雷神技術公司 (RTX) 2010 Q3 法說會逐字稿

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

On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer and Akhil Johri, Vice President of Financial Planning and Investor Relations.

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

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

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

Once the call becomes open for questions, we ask that you limit your first round of questions to two per caller to give everyone the opportunity to ask questions.

You may ask further questions by reinserting yourself into the queue and we will answer those questions as additional time permits.

Please go ahead, Mr.

Hayes.

Thank you, Katie, and good morning, everyone.

As you saw in the press release this morning, solid results and end market environment that continues to improve.

Some key takeaways for the quarter; organic revenues grew 3%, segment operating profits grew 9% adjusted for restructuring and one-time items, demonstrates the benefit of our structural cost reduction and the resulting strong operating leverage.

Segment operating margins set another record and free cash flow is very strong at 125% of net income.

As you all know, the global economic recovery remains uneven.

Global airline industry continues to gain traction as airlines have kept capacity additions well below air traffic growth, leading to higher yields and capacity utilization.

On the other hand, commercial construction markets remain weak with the exception of emerging markets.

In the face of this economic picture, UTC will continue to focus on cost containment and rigorous process improvements in our factories, our back offices, and our supply chain.

Based on this strong year-to-date performance we're confident in raising our EPS guidance to $4.70, that's the high end of our prior range of $4.60 to $4.70.

While firming up our outlook of $4.70 or 14% EPS growth, we're also increasing our estimate of restructuring costs in excess of one-time items by $100 million.

That's now $0.28 per share for the full year versus our prior guidance of $0.20.

Given the unevenness of the global economic recovery, we're going to continue to aggressively take out structural cost to position UTC to grow earnings consistently in the years ahead.

Turning to third quarter results, as I mentioned revenues grew organically at 3%.

Carrier had another very solid quarter with 7% organic growth driven primarily by continuing strength in the Transicold business.

Pratt & Whitney saw the expected recovery in the commercial aftermarket and Hamilton Sundstrand returned to organic growth for the first time since the first quarter of 2009.

On the other hand, Sikorsky's revenues declined 6% but they remain on track to deliver on the revenue guidance for the full year of up high single digits.

Earnings per share in the third quarter were $1.30, that's up 14%.

Net restructuring and one-time items were a charge of $0.09.

Excluding restructuring and one-time items in the third quarter of both 2009 and 2010, earnings per share increased 9%.

Restructuring charges in the quarter were $58 million and significant one-time items included an impairment charge of $159 million or $0.17 per share to bring our Clipper Windpower investment to market value as of September 30th.

This week, as you no doubt heard, we have announced our agreement to acquire the remaining 50.1% of Clipper at 65 pence per share.

We continue to see wind power as an attractive, high-growth market and Clipper Windpower will benefit greatly from the operational and financial strength of UTC.

Partially offsetting the Clipper charge was a net tax benefit of $102 million, related to our decision to repatriate additional high tax foreign dividends as a result of recent US tax law changes.

The accelerated dividend plan provides a benefit this year but the tax law change is a negative going forward as it will limit our ability to utilize foreign tax credits.

Cost execution continues to be exceptional across our businesses resulting in segment margin expansion of 90 basis points to another record of 16.3%.

Year-to-date segment margin expansion is 110 basis points, strong evidence of the operating leverage from our relentless focus on cost control.

Five of the six business units improved margins on an adjusted basis with Carrier, Fire and Security, and Sikorsky increasing by over 100 basis points.

Once again, Carrier led the way with 200 basis points of margin expansion to 12.1%.

E&D was up by $89 million over last year's third quarter and is now up $152 million year-to-date.

We now expect engineering and development to be up around $225 million for the year.

Hamilton continues to support the 787 flight test program but program delays continue to put pressure on their E&D spend.

Pratt and Whitney and Sikorsky also continue to ramp up new product development programs.

Okay, onto slide two, order rates.

Order rates remain robust across the business with a few exceptions.

Importantly, commercial aerospace aftermarket orders improved in line with our expectations for double-digit growth in the second half.

Pratt & Whitney and Hamilton Sundstrand commercial spares orders increased by 35% and 13%, respectively.

Carriers US residential HVAC shipments actually declined in the quarter due to consumer-related weakness while Hamilton's short-cycle industrial businesses continue to grow strongly.

Orders in our long cycle businesses were mixed.

Otis new equipment orders were flattish while Carrier's commercial HVAC global new equipment and total Fire and Security were up 4% and 7%, respectively.

Slide three -- in the quarter, free cash flow was 125% of net income, as I mentioned.

Strong performance even as we made additional pension contributions.

Importantly for the year, we now expect free cash flow to exceed net income.

In the quarter, we contributed $350 million in cash to our domestic pension plans bringing year-to-date cash and stock contributions to $800 million.

We now expect total domestic pension contributions to be around $1 billion for the year.

We also maintained the pace of share repurchase at nearly $500 million in the quarter and year-to-date we've now repurchased over $1.6 billion in stock.

For the full year, we expect to repurchase at least $2 billion.

So another solid quarter, continued organic revenue growth and a focus on cost reduction that drove strong earnings growth, margin expansion and good cash flow.

I'll come back and talk more about the fourth quarter and 2011 but for now, let me turn it over to Akhil to take you through the business unit details.

Thanks, Greg.

Turning to page four, let me remind you that I will talk to the segment results adjusted for restructuring and nonrecurring items as we usually do.

Otis had another strong quarter with margin expansion of 60 basis points to a record 23.7%.

At constant currency, profits grew 5% on flat revenues as benefits from higher service revenue globally and the ongoing cost reductions more than offset the impact of lower new equipment volume and pricing.

Foreign currency reduced revenue by two points and profits by four points.

New equipment revenue was down 3% in the quarter, excluding currency, as growth in the BRIC countries and the Middle East partially offset lower volume in North America.

Service revenues offset the new equipment decline driven by continued growth in contractual maintenance and improving repair sales.

New equipment orders in the quarter were essentially flat at constant currency as robust growth in Europe and a modest increase in China were offset by around 25% decline in North America.

On a year-to-date basis, new equipment orders are up 4% at constant currency, led by China, where orders are up over 15%.

In light of continued strong operating margin performance at Otis, and the recent US dollar weakness, we now expect full year profit to grow by at least $75 million as compared to our prior guidance of around $50 million.

We expect Otis revenues to be down slightly for the year from the mid single digit decline in new equipment.

On slide five, Carrier continues its transformation to a higher returns business and posted record Q3 margin of 12.1%.

Profit grew 19% on flat revenues, resulting in 200 basis points of margin expansion.

As Greg said, organic revenue growth in the quarter was 7%, similar to what we saw last quarter.

Continued strength in Transicold, Asian and Latin American HVAC markets more than offset weakness in shipments of US residential systems, which were down high single digit.

Transicold's organic revenues were up 40% while global commercial HVAC equipment organic revenues were up slightly.

Order rates for global commercial HVAC equipment were up mid single digit at constant currency.

Profit growth was driven by strong conversion on organic revenue growth as head winds from commodities and a $30 million one-time charge related to an unconsolidated foreign joint venture was more than offset by carryover benefit from cost reduction and restructuring.

We reaffirm Carrier's prior guidance of profit growth for the year of $250 million plus on mid single digit organic revenue growth.

UTC Fire and Security delivered operating margin expansion of 140 basis points on 20% higher revenues.

Organically, revenues increased 1% with the product businesses increasing low single digits and the service and install businesses flat.

Net acquisitions primarily GE Security contributed 21 points of revenue growth.

Foreign currency translation decreased revenues 2% year over year.

Third quarter orders grew organically 7% following mid single digit rate growth in Q2.

Backlog is up at a mid-teen organic growth rate from the beginning of the year, orders in Asia as well as the global product businesses were up around 20% year-over-year.

Operating profit grew 35% driven by acquisitions and the continuing benefits or productivity initiatives integration of field operations and restructuring.

For the full year, we expect Fire & Security revenues to grow high teens and operating profit to be up approximately $200 million compared to the prior guidance of up $200 million to $225 million.

Turning to Aerospace on slide seven, at Pratt & Whitney, revenues were up 7% in the quarter including four points from favorable currency conversion at Pratt & Whitney Canada.

Higher commercial aftermarket and military revenues were partially offset by declines at Power Systems and Rocketdyne.

As expected, large commercial engine spares revenues increased in the quarter and were up about 25% as compared to the third quarter of 2009.

Book-to-bill in the quarter was slightly above one.

Operating profit was up 12% driven by the benefits of favorable currency at Pratt Canada and higher overall volumes, which more than offset higher E&D and the absence of favorable contractual items recorded in the third quarter of 2009.

Operating margin at 17.2% was up 70 basis points.

We remain confident in Pratt's full-year guidance for an operating profit increase of $75 million to $100 million on low single-digit growth in revenues.

In the quarter, Hamilton Sundstrand revenues were up 1%.

On an organic basis, revenues were up 4%.

Aero OEM and commercial aftermarket revenues were up low single digits while military aftermarket was down mid teens.

Industrial revenues were up mid single digits and up 14% organically.

Commercial spares revenues were flat to last year but orders were up 13%.

Industrial orders increased approximately 30% on a constant currency basis.

Orders were up across all industrial businesses with particular strength in the Sullair compressor business.

Operating profit was down slightly due to the absence of a prior year gain from the sale of a business, adjusted for this, operating profit was up mid single digits.

This improvement reflects the benefits from higher volumes, continuing cost control and restructuring, which more than offset the impact of higher E&D on multiple new platforms including 787.

In spite of the latest 787 delay, we continue to expect Hamilton Sundstrand's operating profit for the full year to be up $25 million to $50 million and revenue up slightly.

Turning to Sikorsky on slide nine, operating profits grew by 8% on 6% lower revenues.

During the quarter, Sikorsky shipped a total of 62 large helicopters, one more than third quarter 2009.

52 aircraft were based on military platforms and ten commercial.

Lower revenue in the quarter was driven by a different mix of aircraft deliveries.

Q3 2009 included two high-value international development aircraft and three more S-92s.

This impact was partially offset by increased aftermarket and US military aircraft volumes.

Operating margin expanded 150 basis points in the quarter to 11% from a favorable mix within military aircraft and higher aftermarket volumes, partially offset by increased E&D spend.

Of note during the quarter, the X2 Technology Demonstrator aircraft achieved its goal of 250 knots.

The X2 is already generating substantial customer interest for high speed missions.

We remain confident in Sikorsky's 2010 guidance with revenues projected to grow in the high single digits and operating profit expected to increase $100 million to $125 million.

With that, let me turn it over to Greg for wrap-up.

Okay, thanks, Akhil.

Moving on to slide ten now, organic growth and cost traction momentum continues at UTC.

Once again, record segment margins and strong cash generation.

The things you have come to expect from UTC.

For the full year, we still expect organic revenue growth to be around 2% and overall revenues to be around $54 billion.

Our strong year-to-date performance gives us confidence in our 2010 earnings per share outlook of $4.70 and higher restructuring positions as well for 2011.

As we close out the year, we expect operating performance to remain strong, even in the face of slower economic growth.

We're also going to see tougher Carrier compares in the fourth quarter, higher E&D and adverse FX.

Even though the US dollar has weakened considerably in recent weeks, it's still significantly below last year's fourth quarter average of $1.48.

Slide 11 -- just turning quickly to 2011.

While we do face multiple headwinds such as higher pensions, taxes, and engineering investment as well as slow recovery in many of our end markets, we are committed to double-digit earnings growth in 2011.

At current discount rates, pension expense would be about a $0.20 headwind next year.

Based on the recently enacted tax law changes, we know that our effective tax rate will go up next year to around 31%, which costs us another $0.15 a share.

Our engineering investments, while positioning UTC for strong long-term growth, will be a near-term headwind.

On the plus side, though, as we have said before, we will return to the UTC formula of restructuring equal to gains and this will result in a net benefit next year of $0.28.

We also expect to see operating margin improvement next year in Carrier, Fire and Security and Sikorsky as they all continue to track towards their medium term margin targets.

You should also keep in mind 40% of UTC's revenues are in the highly stable and profitable aftermarket.

While these revenues are not immune to the economic downtown, we're seeing positive trends and expect continued growth, some of which is in the form of pent-up demand.

Given the strong RPM and improving airline profitability, we expect to see continuing improvement in the commercial aero aftermarkets of both of Pratt & Whitney and Hamilton Sundstrand.

FX and commodities remain a significant question mark given the volatility we've seen this year.

Looking at FX, while the Euro rate has been around $1.32 so far this year, it's fluctuated between $1.19 and $1.41 just since June.

As for commodities we have seen a run-up recently in prices.

Copper, for example, has risen from around $3 to $3.80 over the last three months.

Oil prices are back in the $80s.

While that increases our input costs, it also drives more demand for UTC's energy-efficient products.

These are uncertainties that we will have to manage as we always do.

In summary, we remain committed to our target of double-digit earnings growth in 2011, even in the face of some challenging headwinds.

Louis will provide specific guidance at our December meeting and you can be assured the UTC leadership team is focused on delivering to its 2010 commitments and establishing aggressive plans for 2011.

With that, let's open the call to questions.

Katie?

Thank you.

(Operator Instructions)

Your first question comes from Nigel Coe with Deutsche Bank.

Thanks.

Good morning.

Nigel.

So Greg, I just want to pick up on the 2011 road map.

First of all, so I think you said $1.32 FX rate year-to-date, so I am assuming that current rates the FX would be closer to $1.34 for the full year so I'm guessing FX right now wouldn't be a material tailwind to 2011.

It's actually neither a headwind nor a tailwind, right now.

The issue really is going to be on the commodities side because as the FX rate has gone in our favor these last three months, commodities are actually going the other way so probably a $40 million or $50 million headwind right now in commodities next year.

Okay.

Nothing too big.

What about, obviously you mentioned the E&D and the Canadian dollar, I mean clearly moving targets right now but would you give us a placeholder for two items?

As we said before, on E&D at Pratt, we've got at least $100 million of headwind next year on programs that have already been announced and that's the CSeries, MRJ and the Irkut, or the Pure Power 1000.

Obviously, that could be even higher if we get a expected launch of the Airbus A320 NEO later this year but I think $100 million plus right now is probably the best I can do for you.

On FX, probably in the $70 million, $75 million range in terms of head wind for Pratt Canada as we see it right now.

And obviously you have produced (inaudible) units in Japan with the Toshiba which gets exported.

Would that have a material impact next year?

I'm sorry.

Would you ask that again?

The Toshiba JV in Japan -- I mean obviously we've seen a big increase in yen -- would that -- is that having a material impact this year and will it have an impact next year?

That's really not very significant at all.

Total FX at Carrier has not really been an issue.

Yes.

Nigel, we have a 40% share in the Toshiba joint venture as you know and the profitability is not that great, not that big.

So it doesn't impact us very much.

Okay.

And then on the A320 re-engining and was obviously kind of a big to and fro with that program, but what is your current standing in terms of timing and the tone of conversation with Airbus?

We still are working actively with the team at Airbus and I think, as you heard, many times, they're trying to sort out where they are on engineering resources before they launch this program but we still fully expect this to be launched before the end of the year.

Okay.

And then finally, just to kind of put all of these together -- do you still think you can do 10% growth next year?

Yes, absolutely.

Again, I think we feel more confident today with the Euro where it is today and with our visibility into 2011.

We feel confident that target of 10% is doable.

What could derail that target?

I mean if we see a big run up?

What do you think is biggest risk to that 10%?

The two big risks you have out there are going to be what happens with FX and what happens with the global economy.

I think again, we're not immune from the global economy.

The end markets look to be improving but any big shock to the global economy could still be -- make it tough.

Yes, but your more immune than most.

Thanks Greg.

Your next question comes from Howard Rubel with Jefferies.

Thank you very much.

I'll just keep it to one question.

Could you explain what is left to do at Carrier?

These are great numbers and where do you take -- I know you have a longer-term target, Greg, but what's really left to do from blocking, tackling, and strategic basis?

Well, I think in terms of the blocking and tackling, it's been pretty much done in terms of the structure at Carrier.

We've divested about $2.2 billion of revenue.

I think Geraud has another $500 million -- maybe $1 billion to go.

Most of that is on track.

I think we've got some distribution still in northeast and Canada that we're taking a look at.

We've got some of our other operations internationally on the res side.

But that, really, is all in place.

I think the cost structure has been optimized now and you see these wonderful conversion rates on mid single digit revenue growth, you're getting 19% earnings growth.

That gives us confidence as we go forward, margins will be even better.

As you look at this quarter, at Carrier, we had 200 basis points of margin expansion, that included a $30 million charge that Akhil described.

Absent of that one-time charge, you would have seen 300 basis points of margin expansion.

So I think the Carrier story is well on track.

You're just going to change the bar at some point, then.

That's a great question for Geraud in March.

Thank you very much.

Thanks, Howard.

Your next question is from David Strauss with UBS.

Good morning.

Good morning, David.

Greg, it looks like you took up E&D guidance for 2010.

You've obviously -- have additional restructuring you're talking about-- how much of this was an attempt to pull some spending from 2011 into 2010?

We're going to take E&D -- we said $150 million plus and now we're looking at $225 million, so that's $75 million.

I'd tell you about a third of that is at Hamilton, part of that's on 787.

We've also got increases, really, across the board.

You have some at Pratt, some at Sikorsky, and some of these new technology programs and, also, additional at F&S with the GE Security deal.

We continue to invest in new game changing technology I think Louis has talked about a lot and Greg has.

It's appropriate to see some increase in E&D.

In terms of -- I don't really think this is going to do much in terms of next year.

This really isn't going to impact our view on next year's E&D bill, if that's your question, David.

Yes.

And I guess on the restructuring side as well, is any of this an attempt to get ahead of things for 2011?

Absolutely.

All this restructuring that we're doing this year, really, structural cost take out to position us to grow earnings not just next year but the years after that.

There's a lot of good things going on.

And then your FX assumption for the fourth quarter, where do you stand now in terms of contingency at the $4.70 level?

Yes, the - When we talked about contingency back at the second quarter, we had about $100 million of contingency left, I tell you that's really all been taken up even though we've seen good news on FX since then.

We've had bad news obviously on -- our consensus has moved up and we've also seen E&D and restructuring up so, again, right now, we're very comfortable with $4.70 but I don't have a big contingency left.

Okay.

Thanks.

Your next question comes from Robert Stallard with RBC.

Good morning.

Good morning, Rob.

Greg, just a couple of questions on the aerospace aftermarket.

First of all, I was wondering about Pratt and Whitney -- very strong quarter for aeroengine sales there.

Was there anything unusual?

Do you expect to revert back to more normal rate next quarter?

No, I don't think there's anything unusual in the run rate.

No, Rob.

So the 25% growth year-on-year, was that very easy comps versus last year?

That's really the issue.

I think last year was down significantly so, again, orders were up 35%.

Sales were up 25%.

So, easy compare last year - I think last year third quarter was one of the worst in terms of order intake but a strong recovery.

It's really in line with what we have talked about all year.

We had visibility into what the airlines were doing.

We were confident the second half would be better and really no surprise here.

I think maybe a little surprise in orders up 35% but it's in line with what we expected.

Okay, second at Hamilton Sundstrand -- commercial orders there are up 13%.

Do you expect that to convert into revenues in Q4 into Q1?

And also is there any element to the 787 initial sparing in there?

There really isn't anything on the 787 but I will tell you we expect aftermarket revenues to be up at Hamilton in the fourth quarter strongly.

As you saw this quarter, aftermarket revenues were only up slightly with 13% order growth.

So some of these orders are a little longer lead but we are going to see good revenue growth in aftermarket in the fourth quarter and that should continue into early next year.

We don't expect 787 provisioning really to be a major part of the Hamilton story until the second half of next year at this point.

That's great.

Thanks, Greg.

Yes, Rob.

Your next question is from Deane Dray with Citi Investment Research.

Thank you, good morning.

Hey, Deane.

I'd be interested in hearing the thoughts on Clipper.

It didn't sound as though this was your near-term plans to become a wholly owned subsidiary.

What are the expectations, and where might this be included on a segment basis?

Well, this clearly was not the plan when we made the initial investment back in January when we bought the 49.9%.

As Louis has said, as I have mentioned to you, the idea here was to make a small investment in alternative energy in a business that we saw had very, very solid technology but not very good operating disciplines.

Unfortunately, the wind market was a lot worse than anybody expected and as a result of that, Clipper got into a liquidity problem and of course they look to us to bail them out.

And, as we looked at this, the thought of lending money to Clipper was not nearly as attractive as actually buying the rest of Clipper and controlling this business.

And really, it's a -- again, it is still a small investment in the scheme of UTC.

We'll have about $375 million total cash invested in this business and we'll see how it goes.

We can only expect long-term that this is going to be a high-growth market.

It's a $60 billion wind market and this year obviously it's down.

But the opportunity still remains long-term, I think, for wind to grow and we're going to do what you would expect with any UTC acquisition.

We'll put our folks in there, we're going to use the ACE operating disciplines and make that place look like any other UTC business.

The other thing we're going to do with Clipper, not surprising, is we have to expand it internationally.

It's really been just a US play for the last few years and the idea -- step one, after we get our folks there, is we've got to expand into the emerging markets.

We have to find partners in China, India, and we have to grow that business.

So, look, it was not what we planned to do.

I think it was the right thing to do and it gives us an option in a great growth market.

That's helpful.

And then just follow-up question on Carrier on the residential side.

If you could just give us some color regarding the cooling season, the split between OE and aftermarket and especially, how did the Watsco joint venture play out versus expectations?

Yes, well, the residential cooling season was not what we had expected, especially with the record weather we saw across the US.

Shipments I think were down 9% in the quarter for Carrier and we think we're probably in line with the market.

What we saw was a big growth in repair versus replacement and that really goes to the new 410A introduced in January with the new refrigerant, cost to replace the system almost doubled when you had a compressor failure.

So, I think what consumers did -- what we would expect them to do is repair old units as opposed to replacing the whole system and that really caused havoc with the overall shipments for the industry in the quarter.

As far as Watsco goes, it's in line with expectations.

It's about a little more than $10 million year-over-year benefit to Carrier in terms of earnings from our Carrier enterprises business.

Akhil, do you have anything?

No.

Comment on Carrier -- some on the residential side?

Is that part of structural cost or is it distribution?

That's distribution.

And is that -- the same geographic -- you said northeast Canada?

Yes, northeast and Canada are the two big North American distribution plays still left and again actively working on those.

Great, thank you.

Your next question is from Ron Epstein with Bank of America.

Yes, good morning, guys.

Hey, Ron.

Greg, can you -- in terms of the China business with Otis, when you look sequentially from Q1, Q2, Q3, did you see any deceleration in order activity?

What we saw is deceleration in the rate of growth.

Obviously, first quarter was very strong up nearly 50%.

This quarter in China, at Otis, new equipment was only up -- order rates now only up about 3%.

It's still growing.

Year-to-date, I think it's up 7 -- 15% and we expect it will be up 15% here for the full year so fourth quarter ought to come back.

We had a little bit of a timing issue year-over-year.

Last year's third quarter, as you will recall, Otis was very strong in China as there was a big rebound from the first half slowdown.

So again, tough compare but for the year, we still expect very strong growth there.

If I may just add a couple of data points, last year, third quarter for Otis in China was 30% of the entire year.

Orders for China, Otis, the average for last five years is about 24% so clearly tougher compares for China this quarter but as Greg said for full year we still expect 15% plus order growth.

Okay, okay.

And then another quick question if I may.

Pratt Canada, what are we seeing them in terms of trend across the business jets, turbo props and helicopter stuff they do up there?

Yes.

Well, I think there's no news on bizjet.

No good news, I guess, in terms of the turnaround in that market and you recall that's about 50% of our engine shipments come on the bizjet side.

We are starting to see some recovery in the regional side of turbo props and a little bit of good news on the helicopter engines as well.

Aftermarket also started to pick up there, which is good.

The real issue though is in bizjet where you see 15% of the worldwide fleet for sale and prices are still depressed, so until that comes down to the 11% or 12% range, we're not going to get much growth we think in bizjet.

Okay.

And just one quick clarification -- you said you took up the number for restructuring -- $100 million, I think it was -- does that include Clipper or not?

It does include Clipper but it also includes the tax benefit that we had in the quarter and what we expect for the full year so Clipper was a charge of about $0.17.

We're going to get about $0.15 of good news from the tax benefits, part of that $102 million came -- $0.10 came through here in the first -- I'm sorry -- for the first three months.

And the last part of the taxes in the fourth quarter.

Just on those restructuring projects, we still have a long list of good projects and, it's surprising, after spending $1.4 billion restructuring over the last four years, to still have another robust list of opportunities is encouraging.

So, the guys continue to work this, it's part of the culture out there and they're going to find more things to do.

Great.

Thank you.

Thanks, Ron.

Your next question is Jeff Sprague with Vertical Research Partners.

Thank you.

Good morning, everyone.

Just first, Greg.

Just to get a little tax minutia.

I know you love that.

It appears that you're talking tax rate up more than kind of the average multinational on these tax law changes and maybe you're on top of it and they're not, but is there -- From what you know about how others are structured or peculiarities of your structure, is there something in particular that disadvantaging you more than the average multinational around these changes?

It really -- part of it goes to income distribution in terms of where your earnings are coming from and which pools they're coming from overseas and we've done a lot of work on this over the last year as we saw this tax law change coming.

The good news, of course, is it's not going to be implemented until January 1 of next year, which gives us an opportunity this year to drive -- or repatriate some of these high tax pools.

Maybe just as a data point for you, we were down in Washington talking to the Treasury about this issue and this was supposed to be a $10 billion revenue raiser as part of this bill that got passed back in August, but the Treasury's own estimate was more like $40 billion revenue raiser.

So, we think there's a lot of other folks that are going to be impacted, maybe not to the full 2 points that we are but there's a lot of revenue that will be generated over the next ten years for the Treasury as a result of this change so we'll see.

One of the keys still is the extenders that hasn't passed yet and that could actually be a benefit next year in the race -- we're taking a conservative view of next year for taxes and certainly could be better than the 31%.

But we'll see.

On extender you mean R&D tax credit again?

Exactly.

Okay.

What's that worth?

About a point to you if it happens?

About a half a point.

And then just on Carrier just a little more granularity if you don't mind -- obviously the underlying core is much better but how much of the margin benefit was just the addition by subtraction -- the absence of the divested revenues.

Just give us a sense of really how strong the core was.

Yes, if you think about that 200 basis points of margin expansion we talked about, about a third of that came from the divested businesses, so call it 70 basis points.

Okay and could you give us a little bit more granularity on how Transicold performed in the quarter, order sales and what the outlook is there?

Transicold was up significantly, up 40% in orders for the quarter and containers were way up but we saw strengths across the business.

I think the lowest order growth rate really came in the North America truck trailer.

That was still up strong.

Europe was up strong and containers were through the roof.

I guess just finally the weakness in Otis North America, I don't recall what the comps were there.

Obviously US commercial construction is still weak, although there's some indicators that suggest things are bottoming, even the ABI was above 50 this morning.

Do you guys see light at the end of the tunnel in Otis North America?

Or even Carrier North America commercial?

We should differentiate Carrier from Otis because Carrier North America continues to do much better than what we expected, had positive order growth here in Q3.

Otis North America, it's been a tough couple of years and again down about 25% in North America in the third quarter, was a little worse than we expected.

We have seen awards, which are kind of the leading indicator, actually start to pick up but we saw that towards the end of the second quarter.

We hope that light at the end of the tunnel is really light and not a train but the ABI this morning was really the first positive sign that we've seen that the market really is -- has bottomed and it is going to recover.

This is going to be the second half 2011 and maybe early 2012, before we're going to see that play out in terms of sales, but hopefully the worst is behind us.

Thank you.

Thank you very much.

Next question is from Joseph Nadol with JPMorgan.

Thanks, good morning Greg and Akhil.

First question is on the GE acquisition and F&S.

If you could give us an update on how things are going there.

It's a home run -- if nothing else.

That business, as you can see from the release, and from the numbers, most of the operating profit growth and revenue growth is coming from GE Security.

Nothing but a pleasant surprise, I think, from the people that we got and the products and technology.

It's all been a home run.

A little bit of restructuring there this quarter - F&S probably started its restructuring in GE Security, that's going well, we're in the process of closing a facility in Ireland and doing some other headcount things but all that going along as we expected, maybe even better.

Okay.

Very good.

And then second question -- is on the Bombardier global engine.

You lost that source selection.

Any color you can provide on that?

I think we work very closely with the folks at Bombardier and it was a tough competition.

It's unfortunate that we lost but we have a very strong position up there with Bombardier on the CSseries.

A number of other opportunities up there so it's -- again, tough competition.

We put in we thought a very competitive offer but in the end they elected to go with someone else.

Are there still other prospects out there for business jet applications in the coming years for the core or how are you looking at that?

Absolutely.

We started this core, the Cessna Columbus PW-800, and we continued to do work on that core.

We think it's going to be a great engine for the heavy long-range jet market and we continue to work with customers to find the right application.

Okay.

Thanks, guys.

Thank you.

Your next question comes from Terry Darling with Goldman Sachs.

Thanks.

Just a couple of follow ups, Greg, on the 2011 outlook items.

On pension, what impact is stepping up the funding have in terms of mitigating the head wind, if at all, in 2011 versus your prior expectations?

It's been helpful, obviously, and we started out the year with about $500 million.

I'm sorry, $400 million domestically.

We are going to be up to $1 billion.

We have $600 million incrementally, which will earn a little over 8% so that obviously helps to the tune of nearly $50 million.

At the end of the day, as we think of it with pension discount rate of 5.1% this morning, that's really, hurts us quite a bit.

Year-to-date pension performance has been strong.

I think it's up about 11% so the plan asset returns are doing well but you just can't get ahead of the discount rate and what we really need is a little pop in discount rates and we'll feel better about pensions.

In the near-term, though, we're looking at doing more pension funding next year, just to try and, again, take advantage of low rates that are out there and the arbitrage and put some money in the plan.

Okay, and then you did talk about the commodity head wind if we were to mark-to-market now.

Talk about pricing, what you're expecting to be able to realize there, obviously on the aftermark business picking up.

You would assume you would get that as usual but some of the other parts of the business as well.

Yes, the aftermarket catalog price increases are already in place for next January so I think that's all normal and usual, nothing unusual.

Pricing remains difficult, I would tell you, in several of our markets.

China continues to be a difficult market.

And North America for Otis has also been -- we've seen stiff pricing.

Carrier pricing is always an issue.

It's one of those things that we have to manage and we focus on taking costs out.

The good news, I think, on commodities is if we see commodities remain at this level, the competition has the same cost inputs as we do so we ought to see some pricing traction next year, if commodities remain high.

Okay, and then the -- wonder if you could talk about maybe the range of expectations you're working with now on revenue growth for the aerospace aftermarket on the plus side.

Let me defer that question until December.

Louis is going to give you detailed guidance for each of the business units when we'll go into that.

We're really still trying to digest the third quarter results.

Again, we will see growth in the aftermarket next year but let me defer that for six weeks with until Louis is in front of you guys.

Okay and then, just lastly, Clipper impact on EPS in 2011?

You want to talk about that?

Not if I don't have to.

It's not going to be significant.

Maybe $0.03 or $0.04, maybe a $0.01 a quarter, based on the amortization of the intangibles and such.

Okay, great.

Thanks very much.

Your next question comes from Cai von Rumohr with Cowen & Company.

Thank you very much.

So you mentioned that existing programs at Pratt, the R&D would be up about $100 million next year.

If Airbus actually launches the A320 re-engine and picks you, how much would that be, given you don't have partners signed up yet?

And secondly, at one point you were talking about potentially winning the engine for Gulf Stream, the 450, 550 replacement -- you didn't talk about that this year.

What's the status of that potential?

Well, let me take the NEO question first.

Obviously if -- as expected -- that does get announced in the fourth quarter, we would expect -- start to ramp up spending but really not a lot of spending in the first half.

You might see a little bit in the back half of the year and that will really get going into 2012 so there is some headwind but I wouldn't say it's significant and we do have partners already signed up for that.

We have MTU and others that are in the wings, and we continue to see a lot of interest from the partners in that potential re-engining application.

As far as Gulf Stream, we continue to work with Gulf Stream on their new platforms.

We'll see what gets announced when.

When they are ready to make a decision, we'll let you guys know.

Okay, but assuming they do make a decision, is that also, essentially, a 2012 issue or could that be a 2011 headwind?

That's probably more of a 2011 headwind.

We continue to work on the core of the 800, even though we don't have a firm slot for that so you'll see a little pressure up at Pratt Canada anyways.

If you get an announcement and new engine offering, we probably ramp that up pretty quickly at Pratt Canada so you may see -- again, this is not $100 million but it's still a significant amount for Pratt Canada.

And you mentioned that the increase in R&D this year, a part is Hamilton Sundstrand.

The margins were pretty good in the third quarter.

Is more of that increase going to hit in the fourth quarter or is the R&D going to start down in the fourth quarter for with the aftermarket getting better, you may have a margin pop?

E&D should start to go down in the fourth quarter.

The 787 has been kind of the wild card out there.

And again, as we go into next year, that should be a significant benefit to us with 787 spending going down.

They will get replaced somewhat by A350 and CSeries, and other new platforms that are on, but we really ought to see a margin benefit from lower E&D and stronger commercial aftermarket in the fourth quarter.

And then technical question -- what should we model for a tax rate in the fourth quarter?

Let's see -- probably 27% -- about 27%.

Okay.

And then, general question, many of the other defense contractors have seen significant order delays, pressure on pricing, all kinds of things like that.

Maybe you could comment about your defense operations.

What are you seeing there in terms of delays and pricing pressures?

Quite frankly, we haven't seen much of that at all but pricing and cost is always an issue with the government customer.

We're on great programs.

The Blackhawk remains the vehicle of choice for the Army and the wars in Afghanistan and Iraq.

Continue to see strong international order growth there.

But in terms of US military, not much really going on.

We have a multi year contract with the government for Blackhawks.

That will go through early 2012.

We're in the process of renegotiating multi year eight, which will be for over 500 more Blackhawks.

And again, good opportunities down at Sikorsky.

Also have opportunities internationally with the Blackhawk, opportunity in India and other emerging markets.

Pratt on the GTF -- sorry, the JSF -- obviously there's cost pressure there.

We've met the customers' goal in terms of cost reduction.

We're on track for that.

We are seeing pressure on the military side of Pratt for C-17.

That production is going down but hopefully we'll see some orders in India that will keep that production line going for awhile.

We also got an order this past quarter for 25 spare engines for the F-22 which will keep that production line going into 2012.

So again, there's pressure out there on cost but again, we've got a very, very solid reputation with the customers and on very good programs.

It's not as much -- again, military is 18% of our revenues so it's not insignificant.

It's part of the whole balance of UTC.

Thank you very much.

Okay.

We'll take our next question from Sam Pearlstein with Wells Fargo.

Good morning.

Can you talk maybe this was related to Carrier in terms of the North American residential but it looks like from the second quarter, inventories grew by about $350 million.

Normally Q3 is when you liquidate inventory, so can you just talk a little bit about that?

Sure, Sam.

You're right.

Inventories did grow from June, but it's largely in the aerospace side, more at Sikorsky and Pratt.

Carrier did see a decline in the inventories, as you would expect.

Okay.

And then on Fire and Security, if I just look again, since the second quarter, revenues were up modestly $38 million.

Profits were up on the order of $24 million ex restructuring.

And if we actually look year-over-year, it looks like your incremental margins are close to 20%.

Is that really where you should be trending in terms of where Fire & Security could ultimately get to?

We're not going to set a new margin goal of 20% today but I think clearly it shows 15% that Bill has out there is very achievable.

We are getting good cost traction, again we've taken a lot of structural cost out across the business and they continue to do restructuring.

So, I think these incremental margins are sustainable as we see a recovery in revenues.

Okay and then just last question is on the crude expense line that jumped in the quarter.

Is that mostly the pension or is there something else that went into that?

Well, there's restructuring and there's also the pension.

That's actually the pension fund down in other assets.

May I take a look at that?

Come back to you, Sam, on that, but I think Greg is generally right.

Okay, great, thank you.

Thanks, Sam.

Your next question from Shannon O'Callaghan with Nomura.

Good morning.

Just first on the aftermarket business in commercial.

Obviously spares are up off easy comps but have you seen any change in airline maintenance behavior?

I mean, you've talked in the past about expecting a shift from light to heavy overhauls.

Have you seen any of that start to take place?

Yes.

In fact, heavy shop visits in Q3 are actually up about 12% year over year, that's 4000s and Vs and we've also started to see inductions of CFMs into our shops.

I think it's in line with what we had been expecting, this shift from light to heavy overhauls.

Okay, so you're actually seeing -- the profitability side of airlines having an impact in terms of more discretionary things ramping up?

Absolutely.

And then, just a follow-up on Carrier -- you mentioned year inventories were in good shape but if indeed this repair instead of replace trend surprised people negatively, which it sounds like it did you guys, you'd think there would be some excess inventory after the cooling season and you sound pretty cautious on pricing.

Is pricing getting tougher at Carrier than it normally is or about the same?

No, I think it's about the same.

In fact, as far as inventories out there in the channel, channel inventories are actually down.

And to me, that's actually a positive going into next year.

The lead time on these air conditioners is not very long so it's not like we're stocking at lot of inventory, and we can quickly adjust to meet the demand.

But channel inventory is down and inventory overall at Carrier is down so both positives as we go into next year.

Okay, and nobody's sort of throwing in the towel and undercutting on price at this point?

Look, pricing is always tough at Carrier, especially in the residential side but I don't think it's anything unusual or more than what we've normally seen.

Okay, great.

Thanks.

Okay.

We'll take our next question from George Shapiro with Access 342.

Yes.

Greg.

If you could just break out the mix of OE versus aftermark at Otis, and did that explain all the margin increase or was there something else going on?

The margin -- I think the -- mix was up about a point and more aftermarket so about 25 to 30 basis points -- roughly half of the margin expansion at Otis would be due to the mix but the rest is due to just the conversion on the cost reduction and restructuring they've done.

For the quarter, if you could break out how much of the R&D increase overall was at Pratt versus Hamilton?

Overall E&D was up $89 million in the quarter, about 40% of that was actually at Hamilton and a piece of that, of course, was on 787 as well as we ramp up some of these other new programs.

The rest was really spread between three places.

Increases at F&S, Pratt, and Sikorsky.

The Pratt piece was not terribly significant.

Okay, and then if you could -- it would seem to me that the disparity in growth and aftermarket at Hamilton versus Pratt is maybe geographically related to the fact that Pratt is more focused in North America.

Would you agree with that statement and if so, could you talk about what you saw geographically throughout the world?

I think, generally speaking, Hamilton is on every aircraft around the world.

So the decreases that we saw last year were not as dramatic as that which we saw in Pratt.

Pratt is on a lot of older airplanes and were impacted by the parked aircraft last year.

But as those planes come out of the desert and as the heavy maintenance comes back to us, I think we're going to see a bigger pop at Pratt than you are at Hamilton.

Hamilton is coming back and we'll have strong growth but I think you'll see more of a recovery at Pratt.

Geographically, you're probably right.

North America is really the predominant market for the Pratt engines but we've got exposure really around the world.

And Greg, how about -- if you look, try to split the increase in the orders between North America, Europe, and Asia --

Why don't I take it offline to go through the details of that.

Yes, I'm not sure I have that here.

Okay.

Thanks a lot, guys.

George, thanks.

We'll take our next question from Doug Harned with Sanford Bernstein.

Good morning.

Good morning, Doug.

On Fire and Security, can you talk about the restructuring effort, where it is right now, the efforts that are underway, and where you see that trajectory going?

I'm trying to understand how far along we are in the restructuring process as -- as you're getting margins up.

I would say, generally speaking, we're nearing the end of the major restructuring at legacy Fire and Security, we're just really starting restructuring of the GE Security business.

We just announced the closure of a factory in Ireland, it was a GE Security location.

We're announcing some other moves.

As far as the other major branch office consolidation work that we've been doing across Europe for the last couple of years, we should finish that up in 2011.

We'll start to see some benefits next year but all of the benefits will kick in by 2012.

And your expectation for how long that GE restructuring will take is --?

Probably about a year.

About a year?

Hopefully by third quarter next year we'll pretty well have it complete.

And then on Carrier, this is back on the pricing question, if you look at Transicold, which you use to get great margins at.

Where are we today in terms of both where the margins are at Transicold compared to -- I'd say -- better times, before the downturn, and also where capacity utilization is today, both for you and the industry more broadly?

I think, Doug, we've talked about this before.

The markets are still significantly lower than what they had been at their peak so capacity utilization lower than what it has been at containers and truck trailers -- but the margins are -- because of the cost actions that Carrier has taken, margins are starting to move towards the peak they have seen in the past, they are not quite there yet.

So, there is still some more room.

But, I think we've seen a nice turn because of all the tough cost actions-- not just in the Transicold business but also in the residential -- US residential business, where significant actions have been taken to reduce the breakeven point, we've seen very nice conversion on the margin there.

But what this suggests is that going forward -- good pricing opportunity in Transicold that could be additive to what you've been able to gain in margin on the cost side.

Pricing is always tough in this industry, as you know, especially since the capacity of utilization is still not at the peak levels.

So, I wouldn't quite say that there is huge opportunity, but certainly, Carrier -- The broadest statement one can make is that Carrier very confident and comfortable with the target of 12% by 2012.

Okay, great thank you.

Your next question comes from Julian Mitchell with Credit Suisse.

Yes.

Thanks.

I had a couple of questions, please.

The first one is -- you gave an update on Otis in China earlier.

Could you give us a similar profile of the Carrier order trends there and how they were in Q3 versus Q2?

And then, secondly, just on M&A -- kind of just run through a little bit moving parts -- the Clipper deal is fairly small.

You've seen the dollar weaken, which makes it more expensive to foreign deals.

You're obviously putting more into your pension and into your buyback.

So, when you net all of that together, can you just give an update on how you see the M&A environment at the moment?

Thanks.

Let me take the Carrier question first.

The Carrier performance in China, the orders for the commercial business, which is what we have there, were very strong, north of 25% up in the quarter.

So that shows the signs that China is not slowing down at all as far as our businesses are concerned.

Otis was a peculiarity because of difficult compares, but certainly Carrier has done very well in the quarter.

As far as the M&A pipeline, we still think that $3 billion number is the right number for this year.

We're on track with the Clipper deal to close in on that.

As far as the pipeline, I would tell you there's still a lot of the great targets out there but we still have a disconnect between pricing expectations versus our own kind of disciplined approach to valuation and, as a result, right now it's a much better deal for me to go out and buy our own stock than to buy somebody else's.

So I think that trend is going to probably continue here as we generate a lot of cash.

We're going to buy back shares.

But we'll be opportunistic.

If there's a good deal out there, we'll go after it.

We don't need to do a big deal.

I think certainly we are -- our eyes are always wide open.

Also on one last thing on this, we do try and return about 70% of the cash to the shareholder in the form of share buyback and dividends.

That's something we keep in mind as we look at all these things.

Yes.

Okay, thanks.

All right.

I want to thank everybody for listening today.

Again, solid results in the quarter.

We're confident in the improved outlook.

Now, if FX continues to be better, as we've seen, and we get better operational performance, we'll likely take up our restructuring to position us better for next year.

The goal here is always to outperform in any environment.

Again, it's been a tough year.

We think we've got good results, solid results, and we'll continue to strive to do better next year.

So with that, thank you very much and we'll see you all in New York in just about six weeks.

Bye-bye.

That does conclude today's conference.

We thank you for your participation.