雷神技術公司 (RTX) 2010 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, Senior Vice President and Chief Financial Officer and Akhil Johri, Vice President Financial Planning and 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 the 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.

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 then we will answer those questions as additional time permits.

Please go ahead, Mr.

Hayes.

Okay, thank you, Michael.

Good morning, everyone.

As you saw in the press release this morning, a strong close to the year with 6% organic sales growth in the quarter.

Solid margin expansion on the back of sustained cost traction and of course excellent cash flow.

Our short cycle markets are recovering as expected.

Emerging markets continue to gain traction.

And we are finally starting to see a modest recovery in the commercial construction markets in the US.

We also continue to invest in new platforms and new markets that position us well for long-term growth.

And as always, we remain focused on structural cost reduction, operational excellence and disciplined cash redeployment.

Nothing new here.

Okay, just a reminder, as we go through the numbers today, we'll talk to the segment results adjusted for restructuring and one-time items as we usually do.

So as you look at the segment results, you will see that UTC delivered exceptional segment operating margin expansion for the year of 100 basis points to a record 15.4%.

Even as we increased investment in E&D by $188 million, or 12% over 2009.

Importantly, all six businesses expanded margins in 2010.

And all six businesses achieved double digit operating margins for the first time in UTC history.

That's quite a milestone.

Otis led the way with operating margin of 23% and Carrier led the margin expansion story with 240 basis points of growth.

The operating margin performance at Carrier, Fire & Security and Sikorsky put them all firmly on track to achieve their margin targets.

For the full year, sales were $54.3 billion.

That's up 4% year-over-year.

Earnings per share were $4.74.

And that's up 15% versus 2009.

Absent restructuring and one-time items of $0.29 in 2010 and $0.46 in 2009, earnings per share were up 10%.

Free cash flow, 115% of net income attributable to common share owners.

And we made over $1.5 billion of cash and stock contributions to our global pension plans.

UTC's pension plans are in a good position.

We're 92% funded on a PBO basis at year end.

And that's up from 87% in 2009.

Despite the fact that the discount rate has declined about 60 basis points.

Okay.

Turning to Slide 2 now.

Fourth quarter performance was solid across our businesses.

Total segment operating profit grew 11% on organic sales growth of 6%.

Pratt & Whitney and Carrier led the way with organic growth in the quarter of 12% and 9% respectively.

Five of the six business units expanded operating margins in the quarter, led by Carrier, Fire & Security, and Sikorsky, each with over 100 basis points of margin expansion.

Evidence that our structural cost reduction efforts continue to pay off.

Net restructuring and one-time items in the quarter were a headwind of $0.03.

Restructuring charges in the quarter were $233 million or $0.17.

Pratt & Whitney continued its push to reduce its footprint in high cost locations, and to reduce overhead in the face of increasing investment in new technologies and programs.

Hamilton continued to work on its low cost sourcing initiatives and the commercial units remain focused on footprint and overhead reductions in both the domestic and international markets.

Significant one-time items in the quarter included a gain of $76 million, or $0.08 a share, from a tax benefit and net asset revaluation associated with the Clipper acquisition.

Some good news from Clipper.

We also recorded a net tax benefit of $38 million, or $0.04 from the repatriation of foreign earnings.

Earnings per share for the fourth quarter were $1.31, that's up 14%.

Excluding restructuring and one-time items in both 2010 and 2009's fourth quarter, earnings per share increased 9% on 6% higher sales.

Foreign currency was a tailwind, with an impact of $0.02 from net hedging activity at Pratt Canada, more than offsetting unfavorable currency translation.

Fourth quarter short cycle shipments order rates were robust and consistent with our expectation for sales growth in 2011.

Carrier's US residential gas furnace and splits unit shipments were up nearly 10%.

In Aerospace, fourth quarter commercial spares orders at Pratt & Whitney and Hamilton Sundstrand were up 45% and 31% respectively.

Otis' new equipment orders grew 11% in the quarter and Carrier's global commercial HVAC new equipment orders were up 20%.

So the end markets are recovering in line with our expectations for 2011.

In the fourth quarter, free cash flow was 108% of net income at $1.3 billion.

And this was after $600 million of cash contributions to our global pension plans.

Solid cash flow resulted from strong working capital performance across the businesses.

Share repurchase in the quarter was $556 million, bringing the year to date total to $2.2 billion.

So again, no surprises.

Just as you heard from Louis in December, a strong finish to the year, where we saw accelerating organic sales growth, excellent margin expansion, and strong cash flows.

I will come back and talk a little bit about 2011 but for now let me turn it over to Akhil to take you through the segment results.

Thank you, Greg.

Turning to Page 3, Otis delivered another solid quarter with operating margin expansion of 60 basis points to 22.6%.

At constant currency, profits were up 3%, despite a 1% decline in sales, as benefits from high service volume, and ongoing cost reductions more than offset the impact of lower new equipment volume and pricing.

New equipment sales were down 8% in the quarter, excluding currency.

Trends remain the same as growth in China was offset by declines in North America, and Europe.

Higher service sales from continued growth in the contractual maintenance business, and improved repair volume, helped mitigate the new equipment decline.

New equipment orders in the quarter, however, were up 11%, led by China, where orders grew 30%.

Orders in North America were up 15%, as a result of the order for the new World Trade Center Transportation Hub.

Orders in Europe were down slightly.

As the global economic recovery continues, Otis expects to see ongoing strength in China and other emerging markets along with stabilization in construction markets in US and Western Europe.

For the full year, margins at Otis expanded by 120 basis points to a record 23%.

At constant currency, operating profit was up 5% on a 2% drop in sales.

On Slide 4, Carrier posted another quarter of solid profit growth and strong margin expansion.

Profits were up 24% on 3% higher sales, resulting in 130 basis points of margin expansion.

Organic sales growth in the quarter was 9%, on continued very strong results in Transicold, plus good growth in all other major markets, except HVAC Europe.

We saw nearly double digit growth in shipments of US residential systems, as Greg said.

Organic sales for global commercial HVAC equipment were down slightly, while order rates were up 20% at constant currency.

Profit growth was driven by strong conversion on organic sales growth, and the carryover benefit from cost reduction and restructuring, partially mitigated by higher commodity costs.

For the year, Carrier grew earnings by $276 million, or 32% on 6% organic sales growth.

Margin was 10%, up 240 basis points, and on track for the target of 12% by 2012.

UTC Fire & Security delivered operating margin expansion of 130 basis points in the quarter on 18% higher sales.

Organically, sales were flat, with the product businesses up high single digits, Asia up double digits, and the other regional service and installation businesses down mid single digits.

Net acquisitions primarily GE Security contributed approximately 20 points of sales growth.

Fourth quarter orders grew organically 6%.

Orders in Asia, as well as in the Global Fire Products business, increased more than 20% year-over-year.

Backlog is up 14% organically from the beginning of the year.

Operating profit in the quarter grew 30%, driven mainly by acquisitions, and the continuing benefits of productivity initiatives and restructuring.

For the full-year, operating margin at Fire & Security was 12.2%, up 120 basis points over prior year, and on track to 15% by 2012.

Now, turning to aerospace.

On Slide 6, at Pratt & Whitney, sales were up 12%, including three points from favorable currency conversion at Pratt & Whitney Canada.

Higher overall aftermarket sales and engine volumes at Pratt Canada were partially offset by significantly lower industrial volumes at Power Systems.

Large commercial engine spare parts were up over 40%, in the quarter, coming off the lows of 2009.

Operating profit was up 14% in the quarter.

The benefits from higher sales, favorable foreign currency at Pratt Canada, and restructuring were partially offset by unfavorable engine mix, startup and other costs, at our non-legacy engine centers, as well as higher E&D.

Operating margin for the quarter was up 40 basis points.

For the full year, Pratt & Whitney operating profit increased 5%, or $100 million, at the high end of the guidance range.

In the quarter, Hamilton Sundstrand sales and operating profit were both up 6%.

Industrial and aerospace aftermarket sales were up low teens.

While aero OEM sales were down low single digits.

Inside the aero OEM sales, commercial aero OEM was up high single digits, but was more than offset by lower military and space volumes.

Commercial spares sales were up nearly 25%, and orders were up 31% versus last year, with strong activity for both parts and provisioning.

Book to bill was slightly above one.

Industrial orders increased 13%, on a constant currency basis.

With particular strength in both the Sundyne and Sullair businesses, while Milton Roy was flat.

Profit growth in the quarter reflects the benefit of higher volumes particularly of the high margin commercial spares and industrial businesses.

This benefit was partially offset by substantially higher E&D.

For the full year, Hamilton delivered profit growth of 4% on 1% higher sales.

Operating margin at 17.5% was up 50 basis points.

Turning to Sikorsky, operating profits grew by 18%, on 7% higher sales.

During the quarter, Sikorsky shipped a total of 74 large helicopters, 58 aircraft based on military platforms, and 16 commercial.

Higher sales in the quarter were driven by increased international military aircraft shipments and higher aftermarket volumes, partially offset by lower US government and commercial aircraft volumes.

Operating margin expanded 110 basis points in the quarter to 11.5%, from lower manufacturing and overhead costs.

Of note, during the quarter, Sikorsky announced that they will develop and fly two prototype light tactical helicopters, the S-97 Raider, using the X2 Technology.

In advance of the US Army's planned Armed Aerial Scout program.

For the year, Sikorsky delivered 253 aircraft, operating margin of 10.9% reflects our 110 basis point improvement from 2009, and is on track to the target of 14% by 2014.

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

Okay, thanks, Akhil.

We're on Slide 9 on the webcast now.

As you just heard, 2010 was a strong year at UTC.

Organic sales growth resumed accompanied by exceptional margin expansion and as usual, solid cash flow.

In 2010, we returned $3.7 billion, or about 75% of free cash flow to share owners in the form of share repurchase and dividends.

We continue to expand UTC's presence in emerging markets, which now represents just over 20% of UTC's sales.

The GE Security acquisition closed on March 1.

The integration efforts by the F&S team were flawless.

As a result, the acquisition was accretive in year one.

Carrier's transformation continues to yield strong results and exceptional margin performance.

Pratt's re-emergence in the commercial engine market gained more traction with the GTF selection on the Airbus A320 NEO, the fourth aircraft platform to adopt this new technology.

Importantly, the first GTF engine has completed 150 hours of testing, confirming the fuel consumption, emission and noise improvements which were predicted.

Sikorsky achieved its goal of 250 knots on the X2 Demonstrator program, while Hamilton continues to bolster its market leading position with its selection by COMAC to supply five aircraft systems on the C919.

And lest we forget our most profitable business Otis, it expanded its industry leading margins by over 100 basis points.

We also continue to aggressively restructure and drive efficiency throughout our operations.

In fact, UTC's 2010 profit per employee, a key productivity measure, surpassed even the peak EPS year of 2008.

This performance gives us confidence that UTC is well positioned for sustainable double digit earnings growth into the future.

Okay.

On to 2011.

All of the economic data over the past month and a half, since our December 9 investor meeting, seems to be generally in line with our expectation of a gradual recovery in our end markets.

So today we're affirming the 2011 EPS guidance that Louis provided in December of $5.05 to $5.35 per share.

That's earnings growth of 7% to 13% on sales of $56 billion to $57 billion.

We have seen a little bit of good news on pension expense since the meeting.

You'll recall that we estimated a headwind of $0.17 for the year.

As a result of slight improvements in asset returns and the discount rate, as well as an additional pension funding that we made in the fourth quarter we now expect that headwind to be only about $0.13.

On the other hand, we are seeing some pressure from commodities inflation, and higher E&D, as a result of the 787 delivery push out.

You also heard us discuss the higher tax rate from the 2010 law changes.

In addition to the higher rate for the year, these changes will cause variability in our tax rate from quarter to quarter.

As an example we expect the first quarter tax rate to be around 33%.

As most of the transactions impacting our tax rate won't occur until the second half of the year.

For the full year, we still expect the effective tax rate to be about 30.5%.

Just a little bit lumpy during the course of the year.

FX will also be a slight headwind in the first quarter.

You'll recall that the euro averaged $1.39 in the first quarter last year.

In the business units, Sikorsky will have a challenging start to the year, as it delivers its first Canadian Maritime helicopters.

On the other hand, we do expect to see continuing strength in Carrier's Transicold business, easier compares in commercial aero and tailwind from lower net restructuring.

So lots of moving parts.

The bottom line is we're targeting double digits earnings growth in each quarter, and we still expect quarterly EPS growth rates to be in line with our full-year guidance.

On cash flow, we continue to expect free cash flow for the year to equal or exceed net income, and as Louis stated in December share repurchase guidance is $2.5 billion for the year, that's up from $2.2 billion last year and the acquisition place holder is $1.5 billion.

With our industry-leading franchises, seasoned management team, and sustained structural cost reduction, we are well positioned for strong earnings growth in 2011 and beyond.

So with that, let's stop and open up the call for questions if we could.

Michael?

Thank you very much.

Ladies and gentlemen, today's question-and-answer session will be conduct electronically.

(Operator Instructions)We will take our first question from Jeff Sprague with Vertical Research Partners.

Thank you.

Good morning, everyone.

Hi, Jeff.

Greg, could you elaborate a little bit around what you said on US commercial activity, in particular?

Akhil called out Otis being positive on the World Trade Center order, but if you kind of take that out, give us a little more color on what you're seeing and generally, in Otis in North America and also in Carrier?

I think the World Trade Center order was a big order.

And absent that order, if you take, really kind of a apples-to-apples year-over-year, it would be relatively flat I would tell you in Otis for North America.

So awards still look to be promising for the year but quite frankly we're not expecting an improvement in commercial construction markets probably until late 2011, early 2012 and the ABI has been positive for the last couple of months, I think that is all trending in the right direction but that is a leading indicator.

On the Carrier side, I think again we saw much better traction.

We saw orders growth of about 14% in North America.

Which again, really plays to the energy and efficiency theme a lot more than the commercial construction starts.

So a little bit of a different story from Carrier to Otis, but generally, I wouldn't say we expect a big, big recovery in commercial construction for the year.

And I think the comment was resi, it might have been orders but I thought it was shipments up 10% --

Yes.

For the quarter.

You can give us some color on the attempts to position for price in that business, as you kind of move into the season here, in the middle of 2011?

We raised prices or we announced a price increase of between 2% and 6% late in the fall to take effect I think on February 1.

We think again, the price, it's been followed by most of the competition, so we expect these prices to stick.

It's not surprising with copper at $4.40 or so, there is lots of reason out there for people to be pushing price higher.

Again, I think maybe the good news is we look at the resi business in the US, as inventories were still down in the fourth quarter, and even with the expiration of the $1,500 tax credit, we still saw momentum going into the end of the year.

The tax credit is going to come down to $500 a system, starting in 2011.

So again, probably not going to play as big of a role as we've seen in the last couple of years.

But obviously, commodities are a problem.

We can deal with that, though.

It is all part of the guidance for the year.

I was just wondering, Greg or Akhil, can you give us a little more color on just Otis aftermarket, kind of the contractual service versus modernization.

Any kind of distinction there in the trends?

I think we saw continued good growth in the contractual maintenance.

I think that was up about 5% or I'm sorry 3%.

Repair was actually up stronger but modernization was relatively flat.

And again modernization is more of a US and European story and we just didn't see much traction there.

Coming up on 2011 we do expect to see a pretty robust growth back in modernization and repair and as well as continued growth in the contractual maintenance.

And just finally, do you have an imbedded pension tailwind for 2012 now based on where the line was snapped at the end of 2010?

No, I think again, as we look at it, we're still amortizing some losses from 2008 and 2009.

So there will still be a little bit of headwind next year.

Okay.

Thanks a lot.

Jeff, it's only January 2011.

I know.

Get to work.

How far does your model go out?

Thanks a lot, guys.

We'll take our next question from Joseph Nadol with JPMorgan.

Thanks.

Good morning.

If you look at equipment orders in general, actually just orders across the business, Greg, the percentages look terrific, relative to last year.

But the comps are in different places a year ago, or were in different places a year ago.

I'm wondering if you guys could just provide some big picture color, and not by geography but by business, where we are relative to where things were before the world fell apart?

Where do we have a long way to recover still, and where are we approaching kind of where things were before 2008?

That's a great question, Joe.

Because I think there is some euphoria over the order rates that we've seen, but we should recall that we are still not anywhere near back to the levels that we saw in 2008.

If you look at commercial spares, they were up very strong in both Pratt & Whitney and Hamilton this past year, but still below or well below 2008 levels.

I think at Pratt, spares are probably about a $1.75 billion or so, down from about $2 billion in 2008.

So you've still got some room to recover on the commercial spares side.

Both Pratt and Hamilton.

Transicold, another great story.

Again, we saw very strong orders growth at Transicold.

I think orders overall at Transicold were up about 75% with very good strength in containers and also good strength in the truck trailer in Europe and in the US.

Again, still below -- the market, I think for containers still well below what we saw as the peak in 2008.

I think if you go around the business you will see that really it's a consistent theme.

Res, again at Carrier's, it's the same kind of story, very nice traction but a long, long way from our peak.

And I think the peak in res was back in 2005.

So again, it is -- that all gives us lots of room to grow.

As we've taken the costs out of the business, as these revenues come back and orders come back, I think you're going to continue to see the margin expansion story play out as it has here in the back half of 2010.

Is there anywhere where your orders are now hitting new highs?

I'm trying to think.

Are we --

China, geographically, Joe, China certainly keeps surpassing these past records.

India is doing very well.

Emerging markets I would say broadly, the orders are up significantly, versus the prior peaks.

And then in terms of the other business units, I think probably still long way to go.

Transicold is probably the one that is getting closer but still there is a gap.

Probably 30% to go there as well.

Okay.

That's helpful.

And then kind of a nit picky one.

But if you look at your eliminations in the quarter, ex items the way you define it, it was about $100 million, and it is usually about a $50 million run rate.

It bumps around a little bit but it kind of dampened the EPS impact year on year, in particular, and if segment EBIT was up 11%, and again, taking out the items but consolidated was up only 8%.

I'm wondering what was in there, and how sustainable is that?

A couple of items.

The Clipper charges, the Clipper losses flow through that.

At this point, Joe, I think we talked about the fact that for 2011, we expect between $0.01 to $0.02 a quarter on Clipper, as we absorb that business into our fold.

And then the second item is some legal costs which were a little higher than we've experienced in the past.

May not necessarily continue, maybe a quarter or two more.

But beyond that, it should pare down.

So bottom line, we expect this number to be higher than it used to be, but lower than it was in Q4, going forward?

Yes, I think Q4 is a little bit of an anomaly, just as we had some catch up on these legal costs and of course, it is the first time we saw Clipper in there.

So I think maybe $0.01 or so a quarter is going forward here, over the last year run rate.

Any update on Clipper?

I think the integration is going well, Dr McQuade and team have done a nice job, and it is a very good business in a very bad market.

We've got good people.

We've got good technology.

But it is just a very bad market at this point.

But we're working on some good orders.

And I think is going to be a very successful acquisition over time.

Just not soon.

Okay.

Thank you.

Thanks, Joe.

We will take our next question from Shannon O'Callaghan with Nomura.

Good morning, guys.

A question on the price increase in HVAC.

I mean on the resi side there we had this dynamic play out this year where people were sort of rejecting replacing units for financial reasons.

I mean if we put through a further price increase, and which I understand you have to do, given copper but you put through a further price increase and the credit goes down, do you think there is going to be any demand destruction impact from this?

And are you seeing any change in kind of the fixed versus replace behavior?

Obviously it is off-season but just curious.

I think we saw that issue last year, where we saw again, people were not replacing, they were repairing, and so we saw a big mix shift where would typically had been selling whole new systems, we were only selling condensing units or only selling coils, whatever was broken.

So I think again, as the economy recovers here, it is going to be helpful.

But I think pricing is still going to be tough.

I would also point out that our price is a very small piece of the actual price to the end consumer.

And as you think about it, on a system that might cost $2,500, ours is a relatively small percentage of that total cost to the end consumer.

So this is not a 6% increase that the consumer is necessarily going to see.

Although I will tell you on the service and installation side, I'm sure they're experiencing the same type of cost inflation we are on fuel and other things and labor.

It is one of those tricky things where you've got to manage these price increases judiciously.

We've also got opportunities I think to continue to reign in cost increases as we look for product substitution.

This whole issue of copper at $4.40 just gets to the point where it is going to be less expensive for us to put aluminum heat exchangers in than copper heat exchangers.

And Carrier is actively working on that.

Again, you can't keep pushing price.

We realize that it is a demand-sensitive market.

So, it is a fine balance and I think Geraud and the team has been pretty judicious in these price increases.

Okay.

And then on commercial aftermarket.

I think the prior expectation was for it to be up low teens in 2011.

Obviously things are pretty strong.

Have you changed that assumption?

I think with the strength we saw at Pratt in the fourth quarter, with orders up over 40%, sales up over 30% we got a little ahead of ourselves in terms of expectation.

We still think for the year for 2011, you are going to see aftermarket at Pratt up low single digits as opposed to low teens.

Hamilton, I think is still up kind of low teens overall.

Yes, double digits, Greg I would say for spares.

I think the only thing to keep in mind is, while we still feel good on the orders for Pratt converted into sales in the fourth quarter except for spares, there is a little built of hanging concern with airline profitability because of the oil prices.

If they continue to rise then obviously it can turn around the airline profit situation very quickly and they could be back into a cash conservation mode.

While we still feel good about it, I think double digit at Pratt and low teens at Hamilton are still very good.

That can change as you guys well know.

So it is more, you making an assumption around the impact of airline profitability, rather than something actually you've seen so far in the business?

No, I think there is a lot of factors that go into the forecast.

Obviously, airlines made we think about $15 billion last year, that will be less than $10 billion this year, again just as fuel prices move up, but we look at what we see in terms of shop visits for the year, we expect shop visits to be roughly flat on the legacy Pratt equipment.

We see them going up relatively substantially on the non Pratt or the CFM-56 shops.

So we've got a pretty good view of what the aftermarket is going to do, as we did last year.

I think as Akhil just pointed out, there is always that uncertainty where if oil were to spike above $100 a barrel, that's trouble for the airlines.

We know that every dollar increase in a barrel of oil costs the airlines something like $1.75 billion in profitability.

So it is just a word of caution.

Certainly not what we're forecasting.

Okay.

Great.

Thanks.

We will take our next question from Terry Darling with Goldman Sachs.

Thanks.

Greg, I guess I will keep trying to dance around this question of hey, why didn't we get a little bit of pickup in the revenue guidance with these strong orders.

And I guess, the first part of that is, did you really see the strength to this extent in December?

Or is it, hey, it is just early in the year and there are a lot of variables that can evolve so we're comfortable where we are now?

How do you weigh all of those pieces for us?

I think, we came in a little bit better than what we had anticipated.

Clearly, on the spares side, and at Carrier, I think both Hamilton and Pratt surprised us a little bit on the top line but I think Louis has been talking about this wall of spares for the last year and I think the wall is here and it looks like it is going to continue.

But to your point, it is January 26.

And it is really too early I think to take up the revenue guidance for the year.

But we will be back talking to you guys in another month or so, in New York, and hopefully we will see the trends that we saw in the fourth quarter continuing well into the first quarter here.

Okay.

That's fair.

And then just a couple of items.

Just to beat that copper horse again.

I mean, can you give us what that, at this point, what that year-over-year dollar increase on your copper cost is?

Presumably, you're not -- you don't have anything priced at the leading edge here.

So just a lot of questions around how much inflation is too much inflation, relative to what you can handle with productivity, and a 2% to 6% price increase and just help us with the sensitivity analysis there.

Sure Terry.

Carrier actually did something quite wonderful in retrospect, as they've locked in about two-thirds of their copper for the year.

So even with the price today, let's call it $4.35, $4.40, I think the total price is going to be somewhere around $3.68 or $3.70.

So we would expect something around $75 million of headwind from commodities at Carrier this year.

It is $150 million across the business when you add in steel and everything else.

So it was all part of the guidance.

It might be a little bit more than what we anticipated but not significant from what Louis talked about in December.

Okay.

Great.

And then lastly, on the M&A pipeline, would you anticipate some activity in the first half of the year, or tough to call on that?

And maybe just comment on where bid-ask spreads are at this point.

The bid-ask spreads still remain significantly apart.

I will tell you that.

But again, the pipeline is still pretty robust.

First half versus second half, my own -- if I were to call it, probably more second half than first half, just given the timing of how these deals roll out during the course of the year.

But we're always out there, we're looking at deals, and the key for us of course is you've got to continue to be disciplined.

It is going to be in the core.

It is going to be things that we know what we're buying, and we're not going to overpay.

I think if you go back to the GE Security deal, we liked that deal, it was a good-sized deal.

$1.8 billion.

And it was accretive in year one.

It was an absolute homerun.

Great people.

Great products.

If I could find five more of those, we would do them tomorrow.

Okay, thanks very much.

We will take our next question from Robert Stallard of Royal Bank of Canada.

Good morning.

Akhil, on Pratt & Whitney, you called out that commercial spares on the large engines were up about 40%.

I was wondering if you could give some detail on the other parts of the aftermarket in the quarter.

Sure, Rob.

The Pratt Canada spares were up high single digits.

And the military spares were up over 20%.

So I think overall pretty strong commercial aftermarket, sorry, overall aero aftermarket environment.

Okay.

Just to follow on from that, it relates into Pratt, Hamilton and Sikorsky, what are your thoughts on the defense situation and -- how those have changed since December, but given the uncertainty on the budget where do you see the most negative risk in the defense portfolio over the next 12 months?

The next 12 months I guess I don't see much risk because most of what we have for 2011 is pretty well in backlog today.

I think about Sikorsky will start there.

They're in the process of negotiating Multi-Year VIII.

I think we will have that wrapped up in the back half of the year.

That should add about 500 helicopters to backlog.

On the Pratt side, I think it will probably be a little bit more problematic over the medium term.

We know we're going to see a cut-back in JSF production, probably lose about $2 billion of revenue on the JSF production starting I think in 2013 or so.

So figure about $500 million a year.

Some of that is offset by the SDD program will probably ramp up to the tune of about $500 million.

But still about $1.5 billion of revenue will come out at 10%-ish margins.

But I think the good news is we have got time to address that.

We've seen plus ups over the last couple of years in spares, I think we just got an order for 30 F-117 for the C-17 fleet and Pratt continues to work that.

JSF long term is going to be still a great, great program and continue to work.

The engine is doing very well on tests, not one of the issues that is really holding up the aircraft.

Hamilton, again, they've seen their military revenues coming down.

We saw that here in the fourth quarter.

Most of it on the military vehicle side.

These were the Kidde fire suppression systems in military vehicles and that business this year in 2011 will be probably down another $100 million, $125 million in revenue.

Mostly as a result of just the cut-back on the OEM side.

So it is kind of a mixed bag.

I think we're well positioned at Sikorsky.

Well positioned at Pratt in the long term.

And I think again, the international military is going to pick up some of the slack for the US military.

But again, it is not a great place to be right now.

The budgets will be down.

That's great.

Thanks, Greg.

We will take our next question from Nigel Coe of Deutsche Bank.

Thanks, good morning.

So Greg, I just want to clarify the comment you made to Terry's question about M&A.

Are you ruling out any new type of acquisitions in the near term?

Well, Nigel, I don't think we would rule anything out in the near term.

What I would tell you is that the focus is on the core, it is about things that we know that we can add value.

And I think that is the key, you're not going to see us go into health care, you're not going to see us go into things that really are way outside the core.

In adjacency, where we think we can add value and where we can either bring supply chain and operational discipline, maybe.

But again, the focus here really is on those six businesses that make up the core of UTC.

Okay.

So no health care, that's a big surprise.

So and then secondly, can you talk maybe about where we are on the GTF, risk sharing, I think you mentioned some of your traditional partners could be looking to pick up some share by engine.

Could you maybe talk where are you in terms of negotiations and where you might have some clarity there?

We signed up a number of partners so far.

The MTU is probably the biggest partner that we signed up.

Obviously, JAEC, the Japanese heavy industry consortium is out there, as part of the IAE consortium.

We've had discussions with them about joining us.

The target here is somewhere between 40% and 49% partnershare.

And we've got lots of interest.

The A320 NEO was a huge win for Pratt & Whitney and it really has turned up the heat on the partners to sign up.

So I'm really not concerned about getting to that 40% to 49%.

It is trying to hold the line at that point I think is probably more problematic.

Finally on restructuring, came in $233 million, I had roughly half of that modeled.

Was that just a bad modeling assumption or did you really pick up activity in 4Q and maybe if you could just talk about the kind of pay back you expect on that investment.

There was more restructuring than what we had anticipated.

We had some good news coming off of the tax line, as you saw.

We had a couple of small gains at Carrier, so we took advantage of those, to really go off and do some things.

The biggest thing, I think almost $100 million of it was spent at Pratt & Whitney, most of that on footprint reduction -- trying to move out of some high cost locations to lower cost locations and the payback on the factory closures is not the one year kind of pay back you typically see on the G&A or overhead reductions but they're still out there in the three-year range or so.

On the commercial side, again most of it is on the overhead side and most of those are pretty good bay pack programs.

Frankly it amazes me that we're able to continue to find these very good payback programs out there.

But the guys keep coming up with them.

We have the money.

They're going to find ways to invest it at pretty good returns.

That's great.

Thank you very much.

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

Good morning.

Greg, you had mentioned about the tax rate variability throughout the year.

Is there anything in terms of the restructuring or gains?

Is there anything where it is I guess not covered during any of the quarters as we think about how they lay out?

No, I think we've got this gains equal restructuring math that we're going to go back to which, of course back in 2009, we got off of, but as I look out at the quarters I think we've got pretty well matched up or identified gains to cover the restructuring in each of the quarters.

I don't expect that number is going to be very big.

We're talking about $150 million to $200 million of restructuring so you might see $50 million of restructuring in the first quarter, and $50 million of gains, but it will be pretty close.

Okay.

And then with the 787 delays, have you changed the assumption with regards to Hamilton Sundstrand for initial provisioning spares and then what does R&D look like year-over-year at Hamilton because of that?

Yes, we've changed the provisioning assumptions.

We always anticipated this thing was going to go into service in the first quarter.

So now that it's gotten pushed out to what we think is third quarter.

Some of those provisioning sales will move out.

E&D will also go up, a little bit, maybe $20 million to $25 million.

So, a little bit of pressure at Hamilton but I think, Alain and team have got it pretty well under control.

We're not changing their guidance as a result of this.

I think it is just one of those things that as you think about the contingency that we had, it might be a small call on contingency.

Okay, then the last question is just with regards to the A320 NEO, how should we be thinking about the timing as to when engine decisions get made?

We've seen a couple of orders there.

When do they actually decide which engine selection they will use?

I think you will start to see engine selections probably by the second quarter, certainly by the Paris Air Show this year, I would expect some of the first in line are going to be signing up -- yes, signing up for their engine choice.

The key here, of course, is we have to remain -- retain the discipline of the pricing here.

This is a great value to the customers.

When have you an engine that gets 15% better fuel burn, 50% lower noise and emissions, there is value to the customer.

We just have to make sure that we are going to get paid for that value as part of this.

Again, we will be disciplined.

We got a great product out there.

And as we see, a lot of people want it.

So I think it is a great time to be at Pratt & Whitney.

Okay.

Thanks a lot.

We will go next to Cai von Rumohr with Cowen and Company.

Yes, thank you very much.

R&D, could you refresh my memory, what are we looking for now in 2011?

And is that -- and that number is up?

Yes, I think it is about $175 million higher than 2010.

I think 2010 ended up about $188 million higher.

So it was a little bit lower than what we had expected but still up about $175 million this year.

Okay.

And so maybe a little bit more than you had expected at Hamilton Sundstrand.

In terms of your expectation of bringing on partners on the NEO, are you assuming that as those partners come in, they kind of have to pay tribute as a price to play to get in since you absorbed some of the R&D that they haven't so that that would soften the blow?

Is that baked into the number?

No.

The tribute that you're referring to, or the buy-in to the program is typically put on the balance sheet and amortized over the program.

That actually doesn't reduce E&D.

The reduction in E&D comes when they start taking on the work themselves as part of the program.

So again the $175 million that we have, most of that is at Pratt, but that assumes the partners will be picking up 40% or so of their share of E&D during the course of the program.

Okay.

And then you had mentioned that Sikorsky initial margin pressure on the Canadian maritime program, is that program still at break-even and is there any chance that could move into the red?

No, I mean the program was sold as a 28 helicopters and then a 20-year service and support contract.

And so when we look at the total contract, it is still very profitable over the 20-year time horizon.

The problem of course, is the initial helicopters are each going to go out with a $10 million check.

And so that is what puts the margin pressure on these guys.

$10 million, they are going to deliver six of them this year, probably two in the first quarter, and then the rest over the remainder of the year.

So just year-over-year, they've got $20 million of headwind that they didn't have last year.

The program is still -- again, we think it is a very good program.

The Canadians, they want these aircraft.

We've done a lot to make sure that this is the best search and rescue helicopter out there.

And we think there are still possibilities for international sales, too.

So this will be a good program over the long term.

But it is going to be painful for Sikorsky as they deliver these first 28.

Okay.

And last one, there has been some talk by some other suppliers of a pickup in the BizJet market.

Are you seeing any signs of that at Pratt Canada?

We've seen a little bit of that benefit here in the fourth quarter.

We started to see orders pick up just a little bit.

But quite frankly, we don't expect to see an increase in BizJet delivery, significant increase until probably 2012 at the earliest.

Typically as you know, Cai -- BizJet orders pick up about two years after corporate profitability picks up and we don't think anything is going to change in that model.

There is still 15% of the fleet out there for sale and prices are still relatively depressed for the used aircraft.

Terrific.

Thank you very much.

We will take our next question from Ron Epstein with Banc of America - Merrill Lynch.

Good morning.

Hey, Ron.

As outsiders looking in on the GTF development program, now that you're on several airplanes, what can we use as guides that things are going well or not?

Can you kind of maybe throw out some things we should look for?

I think it is just the achievement of the milestones.

I think the biggest thing was getting the first engine to test, which we did here in the fourth quarter.

And it is completing those milestones.

We're going to take the first engine to flight here probably in the second quarter.

I think it is June.

Maybe July.

And we will actually get the flight test with the CSeries engine up in Mirabel at our new test center up there.

I think it is just hitting those milestones.

And we will talk about those.

I am sure Dave will hit on those in March as we go through the program.

I mean this is a big program.

It is a big investment.

We've got four platforms.

But the technology is really very mature.

And I think that is the key for us, it's mature technology.

This is not a paper engine.

We're going to actually deliver these things on time with the performance that we've guaranteed.

Okay, then maybe a follow-on, switching businesses, if we jump over to Fire & Security, when we all met down in Florida, one of the focus points was the growth of that business, largely around kind of the new products that you've brought to market.

You can give us an update on what is going on there?

How is the fire mist system doing?

And the online security stuff?

I think, Ron, some of the initiatives Bill talked about are doing extremely well.

The Marioff business had very good orders in the quarter, and continues to build its backlog.

I think the one question which comes up is why is there a disconnect between the orders which have been growing strongly for the last several quarters.

We had 4%, 7%, and now 6% growth in organic orders, in the quarter, while sales has not grown as much.

And I think that is because a lot of these orders are coming in long cycle businesses.

Marioff books orders but delivers in 9, 12 months, similarly on some of the other fire suppression and firefighting businesses, we see a time lag between booking of orders and delivery.

But we feel pretty good about the guidance for 2011 of mid single digit type of organic growth for Fire & Security.

Ron, I would just add to that, as we look at the products side of the business, the products business is actually doing quite well, especially on fire products.

We saw very strong order growth, good sales growth on the product side even in the fourth quarter.

Where we've really struggled is on the service an installation side and that is really more endemic of the commercial construction overall markets.

So as commercial construction remains weak in the US and Europe which is the biggest part of the Fire & Security business that's where I think we're going to continue to struggle on service for a bit yet.

But the product pipeline, that Phil talked about, I think it's robust.

I think all of those things are on track and the GE Security products certainly help within the portfolio.

Great.

Thank you.

And we will go next to Doug Harned with Sanford Bernstein.

Good morning.

On Pratt & Whitney and Hamilton, I would like to go back to the order growth, because this was very high order growth, and can you talk about where you saw that both in terms of geography and in terms of legacy versus CFM-56 type growth?

Most of the -- let's start with Hamilton, I guess.

We saw -- again, I think the pleasant surprise in the fourth quarter Hamilton was the recovery in the provisioning market.

Provisioning orders were up over 60%.

Now, that's coming off of a very easy compare in the fourth quarter of 2009.

But we really saw strength across the entire globe in terms of provisioning orders.

And that's not surprising.

The airlines have been so cash constrained, they really needed to bring some of this equipment into their fleet.

So provisioning was up.

But parts were up nicely as well at Hamilton.

And Hamilton is on every aircraft, every commercial aircraft out there.

So their recovery has been pretty broad-based.

Pratt on the other hand, they saw very strong growth, really on the legacy programs, I think the biggest growth in spares was on the PW4000.

And also we saw good growth on the V2500 fleet.

As well as some of the PW2000.

And the JT8s and JT9s are really pretty insignificant.

But think about where those fleets are, those are mostly US fleets for Pratt and some in Asia, so again, pretty good growth across the product lines.

But when you look forward, you were saying before that you thought you would see strong growth on the CFM-56 side, and relatively flat on the legacy products.

Does that have an implication for some margin pressure with respect to aftermarket?

That is a good point.

I think as we look out in 2011, as we're ramping up these new CFM-56 shops in both Shanghai and in Turkey, that's going to drive more spare parts volume into those shops and of course because those are CFM-56 engines, we're not going to see the same margins on those parts as we do on our normal legacy parts, or legacy engines going through the legacy engines centers.

That is really the whole thought there, is just to point out, revenues will probably pick up in the aftermarket nicely this year but there's going to be a little margin pressure as the CFM-56 shops pick up bigger and bigger share.

And lastly on the two, when you look at restructuring on each of them.

They each looked to have higher restructuring than I would have expected.

You commented on the Pratt situation.

What about Hamilton?

Was there something additional there going on?

Most of the Hamilton restructuring is around low cost sourcing and just moving some facilities and some work over to Poland.

Some of it is coming out of our APU business in San Diego.

Really just across the board just trying to downsize and go to lower cost manufacturing facilities.

But these are things that we shouldn't expect to see repeated necessarily, in 2011?

Well, Hamilton's still got some work to do on low cost sourcing.

And I'm sure they got some trailing costs associated with these programs and they will continue and I think, Alain will talk more about this in March but the big push at Hamilton is to move to low cost sourcing.

That's going to involve more restructuring of some of our legacy factories as well as our legacy supply base.

Okay good.

Okay, thank you.

And we will go next to Heidi Wood with Morgan Stanley.

Hi, a question on the NEO.

It looks like that is attracting actually quite a lot of attention with the airlines and the order pipeline looks pretty healthy but I'm just wondering, should we assume that the GTF orders are going to come from the existing V2500 customers or do you possibly see any airlines converting that were CFM56 users?

I'm not sure that I'm going to hazard a guess in terms of which customers will ultimately select but we're certainly -- we've got I think a very competitive offering to both the existing V2500 customers as well as the legacy CFM-56.

Jet Blue is a great example.

They see the value proposition of the GTF.

And then we expect to have a very competitive offer in to those guys.

Could you hazard a guess on the market share balance that you think you will get versus GE on that?

No.

I thought I would try.

All right.

A question on Fire & Security.

Could you give us a sense on that GE Security business?

You've got a pretty good due diligence process but nevertheless I'm wondering what your puts and takes were on what you expected versus what you saw, and what are the chief data points that we should look for in 2011 to see how this integration is progressing?

The key data point, Heidi, is the fact that the acquisition was accretive in year one which I think Louis mentioned in December and Greg confirmed today.

That is certainly better than we had expected.

The synergies are coming in nicely.

Both on the cost side -- actually on the sales side the team has been positively surprised.

As you know, we are very disciplined in determining the acquisition returns.

We generally rely on cost synergies and in this case we have been pleasantly surprised with the sales synergies which are expected to come as well as GE Security brought in a good product pipeline and technology with it.

So I think, all in all, it is going very well and ahead of schedule.

And then one last thing, we've touched on the MRO stuff before, Greg, but I wanted to dot the I's a little bit on that for a second.

Can you give us some color on what you're seeing with the airlines?

For a while they weren't willing to do much in the way of activity.

Are you having conversations where you're getting a feeling like that could start to pick up more in 2011?

Yes, I think as we look at the inductions into the engine centers this coming year, we're expecting significantly more, kind of mid teens, more in terms of heavy overhauls versus the light overhauls and that's the phenomenon we talked about in 2009 was the fact that these engines were coming back as they needed to but they were having light overhauls instead of the normal heavy.

So we're starting to see a trend now, where airlines, I don't want to say they're flush because when you're making 2.5% margins it is not exactly flush but they've got cash and they're investing that in their fleets to make sure they can stay flying.

I think we're going to see nice continued growth there just as the airlines continue to do some of the deferred maintenance that we didn't see done back in 2009 and early 2010.

On Pratt & Whitney Canada I didn't catch what you did in 2010 and what you think in 2011.

For Pratt Canada, Heidi, the engine shipments were up slightly and I think fourth quarter was up 5%.

So we've seen some improvement.

And I think for next year we expect a similar, about a 5% increase in engine shipments.

Okay, great.

Thanks very much.

For the full year, just to correct, for the full year, the engine shipments were down, but fourth quarter they were up 5%.

Yes, good.

Thank you very much.

We will take our next question from Julian Mitchell with Credit Suisse.

Hi, thanks.

My first question was just on the trends you're seeing on the commercial construction, construction generally, I guess within China.

I mean you call out the very strong Otis growth, I can see that, but obviously the inflation concerns have only really become a very big deal I guess since mid late November and I just wondering if you had seen any kind of slowdown in Otis or Carrier in China and what your core expectation is for China growth in most businesses this year.

Thanks.

Julian, I don't think inflation is a new phenomenon in China.

We certainly, we've seen it over there especially on the labor side for the last several years.

Order growth was really strong across both Otis and Carrier.

Both had order growth over 30% in the fourth quarter.

Now, that is going to slow down.

We all recognize that.

We're still forecasting though around 10% growth in orders in China in 2011.

So the government is talking about slowing things down.

Property continues to remain a very, very good investment for people.

It is one of the few places where people can invest their money.

So I think again, slower growth, and there will be some cooling measures, we will continue to see those from the Chinese government, but overall, I think the demand for property and building construction is going to be relatively robust in 2011.

Thanks.

And then in Sikorsky, I mean we're hearing sort of mixed things on commercial helicopters.

I mean Bell was fairly positive this morning.

But Eurocopter a couple of weeks ago were quite cautious.

Can you give an update of what you're seeing?

Is it a lot of talks and discussions but not many placements?

Or how do you see the market environment?

I think we saw a relatively good fourth quarter.

We've had 17 orders.

We had relatively good deliveries, although they were down versus last year.

I think as the oil and gas market returns here, in the US, and some of this deep sea exploration starts again, and some of that uncertainty is lifted from the market, we will continue to see some traction on the commercial side.

But it is a long cycle business.

And I think, 2011 is not going to be a growth year in commercial.

It is really going to be 2012.

And part of that is going to be driven by the introduction of the S-76D which is a new model that I think we'll be starting to deliver in early 2012 at this point.

So again, we're not forecasting our complete recovery in the commercial market this year and it is similar really to BizJet.

It is probably a 2012 kind of phenomenon.

Great.

Thank you.

We will take our final question from Deane Dray with Citi.

Thank you.

Good morning, everyone.

I had a couple of cleanup questions on Carrier and there was an expectation and there might still be some pruning going on in some of those businesses.

What is the timing and potential size?

Deane, we've done about $2.5 billion of asset or business dispositions over the last couple of years.

We still think there is maybe $500 million to $800 million to go.

We still have a piece of the North American distribution here in the northeast and in Canada we're working on.

And when we say disposition, we're really talking about joint venturing obviously with some people there, but I think you will see most of that will probably play out during the course of the year.

Not sure you're going to see anything here in the first quarter but certainly during the course of the year I think Geraud will be pretty much wrapping up on that whole portfolio transformation.

How about just clarity on the European HVAC, you said it was a bit soft, was that timing or is there any austerity pressures there?

Deane, actually orders, even though the sales were soft, as I said, they were down, but the orders in Europe were very strong.

They were almost 20% higher than prior year for the commercial HVAC business.

So I think while there are different markets, Europe as you know is a story of different countries, the southern countries still a little weak, but Germany continues to be strong, and I think we feel relatively okay with the guidance, which is not very robust for next year.

It is about flattish in Europe for next year for us.

Got it.

That's helpful.

And just lastly, Greg, I know you get asked the question about any potential new platform, but given current weather conditions, have you been looking at snowplows at all?

Maybe we can convert some of those fire trucks, that Fire & Security makes and put some plows on them and sell them in the northeast.

Good idea.

We will see.

Probably not much there.

Okay.

Just let me close out and just say thank you all for listening.

It was a very strong 2010.

We're positioned well for earnings growth in 2011.

And Louis and I along with the business unit presidents look forward to meeting with you at our analyst and investor meeting on March 10 in New York City.

Thanks, everybody.

And have a great day.

That does conclude today's conference.

We thank you for your participation.