.

Thanks, Tony, and good morning everyone.

We had a solid fourth quarter to report and Ken will take you through the business unit details in just a few minutes, and following our prepared remarks, Jim, Ken and I will take your questions.

But first I would like to start by hitting some of the high points in the quarter, and I will begin on page two of the web cast.

For the fourth quarter, revenues were $12.8 billion.

That's 14% higher than a year ago.

Organic revenue growth in the quarter was a full 10% and there was a double-digit rate in four of our six businesses.

FX added another three points to revenue in the quarter as the fourth quarter '06 average euro rate of $1.27 was significantly higher than last year's fourth quarter average of $1.19.

The fourth quarter '06 rate was also right on top of the rate we have assumed for the '07 plan.

Earnings per share of $0.87 was up 23% as compared to last year's fourth quarter, and this comparison excludes the impact of the adoption of FIN 47 back in 2005.

After adjusting for restructuring, we saw double-digit operating profit growth at four of our businesses.

The strong commercial aerospace market continued to benefit both Pratt Whitney and Hamilton Sundstrand, resulting in operating profit growth of 15% and 16%, respectively.

While we did see overall commercial aftermarket growth of about 20% in the quarter, the combined book-to-bill rate at both Pratt Whitney and Hamilton Sundstrand was slightly below 1.

The Otis story remained the same with a focus on cost and service efficiency, along with innovative new products and strong growth from emerging markets, resulting in 16% operating profit growth.

UTC Fire and Security also delivered strong operating profit growth as they continued to build a platform for sustained double-digit operating margins.

These businesses more than offset small operating profit drops at both Carrier and Sikorsky.

Carrier, although significantly impacted by a rapid slowdown in the North American HVAC market, recorded an operating profit of just over $200 million for the fourth quarter.

Full year operating profit at Carrier was $1.2 billion.

That is up 5% over 2005.

Sikorsky continued to struggle with the production ramp-up challenges in the fourth quarter as evidenced by an operating profit margin of only 5.5%.

Neither of these two issues are a surprise and we expect both businesses to improve significantly as we move through 2007.

As discussed in December, the tax rate in the quarter was a bit over 26%, which provided us with about a $0.02 benefit as compared to our target effective tax rate of 28%.

This benefit is primarily from the recently reenacted R&D tax credit.

For 2007, we will again be targeting an effective tax of 28%.

Restructuring charges in the quarter were $82 million, or about $0.05 a share.

Total restructuring charges for the year exceeded onetime favorable items by about $0.01 of EPS.

So a strong quarter which finishes off a strong year for UTC.

I'm now on page 3 of the web cast.

Earnings per share for the year were $3.71, that is up 19% over 2005, and keep in mind that 2006 results follow 18% EPS growth in 2005 on top of 19% during 2004.

So clearly the portfolio has been performing well.

During this same three-year period, we invested over $1 billion in restructuring, continued to improve the businesses, including nearly $300 million during 2006.

These restructuring actions will continue to provide year-over-year benefit in 2007, which gives us confidence in our current EPS guidance for 2007 of $4.05 to $4.20 per share.

For the year, revenue growth was a solid 12%, with 9% of that coming organically.

This continued a recent trend of significantly higher than GDP levels of organic growth with 2006's 9% growth following 7% organic growth in '05 and 8% organic growth in 2004.

We have a stable of great new products from Otis's Gen2 elevator to Carrier's SEER 13 system, to Sikorsky's new Black Hawk family of helicopters to Pratt & Whitney's new line of very light jet engines, the PW600 family.

These products, coupled with our strong position in emerging markets of the world, like China, will continue to drive healthy organic growth.

So let me stop there.

Let me turn it over to Ken to take you through the business unit details.

Ken?

Thanks, Greg, and I'm going to begin on page four of the web cast, reminding you that as always, I'm going to talk about the business unit results after adjusting for restructuring and onetime gains.

After solid revenue and profit growth through the first three quarters, Otis finished the year with a very strong fourth quarter at 15% revenue growth and 16% profit growth.

Favorable foreign exchange contributed about a third of both revenue and profit growth in the quarter.

Revenue growth in all regions was driven especially by new equipment, particularly in China.

The operating profit growth reflects continued cost containment and a healthy new equipment volume increase.

For the year, Otis delivered an incremental $170 million of operating profit, or 10% growth on 7% revenue growth.

Margins expanded another 40 basis points in 2006, reaching nearly 19%.

Ongoing cost containment and efficiency actions more than offset commodity headwind, continued pricing pressures and a shift in the Otis revenue mix towards new equipment.

New equipment orders increased double digits, led by China and North America, partially offset by continued softness in Korea.

We expect 2007 to be another solid year for Otis with mid-single-digit revenue growth and operating profit growth of at least $175 million.

At Carrier, fourth quarter operating profit declined 3% year-over-year on 6% higher revenues.

Residential unit shipments in the U.S. were down about 50% in the quarter, reflecting the impact of tough compares to the 13 SEER pre-buy, as well as the weak housing industry.

In the quarter, unit shipments of furnaces were down by more than 30%, further indicating the impact of the slowdown in residential new construction, as well as an unusually warm start to the winter selling season.

As a result, earnings were down significantly in this high-margin business.

On a positive note, we feel good about our inventory position as our stock of residential air conditioning units is at the lowest level of the last four year ends.

Carrier overall has reduced inventories by more than $0.5 billion from the mid-year peak.

The drop in Residential profits was partially offset by better earnings in our Commercial and Refrigeration businesses.

Commercial HVAC continues to benefit from generally healthy markets around the world as well as savings from recent restructuring actions.

The Container market rebounded in Q4 and our European Refrigeration business did continue to grow its profits.

For the year, Carrier earnings were up 5% on 7% revenue growth.

We continue to expect Carrier to deliver mid-single-digit revenue growth and profit growth of $150 million in 2007.

We also anticipate a difficult compare in the first quarter as a result of last year's pre-buy, followed by relatively stronger earnings growth in subsequent quarters.

At UTC Fire and Security, operating profit growth was again strong at 26% on revenues that grew 10%.

Continuing benefits from restructuring and Kidde integration actions resulted in margin improvement of 110 basis points during Q4.

Favorable foreign exchange and acquisitions drove the double-digit revenue increase.

During the quarter, Fire and Security completed its acquisition of Red Hawk, a U.S. electronic security business.

Organic growth was 2% as we continue to focus on margin expansion and building a platform for future growth.

Fire and Security had a solid 2006.

Full-year revenues grew 12%, operating profit grew 35% and margin expansion was 130 basis points, all above our guidance early in the year.

Full-year impacts from a number of legacy Chubb factory closures completed in 2005, as well as Kidde integration savings, generated much of the profit and margin expansion.

We are pleased with the linear progress this division is making towards the goal of 10% operating margin in 2008.

For 2007, Fire and Security will continue to focus on margin expansion and profitable revenue growth.

We expect revenues will grow high-single digits with operating profit growth of over $100 million.

Pratt & Whitney revenues increased $451 million in the quarter, or 17%, led by 20% aftermarket sales growth in the large commercial engine business.

Military engine revenues increased 15% on higher engine volumes and development revenues, and Pratt & Whitney Canada revenues also grew double digits, driven principally by higher new engine shipments, while Power System revenues more than doubled.

The operating profit growth of 15% reflects the higher revenues, partially offset by higher year-over-year commodity costs and less favorable engine mix.

In addition, higher estimated costs for a long-term service contract and legacy environmental exposures resulted in charges of a little less than $50 million in the quarter.

Although up sequentially, R&D costs declined year-over-year, favorably impacting fourth quarter operating margins by approximately 70 basis points.

Pratt & Whitney delivered a strong 2006 with revenues up 20% and profits up 21%.

Revenue growth in the large engine aftermarket in Pratt Canada, up approximately 25% and 20% respectively, drove the profitable results.

While spares order rates have decelerated a bit in the second half of 2006, we continue to project that Pratt & Whitney will post solid results in the coming year.

Revenues should grow at a mid-single-digit rate with operating profit growth of approximately $200 million.

Hamilton Sundstrand also delivered a strong quarter with 16% operating profit improvement on 13% revenue growth.

Resulting operating margin is 50 basis points.

Revenue growth was solid across both the industrial and aerospace businesses.

Operating profit growth benefited from solid aero aftermarket performance, as well as the strength of the industrial portfolio.

As we saw through 2006, higher program-related R&D spending, principally on the 787 program, impacted operating margins with this quarter's headwind at approximately 60 basis points.

Following similar drivers in the earlier three quarters, Hamilton delivered a solid year with revenue growth of 14%, profit growth of 18% and another 60 basis points of margin expansion.

As with Pratt & Whitney, we anticipate a deceleration in Hamilton's aero aftermarket growth in 2007.

Despite this, we expect Hamilton revenues to grow at a high-single-digit rate and profits to increase another $100 million.

Now Sikorsky revenue growth again was strong at 27% in the quarter as customer demand for helicopters and services drove the top line.

Sikorsky delivered 39 helicopters in the quarter compared to 34 last year.

Profits declined 14%, however, and margins declined 270 basis points as Sikorsky struggled with higher production and sourcing cost to deliver these aircraft.

For the year, Sikorsky had revenue growth of 15%, driven by the strong demand for helicopters and services, along with the impact of the Keystone acquisition.

Despite the strike, Sikorsky delivered 110 helicopters, 10 more than 2005.

Production- and sourcing-related cost challenges, coupled with the impact of the labor strike, held back profits, and year-over-year profitability declined 23%.

For 2007, we expect stronger performance from Sikorsky with sequential profit growth each quarter and anticipate revenues will increase high-teens and profits will increase by $150 million.

Now one additional item to cover -- we did have favorability below the segment line where elims and other are better year-over-year, driven primarily by lower insurance costs.

Additionally, we continued to see higher interest income and lower hedging costs, although not to the extent we saw earlier in the year.

Now with that, I will turn it back over top Greg.

Okay, thanks, Ken.

So overall, 2006 was another very strong for UTC.

I know we've said it before, and we'll say it again I'm sure in the future, but balance truly does work at UTC.

Just a few comments on cash flow.

As you know, it has been a challenge for us earlier in the year as a result of our healthy organic revenue growth, coupled with some aero supply chain issues, and of course the Sikorsky production ramp-up challenges.

Free cash flow in the fourth quarter was very strong at $1.3 billion, or 151% of net income.

For the year, free cash flow reached $3.85 billion, or 103% of net income, which is in line with our guidance.

Fourth-quarter cash flow was driven by working capital reductions reflecting inventory reductions of over $500 million and solid collections.

Included in the quarter was $159 million of voluntary cash contributions to our pension plan and $485 million of cash taxes paid.

Cash pension contributions for the year totaled $190 million.

Acquisition spending, including debt assumed, was $514 million in the quarter, approximately half of the $1 billion total for the year.

The acquisitions of Page Aerospace by Hamilton Sundstrand, Red Hawk by UTC at Fire and Security and the Longville Group by Carrier were all completed during the fourth quarter.

Acquisition spending in 2006 was of course short of our standard $2 billion placeholder, but as we've said before, acquisitions happen when they happen.

For 2007, we will again hold a $2 billion placeholder for acquisitions.

During 2006, we returned more of our free cash flow to shareholders than ever before in the form of dividends and share repurchase.

We repurchased almost $2.1 billion of our shares during the year, an all-time high.

Coupled with dividend payments, this equates to about 80% of our free cash flow being returned to shareholders.

For 2007, we are again targeting $1.5 billion for share repurchase.

And depending on deal flow, that number may well drift up during the year, just as it did during 2006.

So a very good year -- so 2006 was a very good year, and for 2007, we continue to see another strong year ahead.

Revenues should grow to approximately $51 billion on mid-single-digit organic growth.

We continue to expect EPS to be in the range of $4.05 to $4.20 a share, and we again expect cash flow exceeding net income for the year.

The market outlook is generally favorable and the businesses are positioned for continued solid performance.

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

Tony?

(OPERATOR INSTRUCTIONS).

Cai von Rumohr, Cowen and Company.

Could you give us a little more color on the charges at Pratt, whether basically or a little more as to what they were for?

Were they always in the plan?

And looking forward, maybe some comment on what you expect for aftermarket growth, given the impact of lower oil prices.

A couple of things about Pratt in the quarter.

Obviously, we're very pleased with the top-line growth, and I would say that the charges that we took really were twofold.

One related to an environmental issue associated with our East Hartford facility or campus, as well as a charge related to some cost growth on an aftermarket contract.

That, coupled with some growth that we saw in commodities again at Pratt, almost $40 million, really are what has held the margins down this quarter.

That, along with I guess you could say probably a doubling of Power Systems revenues at Pratt -- that's our Ground Power business.

As far the aftermarket goes, I think we've said this before and we'll probably continue to say it until we're proved right.

We don't expect 20%-plus growth in the aftermarket to continue, but we clearly see double-digit growth in the aftermarket.

Last one, do you anticipate any more charges for environmental or aftermarket contracts as we look forward to 2007?

No, I think these are pretty much behind us.

Okay, thank you.

Steve Binder, Bear Stearns.

Over at Otis, could you maybe just touch on the proportion of revenues that came from new equipment sales in the quarter?

You touched -- there's actually two headwinds you touched on.

One was pricing pressures, and maybe you can just expand on that.

And two is just the new equipment mix -- what did it represent in Q4, and what it represents for the full year '06 year-over-year?

The new equipment to service mix was very strong, shifted towards the new equipment side, about -- probably high-teens growth on the new equipment orders in the quarter overall for Otis.

And service, as it typically does, grew in the mid-single-digit rate.

So you see that shift in new equipment.

We talked about the markets.

It was strong in North America and China, and then some softness in Korea.

Japan actually had a decent revenue quarter and the orders have been up and down quarter by quarter there.

So that's the strong revenue mix to new equipment.

Pricing and commodities, Otis had a little bit more commodity headwind in the fourth quarter than they've had earlier quarters this year.

A lot of that comes from what we call year tier 2 suppliers, so that's where they're actually buying components from.

And then as they renegotiate that, some of the metals costs that we have seen hitting us earlier in the year at places like Carrier and now rolling a little bit into Otis's commodity headwind.

Pricing, the story is the same as we've talked about all year long.

China has new players come into that market and more and more of the players that we compete with in other markets already.

Pricing is a little bit tougher there.

And then, always, our customers are pushing on us for pricing as we deal in the European and North American markets.

But I would say nothing outrageous this quarter versus the previous ones.

We've just highlighted it consistently.

But, Ken, I was actually just aiming to get the new equipment to -- well, what percentage of sales came from new equipment in the quarter versus the full year?

It was a little bit stronger this quarter. so we said high-teens basically for new equipment revenue growth this quarter, probably a little bit higher, maybe a few points higher than we saw in previous quarters of the current year.

Alright.

And then on a year-over-year basis, Pratt & Whitney, the large commercial engine orders and Hamilton, you touched on book-to-bill coming down.

Just year-over-year growth in orders at Pratt & Whitney and Hamilton Sundstrand for catalog parts -- can you give us some order of magnitude, what kind of growth rate we saw?

Was it mid- to high-single-digit growth?

The orders growth for parts in the quarter were essentially flat.

And lastly, Jim, since you're on the call, or I think you're on the call, could you touch on the acquisition pipeline today compared to what you have seen earlier in the year?

Sure, Steve, thanks.

We did spend about $500 million in the fourth quarter for core acquisitions, so there's some activity going.

Small, again, in the core, and assets are available today.

I wouldn't say the pace of assets has changed any, at least in the seven or eight months that I've been in this job.

That is no different.

And what is also no different is we still buy with attention to value, and that is why we gave you a soft placeholder of $2 billion for the year, and we may do a little bit more.

Or, if the value is not there, will end up doing a little bit less.

Okay, thank you very much.

Howard Rubel, Jefferies.

Thank you very much, just three things.

One, I saw you are starting to move work to Keystone.

Could you address how that is going to help Sikorsky?

Do you want me to give you all three, or do you want to just take it serially here?

Okay, fine, that is first.

Second, talk about Power Systems and what is the outlook there in terms of change?

Is this just one-off, or in fact, are you gaining some share, and is the product starting to take hold?

And then the third thing is, could you just address the first quarter?

I know at the December 13th meeting, you talked about some unusual items, Greg, on both the puts and the takes, and maybe if you could just get that out ahead of us dealing with it for three months from now.

Sure.

Well, let's start with Sikorsky.

Obviously, I think you saw, there was a press release earlier this week, we had the certification down to shift commercial helicopters from our Keystone facility.

Sikorsky had a plan last year to ship about 160 large helicopters; they only shipped about 110 at the end of the day.

This year, they again have a plan of over 160 helicopters, so up about 50%, and that will be another 50% in '08.

So, again, I think that the backlog is strong.

We are starting to get our arms around some of the issues that plagued us last year.

Keystone is really just one of the answers, however, and we have been working this production capacity issue very hard for the last nine months now, and unfortunately, we probably should have started nine months before that.

This problem didn't start with the labor strike back in February, but really started as we saw the ramp-up coming back in 2005.

So we're making progress.

Overdue hours are coming down, but it's a slow journey and it will take us most of the year I believe to get back on track at Sikorsky, but we're confident in the guidance of $150 million of additional operating profit this year and we're confident they have a plan to get those helicopters out the door.

I want to interrupt for half a second.

George had indicated Louis was going to go down there and spend a lot of time at Sikorsky.

Maybe you might be able to just at this juncture give us what he uncovered and what some of the changes were, because -- of his expertise in terms of reorganizing flows and looking at production processes.

Sure.

Actually we have been down, and we've actually implemented monthly operating reviews with Jeff Pino and team.

Louis I know has been down the every week this year sitting with Jeff and the management team and we've participated in some of those reviews ourselves.

And really, what we see is it's basic blocking and tackling, but it's also getting costs under control.

We outsourced last year just to simply find capacity, and when you do that, obviously, you don't control your costs.

So a big focus this year is cost, it's margin expansion there.

And I think what we've found is, we put in an SAP system down there probably a little too quickly and we have been struggling with the production ramp-up as well as trying to understand what's going on in the factory because of the new SAP systems.

So none of that is getting behind -- or, most of that is getting behind us now, but again, it's nothing that is going to be solved today or tomorrow.

I think Louis is going to be visiting some of the key outsourcing facilities later this week at Crestview, which has been a problem for us, and I expect we will uncover more issues there and we will deal with them one at a time.

And any other items in there?

On Power Systems, Ken?

Yes, Howard, on Power Systems, we talked about doubling that revenue in the fourth quarter.

I guess I should also point out that that growth has been sequentially stronger this year where revenues are up more than double for the year in Power Systems overall.

So we are seeing a little bit of traction in that business obviously.

Number of units, we've delivered 32 units this year versus 10 last year, so you can see that in the top line.

A little bit more color on that, and I will leave it at that, is a lot of the shipments are going outside -- or a lot of those contracts are outside the U.S. in emerging markets where the demand is strong.

And so I would guess I would say your question about outlook, we feel good about the outlook of this business continuing with the positive trend.

Howard, your final piece on the Keystone, and for those of you that aren't familiar with that asset, it's a small company that we bought in suburban Philadelphia that does helicopter work a little bit over -- almost two years ago now.

You know, Howard, we needed a little bit of commercial work there, and that's just all part of supply chain and Sikorsky managing its operations.

And I guess the follow-on or the last question that you had, Howard, that related to first quarter, some of the one-timers that we had in 2006, you will recall that Pratt sold a partnership interest in an engine family from Pratt & Whitney Canada to Piaggio, which resulted in a small gain of about $25 million.

That was included in Pratt's segment result.

It was not adjusted out.

We also, you will recall, of course had the strike at Sikorsky.

Their earnings were essentially zero for the first quarter, I think about $3 million.

We also I think had a sale of some marketable securities which gave us about a $25 million gain back on the first quarter.

And of course, we would not expect any of those things to repeat this quarter.

The only other thing I would add to that, Howard, is the -- remember, we pointed out in the script as we were talking about the performance that Carrier's Q1 will be tougher than their following three quarters, just because of that year-over-year compare to the very strong first quarter of '06.

George Shapiro, Citigroup.

It looks like Carrier's profits were slightly better than what you intimated in the December meeting, and Sikorsky's slightly worse.

Can I deduce from that, that you're feeling a little bit better about Carrier, and that Sikorsky still seems to struggle, or is it too short a time to make any deductions?

I think that it's probably a fair characterization of how we finished up the fourth quarter.

Carrier did come in a little bit stronger.

The container market actually ended up with a fairly healthy backlog, which at the end of the third quarter, we did not see.

In fact, we I think signaled some concern about the container market.

So I would tell you, Carrier, they are poised for growth here.

As Ken said, they're going to have a tough first-quarter compare, but we certainly see significant progress during the year at Carrier.

Sikorsky, I think you're right.

Revenues, again, came in fairly strong, but we did not get all of the helicopters out that we had hoped to get out in December.

We're still behind schedule, and that will be a full-year project for all of us.

And then the helicopter, the growth to 160 this year, is that pretty even between military and the commercial, or is it more biased to one?

It's pretty even, in terms of the growth.

Okay.

And if I go back to Pratt for a minute, the book-to-bill in the third quarter you said was a little but less than 1, and yet we still saw spares growing near 20.

Is that just short of lead times, or why didn't the book-to-bill adequately project the slowing growth rate this quarter?

I think what you have seen is a very, very strong order book in the first half, and even in the last half of 2005, and so we carried a fairly significant backlog into 2006.

And so what you're seeing today is the delivery of all of those parts, as well as bigger repair orders, actually higher dollar value repair orders in the second half of the year, which is really offsetting the -- I guess masking, perhaps, the slowdown in the actual order trend.

And was the growth in the maintenance and repair business similarly, about 20%, as the overall spares growth was?

Yes, it's right in line.

Okay, thank you very much.

One last one actually.

In the cash flow, there is a big swing in the other line from this year versus last year.

If you could just go through what that relates to.

On the year-to-date basis, that's about a $900 million variance year-over-year.

About half of that is due FX translation that gets pulled out of operating cash flows, and the other half really comes from the Pratt collaboration settlement that we had earlier this year, reversing that accrual as we paid cash and took a gain.

Those are really the two pieces of that.

Okay, thanks a lot, Ken.

Joe Campbell, Lehman Brothers.

Good morning.

I just wanted to ask about what Howard sort of started on with regard to the sequence of the way we might expect the net income and EPS to progress over the years.

Generally speaking, the first quarter is always a weak quarter with strength in the middle and then a kind of fourth quarter to clean up in.

Should we be expecting that the United Technologies' EPS progression could be characterized as back-end loaded, or will it be pretty close to the -- the usual progression is kind of 50% in the first half, with 20 or 21 in Q1 and kind of 28 or 29 in the second quarter.

Should we really expect any major -- and if you look at 10 years of United Tech, it kind of always looks that way.

Should we really expect 2007 to be any different?

Maybe a couple of factors, and I will turn this over to Jim after I'm done.

I think we obviously see earnings growth, or we see the businesses all progressing through the year.

But I think on the aerospace side, we see a continuation of the trends that we saw in the last half of the year, or really all of 2006.

So no slowdown there, even in the first half.

Obviously, there's going to be a tougher compare, as Ken mentioned, on Carrier.

Sikorsky will have a better first quarter we believe than their fourth quarter, so that's going to be helpful.

So I think it's not going to be a huge first quarter.

We're not going to forecast earnings, however, for the quarter.

I would tell you, second quarter GAAP basis is going to be a really tough compare because of the tax gain and the collaborations gain from last year, so you just need to keep that in mind.

And then through the year, again, I think continue to make progress at Sikorsky and at Carrier.

Of course, there's just a typical seasonality to Carrier's business, which gives us a very big second and third quarter.

And I don't think anything there is going to change dramatically.

Joe, maybe just to go at that a slightly different way, I think typically, UTC grows at about the same good, high rate when you strip out -- occasionally, when gain equals -- or when gain is in excess of restructuring.

And I will say it now more simply, which is -- we aim that you would like each quarter of 2007.

Okay, great.

I was just looking for not the year-over-year gains, but how the 100% of the EPS we're all forecasting, which you agree with, might be distributed, and whether we should expect the difference in the distribution from what is standard.

I mean, there's that kind of variance of a percent or so, but not much.

And I'm trying to figure out whether people who might want to characterize United Tech as being back-end loaded would be correct.

It's usually not the case that more than 50% of the earnings are in the second half, or if that's the case, it's certainly not more than 51.

I think any characterization of back-end calendarization would be incorrect.

Thank you very much, I appreciate it.

Heidi Wood, Morgan Stanley.

I just want to get a little more detail on Sikorsky.

Can you break out for us with this greater than 160 shipments this year, how they would ship over the course of the year to help us gain confidence for this expected recovery in the second half?

We don't actually have in front of us the delivery schedule for the year.

We will tell you (technical difficulty) sequential operating profit improvement each quarter from Sikorsky as we have moved through 2007.

So that would indicate you're going to be delivering more helicopters as you get towards the back end of the year.

That is probably a good question for Mr. Pino, whom you guys will be seeing here in about another five weeks at our annual investor day in New York.

So I think that is about all of the color we can give you there.

Okay.

And then, you talked about cash flow for the year, but we saw a buildup in inventory and accounts receivable.

Presumably some of that is Hamilton Sundstrand, 787 and the Sikorsky.

What happens over the course of the year in cash flow because of those items?

I guess as you go back into 2006 results where inventory grew about $1 billion during the course of the year, receivables really were just the normal seasonality that we see out of Carrier, and we did see Carrier had a significant reduction in their accounts receivable as they collected those accounts towards the end of the year.

I would tell you, Carrier made progress in inventory, Pratt made progress in inventory, Sikorsky and Hamilton did not make much progress in the fourth quarter on inventory.

We would expect those inventories to come down here in 2007.

However, at Hamilton, really no impact on inventory from the 787 program.

All of those costs are sitting there, are being expensed on the development program and we really haven't started ramping up for the production deliveries yet.

There's a little bit in the supply chain, but not a huge amount.

And if Sikorsky inventories are growing, obviously they've got some capitalized engineering on some development programs, and that's actually adding about $500 million over a couple of years to their inventory balance as they prepare to start delivering on the Canadian Maritime Program.

Okay.

When do you begin production on the 787 for Hamilton Sundstrand?

When does that happen in the course of '07?

It will.

There is a buildup of deliveries.

In fact, we are delivering hardware today for some of the first test aircraft.

And given the lead time on that, I think we will start to see some inventory build at Hamilton, but not a significant piece in 2007.

Okay.

And then, can you give us the shipments by engines and helicopter types in the fourth quarter and for the year?

Sure.

There's actually -- we started putting an appendix in the back of the web cast so you can see yet, but I'm glad to give them to you.

I'm sorry, I missed that.

That's okay.

Commercial engine shipments for the fourth quarter were 110, industrial were eight, military were 52.

Pratt Canada shipped about 744 engines in the quarter, and then commercial helicopters were 21, and military helicopters were 18.

And one last question.

Can you just give us an update if you have it available on what your China sales were for 2006 total, then perhaps by division?

China sales for UTC overall reached about $2 billion for 2006.

A little more than half of that was at Otis, followed by Carrier, and then the rest of the business units were a little bit smaller than that.

Alright, great.

Thanks very much.

Nicole Parent, Credit Suisse.

Just a follow-up on Heidi's question.

Greg, you mentioned you're starting to get a handle around the issues at Sikorsky.

At the December meeting, you gave us past dues, you gave us an estimate for the fourth quarter.

Do you have the actuals, and also, an updated estimate for Q1 and Q2?

And I guess you also mentioned Louis has been down there doing monthly operating reviews.

Could you give us a sense of the metrics that you are looking at, whether it's productivity, materials management, engineering, overhead reduction, supply optimization, just to help us get comfortable with the line of site to how you're actually measuring and actually delivering on your goals there?

I think we can do all that.

Let's start with kind of an update from the forecast that George provided to you in December.

We had expected past due hours to come down to about 400,000, down from a peak of just over 800,000 back in the second quarter of 2006.

In fact, we ended the year at just about 500,000, so did not get to our goal of reducing past due hours to 400,000 but we did make significant progress.

We also had anticipated that most of the lines would be at run rate for 2007.

In fact, only two of the four lines got to run rate.

So not as much progress as we had hoped in the fourth quarter, and I think that's borne out by the margins you see at Sikorsky.

As far the metrics that we're looking at, it's probably the normal, usual things that anybody would look at in an operating review.

We're looking at schedule compliance and compliance to MRP, rather; we're looking at past due hours, we're looking at costed bills of material and material price variance.

We're looking at quality metrics.

We're looking at customer feedback, just the normal, usual things.

And I would tell you, it's more blocking and tackling than anything at this point.

It's about execution in 2007 for Sikorsky using the [ACE] tools that we all know well.

If you were to characterize one or two or three as kind of bigger issues in terms of the metrics, what would be the ones you're most focused on, or is it everything?

Well, I think you've got a parade of these things that you have to take and deal with the biggest issues first.

The first issue is delivery to keep the customers happy.

The second issue that we are focused on is cost.

All of those things get better when you get to schedule compliance and you're getting into MRP, and right now, we're running I think less than 7% on time to MRP.

Okay.

And I guess to Heidi's question, when we think about shipments over the long-term at Sikorsky, will we get additional color over, say, the next five or seven years to what your forecasts are by model?

I think Jeff can certainly provide a look into the future.

We've got a very strong backlog, as you know, over 1200 of the R models we expect to deliver, as well as some of the Sierras, and I think we can certainly get you that detail here in the coming month or so.

Great.

And with respect to the new North American Otis orders, I know they were up double-digit in the quarter.

Could you characterize them relative to what they were in the third quarter?

Did you see any softening?

How are you feeling about the pace of commercial construction?

We still feel good about it.

Third quarter, we told you they were at 30-40% growth rate.

This quarter, they were probably a little more than 20%, so they were still very strong.

The underlying indicators looked good for us.

We watch the commercial starts, as you guys -- as we've talked about, you and I have talked about, and the key part of that that we watch are the large buildings, the luxury buildings, and the big resort type projects.

Those really drive the business, and that has all continued to remain strong throughout the year.

Terrific.

One last one on Carrier.

Just given the commentary on lowest inventory levels in four years, how comfortable are you with the ramp-up in that business, given where inventories are and given the shutdown there in December?

I think we're very confident as we look forward, because those inventories are low.

Now the market obviously is down significantly.

We're down in line with the market, but very confident.

But again, Carrier is not just North American res.

It is a piece of the business, but there's more to Carrier, and I think it's those other pieces that are going to continue to perform well.

And the market we expect, if not bottomed out, certainly that's not going to drop significantly more in 2007.

Nicole, remember, that factory, Collierville and Indy, they both shut down a couple of times a year, so they know this process of ramping down and ramping up, and we feel good that before we ramped down this year, we were able to get above the 9000-unit-a-day level.

Okay, terrific.

Thank you.

Joe Nadol, JP Morgan.

This is actually Chris Edwards this morning.

Joe's on jury duty this week.

I just have a couple of more questions on Carrier.

To begin with, Carrier, I know you said that Container came in more stronger than you had anticipated before, but even then, we had expected Carrier to be down more than it actually was.

Was that the only thing going on there, or are there some other moving parts there?

I think, you also have to remember that, as we pointed out, the European refrigeration business continued to grow its profits as we see benefits from restructuring actions, specifically at Linde that we launched as we brought that business a couple of years ago, and we continue to see the benefits there.

I guess that would probably be the other largest item.

And then in the quarter, we have been able to throughout the year make progress on our pricing against commodities.

And in the quarter, Carrier was able to essentially offset their commodity headwind.

So that is also a positive moving part.

That leads perfectly into my next question, because copper prices have taken quite a dive over the last month or two, and I wanted to see, just ask, is that going to make for less headwind than you had previously expected in the coming year, or is it about what you were looking at?

Clearly, Chris, it is a positive for Carrier as copper prices are hovering I think right now about $2.52 a pound.

Last year, the average rate was just about $3.00.

I think the only caveat I would make to that is, Carrier has historical historically hedged copper forward so that about 75% of the next six months' production is generally hedged.

So we're not going to see in the first half the big benefit associated with the reduction in copper, although clearly, we would expect some tailwind from it as we move through the year.

Of course the flipside to that, as commodities start to go down, there's always pressure on pricing, and the trick for us this year will be to hold onto those price increases that we have implemented in the last couple of years and to try and improve the margins in the business.

Alright, thank you very much, guys.

Deane Dray, Goldman Sachs.

I would like to get some more color regarding the core revenue growth.

That 10% this quarter, that's exceptionally strong, both given where your guidance was and versus peers.

You did say Fire and Security came in at 2% organic growth.

Can you give color on the other segments?

Sure, Deane.

Otis was at about 10% organic for the quarter.

Both Carrier and UT Fire and Security were at 2 points for the quarter in organic.

Pratt was strong at a little more than 15%.

Hamilton was about 11%-12%, and Sikorsky was the strongest as we pointed out on the demand, and they were a little north of 20% organic growth.

On Carrier, you had said that you were able to offset the commodity headwinds with price.

So is that -- when you say 2% of organic, that includes price, so it would be probably be flat on units?

Yes.

And remember, you have the whole year-over-year change from 10 SEER regulations to 13 SEER, which also has a price impact in there, but your point is exactly correct.

Of course.

And then in December, George gave the very nonspecific guidance for organic for '07; he said 5-ish, and Greg said mid-single digits.

As we exit '06 at 10%, what is the expected ramp down or headwind, or is this a more traditional conservative guidance for '07?

(indiscernible) is the kind of guidance you give in late January.

Okay.

We ended the year very strong organically, we feel very good about the businesses, our penetration in emerging markets, our products.

I think 2007 will be a good year for organic revenue growth.

That's fair.

More of a strategic question on the (indiscernible) [with] side.

You've had a recent development with GE going into avionics and some extensions, adjacent markets for them with the Smith's Aerospace acquisition.

Can you comment on what this does in terms of competitive landscape for you?

Does it change anything in terms of priorities on the acquisition side, expectations for consolidation?

Obviously, something has changed here, and should we expect any response?

We read the headlines like you, and I don't think a response is required today for couple of reasons.

First is, we didn't compete.

We don't compete against Smith's very often, just the products they make versus the products we make.

Where we did, they were a pretty good competitor.

I expect with GE's ownership, they will be the same kind of good competitor.

Of course, we'd look at an asset like this, as you would expect, and it would have been a nice fit.

But, Hamilton is already a great business with a very, very good franchise, and we'll continue to look to be a consolidation in the space, but at the right valuation.

Great.

And when you comment on the $2 billion placeholder, what would be the maximum balance sheet flexibility that you might have without impacting any of your ratings?

You know, for ratings, we do like our rating and it's not something we assigned.

It's what somebody else assigns for us.

So you would have to talk to the rating agency and they would tell you, well, it's all dependent on what kind of deal and what you do with share repurchase and dividend.

But suffice it to say, we have not felt constrained by the rating to go improve and grow our businesses, and I don't think that would be the case in the future either.

So there is more headroom above that $2 billion placeholder?

Absolutely.

Okay, thank you.

Ron Epstein, Merrill Lynch.

Just a couple of quick questions, just about everything has been asked.

Anyway, when you look at Pratt Canada, you guys had pretty phenomenal growth in units this year.

Looking forward into 2007, kind of how should I think about that?

How should we think about the growth in units at Pratt Canada?

I think you're going to see similar, even higher growth in 2007 as the VLJs come online heavy.

So you saw about 20% growth this year.

We should be north of that in 2007.

Okay, and that's driven by the PW600 family?

Exactly.

That's great.

On global materials solutions, you guys just started shipping product.

Is that right?

In fact, we're going to, we believe, start shipping here in the first quarter, when we -- the first gas pad parts will be certified.

And I just wanted to get an update where global materials solutions stands and how that's going.

In fact, it's right on track from where we had expected from a certification standpoint.

We mentioned first quarter this year, we ought to be receiving FAA certification on the gas pad parts.

By early 2008, we ought to have certification on all of the LRUs and life limited parts in the engine.

So from that standpoint, it's going very well.

Customers, we're still talking to a lot of different customers.

We have not announced a second customer, but there's certainly a lot of customer interest out there in our offering.

Okay, great.

One last final question.

I think this is just kind of following up on one of Heidi's questions.

When we look into the cash flow conversion for next year, it was outstanding in Q4, and you guys are telling the street that it would be about, what, a 100% conversion rate?

That's correct.

When we think about it, the distributions through the quarters, is there going to be any quarter that might be better or worse or lumpier as we think about our forecast for next year?

I think, as we look at this, there is a normal seasonality to UTC's cash flow.

I think a couple of things to keep the mind, we've had strong organic growth and we expect strong organic growth again.

And that will be a -- something we will need to overcome as obviously there's working capital requirements associated with that.

Carrier also has normal seasonality associated with their businesses.

They're building inventory here in the first half, delivering products second and third quarter, and then collecting the receivables in the fourth quarter.

So it is naturally a little bit lumpier than you might otherwise think.

But nothing and outstanding than normal seasonality, just kind of -- that's how --?

No, just -- I'd say the normal, usual.

Okay, that's great.

Thank you very much.

Tony, I think we're going to take one more question please.

Myles Walton, CIBC World Markets.

Greg, it looks like this is the first year in the past four you have been able to make any dent in SG&A expense as a percent of sales for UTC.

I think you got about 80 basis points expansion off of it this year.

As you look to '07, is there more opportunity in SG&A?

Because if there is, it certainly looks like you have plenty of runway also on the gross margin side with the Carrier and Sikorsky improvements.

I think what you see is, in 2006, is we did make very good progress.

In fact, almost I think 100 basis points of margin expansion of as a result of the leveraging G&A, and that's just part of the usual UTC playbook and we're going to continue to go down that path, keeping G&A costs in line as we continue to grow the top line of the business.

And on a gross margin basis, clearly a disappointing 2007, primarily because of the commodity costs at Carrier and the market meltdown at North American HVAC, but also because of Sikorsky.

So those things should start to correct themselves, and we would see an expanded gross margin here in 2007.

And with respect to pension, looking into '07 can you give us an update on what your expense as well as your cash funding assumptions are?

This year, we funded on a cash basis about $190 million for the pension.

Most of that was outside the states where we still have deficits in places like the UK.

And given the good shape of our U.S. plan, I would expect pension funding in '07 would be at that level or a little bit lower.

Great, thanks a lot.

Okay, let me wrap it up then.

Obviously, a very good 2006, and we look forward to another good strong year in 2007.

I think we're well positioned across the businesses.

It is, however, early in the year, and there's still a lot of things to do as evidenced of course by the discussions that we had on both Carrier and Sikorsky.

So nothing to do today.

We will be back in front of you guys again in about five weeks and I look forward to that.

So thank you very much.

This does conclude today's conference call.

We thank you for your participation.

You may disconnect at this time.