雷神技術公司 (RTX) 2011 Q2 法說會逐字稿

Good morning and welcome to the United Technologies' second-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 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, Mister Hayes.

Good; thank you, Dana, and good morning, everyone.

As you saw in the press release this morning, we had another solid quarter with organic sales growth of 6%, and that's after 9% organic growth in the first quarter.

You'll recall that we actually saw the recovery in our sales growth start in the second quarter of last year, where we saw 4% organic growth.

So with five consecutive quarters of organic growth under our belt, we are confident now in the sustainability of the recovery in our end markets.

And we are confident in our full-year forecast of organic sales growth of 5%.

Earnings-per-share in the quarter, $1.45, and that is up 21%.

Continued focus on cost reduction and operating leverage from higher sales drove segment margin expansion even as we increased investments in engineering and development.

And it's no surprise that most of that E&D increase was at Pratt & Whitney, as we continue to invest in the development of multiple Geared Turbofan platforms.

Well, we are clearly operating in a better economic environment than a year ago; however, most measures still point to a slow and uneven recovery.

High unemployment, a weak housing sector, and the deficit standoff in Washington all continue to dampen consumer sentiment here in the US while European sovereign debt worries still plague financial markets and constrain government spending in the EU.

On the other hand, emerging markets continue on their growth trajectories, even with the adoption of cooling measures by the various governments to hold down inflation.

And importantly, airlines continue to fill seats in spite of higher air fares.

So, with this uneven economic backdrop, we continue to see sales and order rates consistent with our full year expectations for most of our businesses.

Carrier's Transicold business remains exceptionally strong, more than offsetting a softer US residential HVAC market.

This improved Carrier outlook along with the translation-related benefits from a weaker US dollar, gives us confidence to raise the sales and earnings outlook for 2011 one more time.

We now expect sales of around $58 billion; that's up from $57 billion we had previously estimated and now up nearly 7% from 2010.

We also expect 2011 EPS to be in a range of $5.35 to $5.45; that's up from our previous guidance of $5.25 to $5.40.

That's a range of 13% to 15% up over 2010.

The foreign exchange has clearly been a benefit so far this year.

The euro has averaged $1.40 for the first half of the year as compared to our original assumption of $1.35.

So we now assume we are going to continue to see this euro average of $1.40 for the balance of the year.

This FX benefit and the improved Carrier outlook will more than offset additional engineering and development investments at Pratt & Whitney, and a lower outlook at Fire & Security in our increased guidance.

Before I start with the second-quarter discussion, just a reminder that we will talk to you -- talk to the segment results adjusted for restructuring and one-time items just as we usually do.

Okay, turning to slide two, second-quarter results, you can see sales up 9% with 6 points of organic revenue growth.

More importantly, this is the first time in three years that all of our businesses reported year-over-year organic sales growth, reflecting a broad-based improvement in our end markets.

And, we still have runway, with most of our businesses well below peak levels, with the exception of Carrier's Transicold business and Hamilton Sundstrand's industrial businesses, both of which are now likely to be at or near their 2008 peaks.

In the quarter, Carrier again led the way with 11% organic growth, while Otis's sales were up 3% organically.

That's after nine quarters of year-over-year decline at Otis, so a real turning point there.

As I mentioned earlier, earnings-per-share in the second quarter were up 21%.

Restructuring expenses were offset by one-time gains in the quarter compared to a net charge of $0.12 last year.

Excluding restructuring and one-time items, second-quarter EPS increased 10%.

Foreign currency was a net benefit of $0.06 in the quarter.

Total segment operating profit increased 10%, even with $67 million of higher engineering and development investments.

Segment operating margin of 15.9% -- that expanded 20 basis points, with five of our six businesses reporting higher margins.

Carrier's segment margins were up 110 basis points to 13.9%.

And with Carrier's operating margins now at 12.9% for the first half of the year, it's highly likely they will be close to their 12% margin target for the year.

And that's one full year ahead of schedule.

Okay, maybe the one soft spot in the quarter and I think the one thing of course that my boss is not very happy about in the quarter -- free cash flow was only 80% of net income, which is of course below our normal benchmark of 100%.

Working capital increased by more than $600 million in the quarter, due to higher shipments across the businesses and the timing of cash receipts.

However, let me point out for the year, we are very confident that free cash flow will still equal or exceed net income.

Share repurchase was 750 million in the quarter, and year to date we've invested $1.5 billion in share repurchase -- a pace well ahead of our guidance of $2.5 billion for the year.

Acquisition spend was light again and year to date we've spent $184 million.

However, Bill Brown and his team continue to work on a robust pipeline, and deals are hard to predict.

As you've seen in the past with the GE Security acquisition, we have the appetite and the capacity for large acquisitions, and we know how to integrate them well.

That said, given that it's already July, we will likely spend less than the $1.5 billion placeholder on M&A in this year, and we will likely spend slightly more than the $2.5 billion placeholder on share buyback.

Okay, on slide three -- orders -- we continue to see strong order trends in the aerospace aftermarket, with Pratt & Whitney large commercial spares up 23%, and Hamilton commercial spare orders up 25%.

At constant currency, Otis's new equipment orders grew 15% and Carrier's global commercial HVAC equipment orders were up 9%; that's a positive sign for commercial construction.

Emerging markets continued to do well with particular strength in the BRIC countries, where combined orders for the commercial business units were up 26%.

So, solid quarter, strong organic sales growth, earnings growth and margin expansion -- all while continuing to make significant investments in these new technologies.

I will come back and talk a little bit more about the back half of 2011, but for now let me turn it over to Akhil to take you through the business unit results.

Thanks, Greg.

Turning to page 4, Otis delivered a strong quarter with profits up 14% on sales growth of 12%.

Operating margin expanded another 20 basis points, to 23.4%.

Foreign currency accounted for 10 points of profit growth and 8 points of sales growth.

New equipment sales were up 8% in the quarter at constant currency, led by strong growth in China and Russia.

Service sales were also up in the quarter with continued growth in contractual maintenance and repair.

New equipment orders increased 15% at constant currency, led by China where orders were up close to 30%.

Orders in North America were up mid-single digit, while orders in Europe were flattish.

Pricing remained under pressure in most markets.

After including the translation benefits from a weaker US dollar, we now expect full-year profit at Otis to grow around $225 million as compared to the prior guidance of approximately $150 million.

Sales are now expected to grow high single digits, based on FX.

On slide five, Carrier posted another very strong quarter with profits up $78 million or 20%, on 10% higher sales.

As Greg said, operating margin for the quarter was 13.9%, up 110 basis points from prior year.

Organic sales growth was 11%, led by continued rebound of the transport refrigeration market.

Transicold showed strength across all products and geographies with sales up organically more than 40%, led by the refrigerated container business.

On the other hand, North America residential shipments moderated this quarter after a strong start to the year.

While split-system unit shipments were up midteens, this was offset by a double-digit decline in gas furnaces.

Earnings growth was driven by volume, strong conversion from continued productivity and cost reduction, and about $15 million earnings improvement in our Japan joint venture from business transformation actions.

The first-half growth in Carrier's Transicold business was truly exceptional.

We expect more normal growth rates in the balance of the year for Carrier.

After a first-half organic growth of 14%, we expect Carrier's organic sales to be up about 10% for the year.

Given the strong first-half performance, we are increasing Carrier's profit growth guidance for the year to about $325 million, from $250 million-plus previously.

UTC Fire & Security delivered profit growth of 15% in the quarter on 8% higher sales.

Organically, sales were up 4% with mid-single-digit growth in the products businesses.

Among the service and installed businesses we saw high-single-digit growth in Asia and Australia, and high-single-digit contraction in the UK.

Second-quarter orders grew organically 5%; backlog continues to expand and is up approximately 15% organically year over year and from the beginning of the year.

Operating profit in the quarter grew 8% at constant currency.

Favorable litigation resolution contributed around $25 million of profit growth.

Benefit from higher overall volumes was more than offset by substantial profit decline in the UK, from lower sales and productivity.

For the full year, we now expect F&S operating profit to be up approximately $150 million, instead of the prior guidance of $175 million, as benefits from a weaker US dollar and favorable one-time gains are likely to be more than offset by lower-than-expected organic growth for F&S as a whole, and lower margins in the UK.

We continue to expect F&S sales to be up high single digit.

Turning to aerospace on slide seven, at Pratt & Whitney, sales were up 5%, driven primarily by higher overall aftermarket sales.

Large commercial engine spare sales were in line with expectations, and up more than 20% over the second quarter of 2010.

Operating profit was down 7% in the quarter.

The benefits from net higher sales and restructuring savings were more than offset by a nearly $70 million increase in E&D, unfavorable engine mix in both the large commercial and military businesses, and higher pension costs.

Operating margin for the quarter was 14.3%, down 190 basis points year over year, due to the impact of higher E&D and the unfavorable engine mix.

As a result of higher E&D investments, primarily from timing of programs, Pratt's operating profit is now likely to be down around $100 million for the year as compared with prior guidance of down $50 million.

We also expect Pratt & Whitney sales to be up slightly for the year.

Hamilton Sundstrand delivered a solid quarter with 13% profit growth on 11% higher sales.

Organic growth was 8 points, while foreign currency translation contributed 3 points.

Sales growth in the quarter was driven by continuing strength in the industrial and aerospace aftermarket businesses.

Commercial sales were up around 35%, while aero OEM sales were flattish as commercial aero growth was offset by declines in space and defense.

Profit growth in the quarter reflects the benefit of net higher sales and slightly lower E&D, partially offset by higher program costs.

Operating margin was up 40 basis points year over year to 17.7%.

Commercial space orders increased 25% versus last year, with book-to-bill slightly below 1.

Industrial orders were up about 20% and remained particularly strong at Sullair.

This quarter, we also saw an improvement in the longer cycle Sundyne business.

For the full year, Hamilton Sundstrand remains on track to increase operating profit by about $100 million, with mid-single-digit sales growth.

Turning to Sikorsky on slide nine, operating profit increased 17% on 6% higher sales.

During the quarter, Sikorsky shipped a total of 70 large aircraft, two more than the second quarter of 2010.

57 aircraft were based on military platforms and 13 commercial, including only one Canadian Maritime helicopter.

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

Operating margin expanded 110 basis points in the quarter to 11.5%, primarily reflecting the benefits of higher aftermarket volumes, low-cost sourcing, and slightly lower E&D.

For the full year at Sikorsky, we continue to expect profit growth of approximately $100 million on sales growth of mid- to high single digits.

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

Okay, thanks, Akhil.

We are on slide 10 now, for those of you following along.

A solid quarter; continued momentum in organic sales growth puts us on track to deliver on improved sales earnings outlook for the full year.

I think that's the really good news here.

It was also great to see Otis report organic growth for the first time since the fourth quarter of 2008.

And of course, it's heartening to see Carrier continuing to deliver on its operational and portfolio transformation agenda with a very strong quarter.

Also in the quarter, some big accomplishments.

Otis won a contract to modernize and maintain the Empire State building elevators, as their biggest modernization contract in history.

On the aero side, we achieved a major milestone on Pratt & Whitney's Geared Turbofan.

Pratt's first GTF engine for the C-series aircraft successfully completed its first flight on June 20 that validated the performance metrics that make it an industry leader on fuel burn, noise, and emissions.

Hamilton Sundstrand is firmly on track to support the 787 entry into service, which we now expect to be in September.

And Sikorsky's Black Hawk platform continues to drive international growth.

We had significant wins this quarter in both Australia and Turkey.

So, with solid results year to date and the healthy order trends, we are confident in achieving the increased outlook of $5.35 to $5.45 for EPS, on sales of around $58 billion.

That's earnings growth, as I said before, of 13% to 15% on sales up nearly 7%.

Now, this conversation wouldn't be complete if we didn't talk a little bit about some of the concerns.

But let me tell you first of all that we are confident in our cost-reduction efforts and our initiatives to drive growth.

There are concerns out there; we all know what they are.

You know, there's a sluggish recovery in the US, a weak consumer sentiment; there's continuing uncertainty in Europe, and we hear a lot about commodity inflation driven by emerging-market demands, as well as high oil prices, which are putting a damper on airline profits.

We know about these things but we are focused on doing things under -- or focused on what we can control and that's costs, and that's delivering value to customers.

We also talked about pressure on E&D as we continue to invest in these innovative new technologies, particularly as we ramp up the multiple next-generation product platforms at Pratt & Whitney.

For the full year, we now expect engineering and development to increase by at least $275 million.

We also expect restructuring expenses of around $200 million for the year.

And for the full year, consistent with our prior expectations, we see one-time gains will offset restructuring expense for the year.

Other couple of changes -- effective tax rate will be a little bit higher, we think about 31% now for the year.

That's up from the 30.5% we had previously looked to or previously estimated.

And we will use that additional tax or the higher tax rate to repatriate some additional foreign cash later this year.

As I mentioned before, free cash flow was slightly before -- slightly below 100% of net income in the first half.

We are still confident in free cash flow will equal or exceed net income for the full year.

We continue to expect solid conversion for organic sales growth for the balance of the year, based on our relentless focus on costs and continuing to take advantage of operating leverage across our businesses.

So overall, very confident in our improved 2011 outlook.

We've got a great, seasoned management team that is focused on positioning the business for long-term growth, with innovative products, a global market presence, and flawless execution.

Now, let me stop there and let's open up the call for some questions.

Thank you.

(Operator Instructions).

And we will take our first question with Terry Darling with Goldman Sachs.

Thanks, good morning.

Greg, real strong performance out of Otis and Carrier in the quarter, relative to our expectations.

And I'm wondering on Otis if you can just talk about the step up in profit forecasts there, given the pricing pressure comments that you made.

It doesn't look like maybe the mix is as much of a headwind as you thought before.

What other dynamics at Otis are going on?

And then, maybe you can address some of the press reports on the China issue there, if there's anything to talk about there.

Yes.

Yes, first of all, I think at Otis they had a very good quarter, continued to grow earnings, continued to deliver on conversion too -- operating profit or segment op margin, I think, was up 20 basis points for them.

Obviously, they do benefit from the mix shift.

Right now about 60% of their business is service, about 40% new equipment.

And we are going to see some pressure going forward, I would tell you, on that margin as new equipment starts to pick up.

And we had a good quarter, I think 15% on a constant-currency basis increase in orders -- very, very strong in China, up almost 30% in orders.

So again, good growth there, good growth around the world.

We saw good growth in Russia, in India, in Brazil.

You know, the US and Europe, kind of a different story, kind of flattish.

The US is a tougher compare because of the big order we had last year with the LAX airport.

But, I think good momentum across the new equipment business at Otis.

And as always, a strong focus on cost control, which is why you are seeing these very, very strong margins.

The second part of your question -- I think everybody has heard, there was an incident in the Beijing Metro a week or so ago, a tragic accident where we had one of our escalators fail.

We are obviously working with the people in Beijing; we've identified the problem.

It's a pretty small problem as you think about escalators sales in Otis is really less than 10% of their total China revenue.

This particular model, there is less than 200 of them in service, so we are out there obviously actively working to correct the problem.

We've identified root cause and we've got to make sure it doesn't happen again.

But no big financial impact, we think, to Otis; obviously, just a terrible accident.

And then, Greg, just on Carrier's second-half implied guidance, I mean you are up almost $300 million profit in the first half, year over year.

You know, I think you had mentioned 6% organic assumption for the second half.

Can you take us through the pieces within Carrier around that 6%?

And then, it does look like the flow-through on the second half, year-over-year revenue increase is kind of light.

And is that caution, is that copper prices moving up, or what's driving that?

Well, let me start and I'm going to have Akhil fill you in with the details.

First half, on an adjusted basis we are up about $245 million.

There is about another $80 million of back half earnings growth that we see.

Again, we saw very strong organic growth in the first half of the year, driven by Transicold.

That's going to slow down in the back half of the year, so again, that's a high-margin business.

We see good sales conversion on that.

So you're going to see a little bit lower conversion in the back half of the year.

But having said that, I think all of the businesses are hitting on all cylinders there.

You know, slowest in the residential side but still I think good earnings momentum there.

And it's going to be a good year.

You just have to remember that compares get tougher in the back half of the year, not just for Carrier but on the commercial aero side as well.

And that's why, again, very strong first half and we will have a good back half, probably not the same big headlines that we saw here in the front.

Yes, just a couple of data points to add to what Greg said.

I mean, first-half organic growth for Carrier, nearly 50% of that came from Transicold which, as you know, is the high-margin business.

In the back half, that slows down a little bit because of tougher compares.

Transicold had started recovering last year, as you will recall, and certainly in the fourth quarter.

So you see probably 10% of Carrier's organic growth in the second half will be from Transicold, and what picks up is international residential, particularly Latin America, which is one of the lower margin businesses.

So I think there's a little bit of impact from that, Terry.

And in reality, 23% conversion in the back half is not really something to feel bad about; I think it's a pretty good conversion still, given that mix issue.

That's very helpful; thanks very much.

And we will go next to Joe Nadol with JPMorgan.

Just sticking with Carrier for a first question, could you guys comment on whether Transicold was up or down sequentially from Q1?

And then, just a little bit of commentary maybe on the gas furnaces which is something we pay less attention to maybe at the splits.

What are the different demand dynamics there, and why was that down?

Sure.

Transicold was slightly, was flattish, although container, which is a big part of that business, was down in the second quarter compared to the first.

Not surprising, Joe, because I think as we talked about, first-quarter container was very, very strong.

And if that run rate had continued, the implied market for the year would be 60% above their prior peak, which was not going to hold.

So I think that's the -- so we see the trends which are not surprising at all, the truck-trailer business picked up a little bit.

I think, Joe, on gas furnaces, obviously we've seen the impact in the quarter of the elimination of the stimulus during the year.

Gas furnace was down; I think cooling was up in the quarter, so the net of residential HVAC was about flat.

I think the good news is, Carrier has got a great new product they are introducing in the back half of the year, the new Aurora; that's a very high-efficiency furnace, and we hope to actually use that to leverage sales growth into both the fourth quarter and into the next year.

But again, I think that goes back to it's a slow economy out there on the consumer side; housing is still relatively anemic.

But again, positioning ourselves, making investments today to grow on the long term.

Okay.

Then second question, just turning over to Pratt, you bumped up your E&D expectations.

Is there -- I mean, I know you have a lot going on there and we understand of course why E&D is going up, but in terms of the incremental change in the quarter, are there areas you are struggling on with the GTF that you have to put more resources into?

I didn't really see any acceleration of any schedules out there, in terms of your platforms during the quarter, so just wondering what that is due to.

I think what we saw in the quarter is the run rate on E&D picked up a little bit from the first quarter, and it's that run rate that we saw in the second quarter, we just recognized is going to continue on through the year.

So I think in total, E&D at Pratt will be approaching $1 billion for the year.

The key here is to get ahead of the curve here, and to continue to make these investments to make sure that we are ahead of the schedule.

You know, Airbus obviously is anxious to get the engine out there; we've pulled that schedule up, we've said before, about six months from our original expectation.

But the key here is just making sure we get everything done ahead of schedule, because if you get behind schedule these programs get very expensive.

And Pratt, as we've said before, they have to execute flawlessly on these programs.

And, to the credit of the folks over at Pratt & Whitney, I think they are spending the resources, they are spending the money today and they are getting the results.

Right?

We validated the C-series on the first flight, we met the fuel burn, we met noise, we met emissions.

So everything is going along, but there's a lot on their plate.

Can you comment, Greg, more quantitatively, in any way you seen possible -- help us understand exactly how you are tracking relative to plan, not from a dollar standpoint but how many boxes are you checking on the program, relative to where you should be?

Yes, you know, we just had our operating review with Pratt & Whitney last week, and it's a great question, Joe, because again as you're spending all this money the question is, are you spending it as efficiently and as effectively as possible?

So, we have something called an earn value management system which tracks the progress that you are making on a day-to-day basis with each dollar that you spend.

And I think what was heartening for us is that Bob Saia, who heads up the program, says they are right on track from an earned value standpoint from the costs.

And the dollars that we are spending so far have been as efficient as we had expected them to be.

So, not to say there's not going to be problems later on, but I would say so far, I think we are doing a great job.

Okay.

Thanks, Greg and Akhil.

And we will go next to Deane Dray with Citi Investment Research.

Thank you, good morning everyone.

On Sikorsky, we were expecting three of the maritime deliveries.

Does that change the outlook for deliveries for the second half?

Yes, absolutely.

I think for the full year we are still at six, so year to date we've only gotten two out, so you'll see again I think probably three push into Q3 and then most likely one into Q4.

Okay, and then over at Fire & Security, the softer operating profit outlook -- you tied it to both, I think it was lower demand and also lower margins in the UK.

I was hoping you could expand on both of those.

Yes, I think, Deane, as you know, as the UK issue first, the government austerity there is hitting the F&S business significantly, because as you know, the UK is a pretty big portion of total F&S.

And government jobs were higher margin and with them going away, there has been some kind of a negative pressure on the margins.

They've also had challenges at some of their portfolio attrition rate which has been decent.

But the margins they are losing on some of those contracts is being replaced with lower margin contracts, and that's hurting a little bit.

And finally, I think -- thing which Scott is focused on very much so, is that costs were added a little ahead of the sales, and there were a significant number of sales force additions in that country and we haven't seen the sales to support that.

So costs are a little ahead of schedule there.

And with all of that comes some pressure on margin.

But Scott and team are on it, and it will be addressed.

So no change to the Fire & Security target margin for 2012, plus 15%?

No, I think what you're going to see, Deane, is the margins will be north of 13% this year.

We will get good margin expansion.

Obviously we are disappointed in the first half, but these are things we can fix.

You know, Scott -- Louis is focused on this with the team.

We are going to get these things behind us, and I think that 15% target is still out there, it's still something we are going to focus on achieving next year.

And I think we've got a roadmap to get there.

Great, thank you.

And we will take our next question from Myles Walton with Deutsche Bank.

Great, thanks.

Good morning.

Just a quick question for you on the interest expense here, running a little bit light in the first half relative to, I think, you are looking for flat year on year.

Is that still the expectation, or are you going to run like at this run rate for the rest of the year?

Myles, I think the rate goes up a little bit in the back half, because we are still planning to issue some debt in the third quarter.

So, I think what we see is probably $50 million reduction in interest expense for the year, as compared with -- I think what we were originally thinking would be flattish, so some good news there, yes.

Okay.

And then, the F-22, it sounds like it's being helped in terms of deliveries at the OEM level from the oxygen distribution system.

Is that affecting the military engine shipments as well, or are you continuing to ship those at pace?

Yes, no, for the F-22 we are in the process of shipping spare engines right now.

In fact, the production engines, those are all gone.

This is just that we are finishing up this year and into next; I think by next April or May we are done with the spares, and that will be it for Pratt in terms of F-22.

That's the F-119 engine.

Okay.

Okay, fair enough.

Great, thanks.

And we will go next to Ronald Epstein with Bank of America-Merrill Lynch.

Just want to talk to you quickly about the announcement this morning out of American.

Yes, what's that?

(laughter).

Yes.

Just thinking about the GTF on the NEOs, it didn't go that way.

I mean, were you surprised by that?

I mean, how much of a campaign was it for you guys?

How should we think about that?

Well, let's be clear.

There has been no engine selection on the A320NEO.

I think the only news in terms of engine selections is the fact that Boeing has decided on an interim basis to re-engine the 737 with the lead backs.

But I think engine competition is still out in front of us; in fact, I think this decision by American to go with Airbus to break up the Boeing monopoly that they've had on the fleet is really a testament to the success we've had on the GTF and what we've been able to do in terms of performance.

I fully expect you're going to -- the A320 family of aircraft with GTF power is going to outperform the 737 in the current configuration.

You know, the NEO is still the best value out there, and we've got a real engine; we've met the performance criteria already, and we are going to get there sooner than GE and CFMI.

So again, I think it's actually good news for us in the fact that we've opened up the possibility of Airbus aircraft at AMR.

And we think we've got a very good shot at putting our engine on those aircraft.

Okay, that's great.

Thank you.

And we will take our next question from Sam Pearlstein with Wells Fargo.

Good morning.

Greg, can you talk a little bit about, I guess, the balance sheet and just the cash which is -- one is, why were receivables up $540 million or so in the quarter, anything in particular driving that?

And then secondly, to get the $4 billion or so that you've said between buyback and acquisition this year means you've got about $2.5 billion left to spend.

If I look at where you are at the end of this quarter, you've still got $5.4 billion or so in cash -- certainly more than enough, and you're going to continue to generate cash.

So, you know, what is the right cash balance you should be targeting as you go through the year?

You know, to your point on the balance sheet, first of all back to cash flow -- obviously, the growth in receivables, it's mostly at Carrier.

Obviously, that's again part of the selling season.

I think we missed a little bit of a few cash receipts that we had been expecting; there was some timing on a couple of issues, but nothing really that gives us concern here and this is really just, I think, a week-to-week, month-to-month timing issue.

So for the full year, we feel very confident about hitting the free cash flow to net income target.

As far as the balance sheet goes, look, there's lots of firepower sitting there.

We've got $5.4 billion of cash at the end of the quarter, debt to cap is just a little north of 32%.

Right now, we are going to buy back stock because we don't see the right M&A target out there.

But I would tell you that Louis, that Bill and the team are focused on doing some transactions, and eventually we're going to get there.

In the interim, though, we are going to use the cash, use the capital that we have to deploy it effectively, and that's right now share buyback, which --.

Look at the quarter.

We picked up a couple of points of earnings at EPS, because of share buyback.

We've taken 100 million shares out of account in the last six years by share buyback, and it's still a very good, accretive investment.

But, we want to do deals, and it's all about timing.

But you've said, you know, being north of $2.5 billion in buyback this year, I don't know if we should be using this Q2 run rate, but I guess what I'm trying to ask is, you know, you ended last year at over $4 billion in cash.

I mean, it still seems like you are running with an awful lot of cash and really, what should that balance be?

Well, obviously, we are running with a lot of cash.

But again, we use that cash every day in our operations.

And again, a big piece of that cash -- probably north of $5 billion -- is sitting overseas.

We use that to fund our overseas operations.

So, if you think about it, you probably don't have access to every single dollar out there, but we do put most of it to use everyday through our intercompany lending program.

And look -- it's higher than we want it to be, in terms of the cash balance because the M&A spend has been light.

I think, again, you'll see us take up share buyback probably -- at least in the third quarter, probably at the same pace that we saw in the first half of the year.

Again, we just don't see a big call from M&A right now.

But these things, they can change quickly.

I'm reminded, two years ago in June of 2008, GE Security wasn't on the horizon, and by the end of the year we had inked a deal for $1.8 billion with GE.

So these things can happen quickly.

That's fair.

And then one last question is just in terms of your thoughts with regards to what was going on in Europe with Otis in particular, a fine; I know I don't know exactly when it gets resolved.

But how do you factor that and that likelihood into your outlook, especially in 2011, for Otis?

Well in fact we just heard back from the first appellate court that we took the case to, and in fact we did not get any relief from the fine that we originally paid, I guess four years ago now, of about EUR300 million.

So we hadn't been counting on any money back; I think we still believe we have some opportunity there.

We are probably going to appeal this latest ruling to the European Court of Justice.

But I'm not going to bake any of that in.

I think those are things that if they happen, they are very nice and we would use that kind of a one-time gain to invest someplace else in the business.

So, you know, didn't count on it and we're not going to count on getting anything back.

Okay, thank you.

We will go next to Jeffrey Sprague with Vertical Research Partners.

Just another question on the whole AMR situation.

Did you guys have -- were you in any way in discussions or have an opportunity to talk about GTF on the 737 re-engine, or did that happen kind of totally outside your sphere of communication?

(Laugh) Look, it's a small industry; obviously we've been working with Boeing, we've talked about this publicly in the past, about the opportunity to re-engine the existing 737.

I think again, the problem we have with re-engining, we've made it pretty clear is they have an exclusive agreement with CFM, and until we have a new aircraft with The Boeing Company for the 737, we are probably not going to have an opportunity.

At the same time, I think the A320 is a great aircraft and it's going to compete very effectively against the 737, this re-engine 737.

Can you give us a sense, Greg, on what we should expect for E&D trajectory into '12 and '13, kind of at what point does the line start to bend at Pratt?

You know, my crystal ball is a little cloudy.

And I think we've said before, E&D will probably peak at Pratt next year.

You know, I'm loath to give any type of guidance on 2012.

I mean, there's a lot of things that will happen between now and December, when Louis stands up to give guidance.

But I think, again, the thought here is that E&D will peak next year, probably start to go down '13, '14.

And I was also just wondering on Carrier, a couple prior questions and Akhil hit it in the open, but could you just be a little bit more specific, Akhil, on you gave us Transicold very specifically but how commercial equipment performed in the quarter -- not the orders, but actual revenue performance and the US resi business?

Sure.

Globally, Jeff, commercial HVAC equipment was up high-single-digits, and US residential was slightly up, just kind of very low- single-digit type of level.

I think geographically, US, Europe -- Asia was stronger than others, but the US and Europe also grew for commercial HVAC.

And can you give us some color on price realization in HVAC in particular, in the US?

Sure.

I think as you know, Carrier announced a price increase in February that has been doing pretty well.

I think we've also just recently last week announced the second price increase, up to 6% on both residential and commercial products, and that should go into effect over the next 75 days or so.

So overall, it's still the net number for the year that we are expecting is still about $100 negative for Carrier, as the gross commodity costs are probably negative $200, offset by about $100 million of price realization.

And just, finally, same thing on Otis.

You mentioned price is still tough on new equipment.

Any change, though, in kind of the level of pricing?

Is it the same, is it worse, is it moderating?

Are there any geographic differences that stand out?

I think, you know, the market especially in the US and Europe remains tough.

Obviously, with the dearth of new commercial construction in both the US and Europe, there's not that much new work going on so the bidding is tough.

At the same time, we've recently raised prices in China on new equipment, to compensate for the higher commodity costs -- especially in some of these rare earth metals that we've seen.

So that happened, I think July 1, we've raised prices.

So again, you know, Carrier has got this $100 million kind of net commodity; I think Otis will probably have $60 million or so of net commodity headwinds for the year, assuming we get good price realization in the back half of the year.

Great, thank you very much.

We will go next to Robert Stallard with Royal Bank of Canada.

On the aerospace aftermarket, Greg, I don't see Hamilton Sundstrand had a very good quarter.

I was wondering if you could give us some sort of clarity on what you think some of the underlying trends might be there, and whether they are sustainable even though you are coming up against tougher comps in the second half?

You know, I think, Robbie, that we had a very good first half and I would say it's a little bit ahead of our expectations.

We talked at Hamilton for the full year of kind of 10% to 12% growth in spares for the year.

Obviously, a good start to the year, but to your point, compares get very difficult in the back half of the year, not just at Hamilton but as Pratt as well.

But I think the good news is that, even with these higher oil prices, airlines are still making money globally, and they are still spending money on maintenance.

And they are still filling up seats.

So could -- I think, you know, could aftermarket be a little bit better than what we expected?

I think so.

Again, inventory we know is low out there, both in the engine shops and in the other repair shops.

So I think there's still some opportunity for a little bit better aftermarket, both at Pratt and Hamilton than what we had originally expected.

You're not expecting any sort of underlying trends to deteriorate in the second half?

It's just a mathematical calculation?

Yes, it's just simply math.

You think about spares at Pratt in the back half of the year were up 30%, but up in the first half in north of 30% now.

So it's kind of tough to grow another 30% off of the 30% from last year.

And again, oil is always out there as a concern to hold down, dampen demand in the back half.

Not that we are predicting a big slowdown; I think we are just going to see a continuation of the run rates that we've seen in the first half, in the back half of the year.

Right.

And then secondly, at Pratt -- I was wondering if you could comment on how, say, business jet aftermarket spares have gone in the quarter and your thinking on the future here?

And similarly, on the aftermarket, have you seen some of these heavier maintenance checks coming through on the engines?

Yes, yes to both.

I think On the Pratt Canada side, the business jet spares overall were up sort of midteens, excluding FX.

And you know it's consistent with what you are seeing on the takeoffs and the regionals, particularly, also have been doing very well.

So I think based on that, the Pratt spares, Canada spares were also in line with expectations.

And to your second point, I think that's -- the answer is yes.

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

Good morning.

Going back to M&A, you know, you've taken -- you've put Bill Brown in charge of the group.

It seems like you're putting a lot of energy into that, into that area.

Yet we've got a placeholder that is small compared to history.

Could you talk out what you're trying to do there?

Should we expect the numbers for M&A or your placeholder for M&A to go up substantially in the future, given an increased emphasis on the group?

Yes, I think, you know Doug, you make a very valid point.

The fact is, the $1.5 billion placeholder we put in place this year is before Louis put Bill in charge of the group.

We are going to stay disciplined in the M&A side, but I think we have an appetite to do more.

And while it's easy to buy back shares and not as easy to buy companies, we think we can create value out there with the M&A agenda.

We've got six great global franchises, we've got opportunities around the world to do things.

And just stay tuned; I think more to come and probably a stepped-up rate of M&A spend, too, here in the next couple of years.

Okay, so making this into a high profile unit -- which it seems like you've definitely done here -- that is consistent with, with a much stronger focus going forward?

Yes, I think and you're going to see us put our balance sheet to work, you're going to see us put more cash to work on the M&A side.

And that's where I think a big piece of growth is going to come from in the next few years; it's going to come from the M&A.

Again, commercial construction is going to be slow, residential slow in the US, but we've got a lot of cash and a lot of capabilities on the M&A side, and I think that's what Louis saw in putting Bill in that role, is that we needed a bigger focus and a better focus, and I think Bill is doing exactly that.

It just takes time.

And then on Fire & Security, the top line growth you've had seems to be a little bit less than you've expected.

When you look forward, and you are talking about this picking up in the back half of the year, but what should we expect longer term?

Should we expect growth rates to move up more toward high single digits?

And if so, what's going to drive that?

You know, I think obviously first-half organic sales growth or even full year, we've taken the target down from 6% to about 4%, so a little disappointed in the rate of growth.

And there's been a couple of issues geographically; Akhil talked about the UK.

I think what's important as we look at the backlog is up about 15% year over year.

So this back-half sales growth looks to be in backlog, and I think again we are getting momentum out there.

But you've got to remember, a big piece of what Fire & Security does in the service and install business, is directly related to commercial construction activity, right?

And so to the extent that there is a dearth of commercial construction activity, you're also going to see kind of slowish growth here.

So it will come back.

I think commercial construction will come back.

We've started to see signs of that at Otis, but it may take a little longer than what we had thought.

But at least for the back half of the year, confident in the sales forecast based on the backlogs that we have.

But you are seeing the growth at Otis, and you are not yet seeing it here.

Is that related to geography, or longer lead times at Otis?

No, I think it's really geography.

If you think about where F&S is particularly strong, it's the UK and it is Continental Europe.

And those are -- and North America commercial construction; those are the same places where Otis is not seeing big new equipment growth.

You know, in the quarter, Otis grew new equipment orders, I think, 15%.

But Europe and the US were not stellar in that regard if we back out Russia.

So, it's really the geography that F&S suffers from today.

Australia is doing very well.

I think the economy down there is doing well, commercial construction is picking up and F&S is doing well in that geography.

They are doing well in Asia.

But unfortunately, the majority of their business is in Europe and North America, and those are the markets that continue to suffer.

Okay.

Great, thank you.

And we will go next to Howard Rubel (technical difficulty).

Thank you very much.

I don't know what happened to the phone all of a sudden.

Howard, we can barely hear you.

Can you hear me now?

Barely.

I don't know what happened with the phone -- let me try one other thing, Greg.

I'm sorry.

Yes, much better, much better.

All right, thank you.

Just a follow-up on a couple things.

One is, you're usually very conservative in thinking about your financial planning.

So this change in R&D at Pratt, does this mean that there's been additional opportunities, or are there some other challenges that you've come across in the process?

I don't think there's other challenges.

I mean, the real issue when we started out the year, the timing on the NEOs still looked to be entering into service probably you know 2016.

Obviously there is pressure from Airbus to move it up, and we talked about maybe late 2015 now, and it's just a recognition that we have to get these programs underway.

We are at peak spend right now on C-series, and it's just, again, a lot of resources.

And I think the Pratt guys are doing the right thing.

They are spending more money sooner, to try and make sure that we reduce the risks as we go forward in the development programs.

And that's why I think you're seeing this greater spend now.

It would all give us a benefit, albeit not next year but it will soon be to the year after.

No, I get it.

In other words, really the way to think about it is, you're not finding -- you're pushing the envelope on risks now and you're not finding anything?

Yes, it's about risk mitigation today, and I think again, with all the bench testing and all of the rig testing that they've done, we call it TRL -- Technology Readiness Level VI -- we're they are on all of our technologies.

Spending on that is not cheap, but it's a lot cheaper than spending it when you are developing the engine and find a failure on a development test bed.

So, I think they are doing the right thing, they are spending the money.

And quite frankly, we can afford it in the guidance here.

So while we are taking it up a little bit, we are doing the right thing in the long term for the business by investing here.

And then the second thing, again, I'd say F&S probably has been, of all the businesses, the most challenging or the one that's not quite met your expectations.

Is there a need to do some further reshaping of the way the business is focused, to improve where you'd like to take it?

You know, it's -- I tell you, we've done 61 deals over the last seven years to pull together the Fire & Security business.

And we think we've got a very solid core of business, both on the fire products, electronic security products and service and installed business.

There is always opportunity, I think, to take a look at the portfolio that you've assembled, just like we've done at Carrier, and call out those that don't make a lot of sense, that don't have the same growth attributes as the rest of the business does.

So, Scott and team are focused on that, they are even working with Bill, I think, on that agenda.

So there's opportunities both on M&A, and I would tell you in disposition and --.

And I think you hear a lot more about that as we go throughout the year, and especially in December when Louis gets up and talks about next year.

And Howard, maybe it's a little bit of pride of authorship here for me, but we've taken 4% ROS businesses and moved them to north of 12%, so that's not something we feel too badly about, I think.

Right?

There is opportunity to do more, but certainly 15% next year would be a great target, and once we get there, there is room to do more.

Well, I know we've had this discussion a bunch; I appreciate that, Akhil.

And then just, the last thing is, the restructuring, frankly, is very modest relative to the size of the company and the various business units.

When you sort of look at what you're doing now today, Greg, in terms of the targets for improving performance, what are the sort of actions you are finding are most effective?

Obviously, as we take out and consolidate back-office functions, those things have the highest payback.

And you know, you talk about modest restructuring, I think we've done about $1.7 billion of restructuring here the last couple of years, and although we are only doing $200 million this year, I would tell you that the businesses have identified well more than $200 million of potential things to do.

So there's always an appetite to do more restructuring, to take out structural costs and to get more efficient.

And you know, the $200 million placeholder is that and I think if gains come in higher than $200 million, you might see us take that up.

The key is, gains will equal restructuring for the year.

We've tried to maintain that discipline, to go back to it for the last couple of years, you know, we've spent in excess.

But we've done enough.

There's always more to do, but we always have our eye on what's going to make sense from a productivity standpoint in the long term.

I appreciate it.

Thank you.

Thanks.

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

Yes, first a tactical question.

Given that we've slipped some of these Canadian helicopters into the third quarter, maybe you could give us a little help the pattern we should look for in Q3 and Q4.

As Greg said, I think we're looking at somewhere in two to three Canadian Maritimes for the third quarter, and then, the remaining in the fourth.

We are still looking at about six for the year.

Does that help?

Yes, I guess so.

I mean, just in terms of the earnings, should we therefore look for (multiple speakers) --?

I think we're looking -- as you know, Cai, we are not going to give quarterly guidance for Sikorsky.

But I think overall we still feel very good about their $100 million.

Second quarter was a good $30 million increase year over year in earnings, and as we look ahead, aftermarket is going to grow even at a faster rate and I think we get some additional benefits on the military side from cost reductions.

So I think those two components will help offset incremental loss from the Canadian Maritime, and we still feel very good about being able to get the $100 million.

You know, I would also add -- we've talked a lot about the Canadian Maritime and the financial impact and the losses associated with the deliveries.

I think that's all well known.

I think the key here is, we are developing the world's most capable maritime helicopter.

We had great reception over at the Paris Air Show, from everybody from the foreign governments that were looking at this thing, and like any developing program, there's going to be fits and starts and trouble delivering a couple of these early this year.

Again, I think that will all be behind us soon.

You know, we've recognized in the forecast, the fact that Sikorsky has got to deliver six of these this year; it's going to cost them, I don't know, $70 million, $75 million in earnings.

And the base business at Sikorsky is doing phenomenally well.

I think you back out these development helicopters and you see a business that's probably going to do 14%.

But the fact of the matter is, we've got to deliver these helicopters.

They are going to cost a lot but we are going to have a great, great aircraft when this is all done.

Terrific.

And then, I guess the bigger question, obviously, I guess in one respect, good news that American is looking at the NEO and I guess you are in the hunt.

Bad news, given that Boeing is deciding to re-engine the 737 and therefore pushing out the new single aisle which would have been the big opportunity for you.

While it's not your call and you obviously must be talking closely to Boeing, do you have any sense as to when the new single aisle might happen, given this turn of events?

You know, I think obviously to your point, we have been working closely with Boeing on the opportunity of re-engine.

I think, again, it's the better outcome we have always said for Boeing is a new airplane with a GTF engine on it.

We just don't have the opportunity, as you know, contractually with Boeing to offer a re-engine on this -- on the current 737.

When Boeing is going to launch a new aircraft, I think time will tell.

I think to the extent that the A320 outperforms the 737 with our GTF engine, that just puts more and more pressure.

And again, the GTF is out there today, we are flying that thing, we've got hours on it.

We know what works.

We're going to have a very, very competitive aircraft in the A320NEO with this engine on it and if anything, hopefully Boeing will move up its decision to build a new aircraft.

But that's really a question for Mr.

McNerney and Mr.

Alba.

Okay, and the last one -- your military engine deliveries, 44 up from 30 in the first quarter.

Where did the big uptick come?

And I've been looking for that to be off 15% to 20%; is that still the right range for the year?

Sorry, Cai, repeat that again?

You know, the military engine deliveries were 44 in the quarter, up from 30 in the first quarter.

You know, where did the uptick come from?

And is that in line with looking for those deliveries to be off 15% to 20% this year?

It is.

I think the delivery increases came from all categories.

I think the F-119s were a little up, F-117s were a little up, and also our F-100s.

I think it's all in line.

First quarter was a little light but full year is in line with what we had said earlier.

Thank you very much.

We will go next to Julian Mitchell with Credit Suisse.

Hi, thanks.

My first question I guess was on what you're seeing or what your expectations are for your construction-related businesses in China, because I guess you've got very good order growth in Q2.

Obviously if we look at things like construction machinery orders and shipments in China, those have been down double-digit year on year the last two or three months, so potentially some -- you know, that's a lead, in some respects, for some of your equipment going into buildings.

So can you sort of clarify how you see that market over the next sort of six to 12 months?

Julian, I think again you've got to look at the various segments in which we participate in China.

It's really on the building side as opposed to on the machinery and equipment side.

And the biggest single driver for growth in China is going to be social housing.

I think year to date they've started about five million new social housing units; they expect to build about 10 million for the year and do that for the next five years.

And I think that's driving growth.

You also see at the provincial level, still big investments in the commercial real estate development.

It may be slow on the east, but in the West it's not that way.

So people need a place to live, we continue to see this big trend in urbanization, we continue to see that as the driving macro force in China that's going to benefit our businesses.

A little different than the Machinery & Equipment segment, because these people need a place to live.

Obviously, it's going to slow down.

I think China -- the growth rate that we saw in this quarter were 30% or nearly 30% at Otis and over 20% overall for our businesses, is not sustainable.

But I still think this is a country that's going to grow at least high single digits over the next few years, and we are going to get more than our fair share there.

Dana, let's take our last question, please.

OK, we will go to Joseph Campbell with Barclays Capital.

Hi, good morning all.

I wanted to go back to the Beijing escalator accident.

There is -- the story continues to sort of stay in the Beijing newspapers, and I wondered if you could just talk a bit more about the extent to which this is the investigation and the sort of pause of using Otis, restricted just to Beijing and just escalators, or is it countrywide, Otis-wide?

Yesterday and the day before there were some comments about perhaps doing the same thing in Shanghai.

And how you see this progressing to sort of restore to normal in good relations that Otis has, China-wide?

Again, it was a tragic accident, Joe.

We are obviously working closely with the authorities in Beijing.

So far, the suspension of Otis has been related to escalators and it's been really related to the Beijing area.

We haven't seen this spread countrywide.

As I said, I think we ship about 6800 escalators in China annually -- not a huge, huge market for us.

And again, as we get to root cause, working with the folks in Beijing, I think we will quickly get to the point where people are comfortable that this was not a basic quality concern from an Otis standpoint.

I think it is probably a sub-tier supplier, that supplied some substandard parts.

We are working through that, we will figure it out.

I think right now there's less than 200 of these escalator models out there.

We've inspected, I think, more than 20% as of yesterday; we will get through those in the next couple of weeks.

We will get all of these back in great working order, and we will recover the lost business.

But clearly it's an unfortunate incident.

These things happen, but the key is how we recover and how we respond to this.

And I think the Otis folks in China are doing a great job.

You never like to hear about these things, though.

Thanks, I think that's just what people wanted to hear, and I think the way that Otis responds will probably be indicative of the way in which you recover from this.

And it seems, although the tabloids are all over this and it just doesn't seem to want to go away, as long as this is working sort of hand-in-hand with the authorities, it should over time go away, I would guess.

Yes, I think again the key is to work with customers and to make sure this never happens again, and to make sure our systems are in place from a supplier-quality standpoint that this kind of mistake can never happen.

But again, I think Otis is on top of this and they are doing all the right things.

Just back to the AMR thing again, so, the -- are the regular A320s do you think an opportunity for IAE, or are we talking about when you say there's still a competition, you are talking about those 130 NEOs and 300 and some-odd options for NEO?

No, Joe, I think those are all up for grabs.

The A320 family, this is the first time they will be in the American fleet and I think IAE will have a good shot at that with the V-2500.

We are going to pursue that aggressively with our partners, as well as the opportunity for the NEO.

Again, there's no fleet commonality issue that we have to worry about.

So, I think we've got a good shot with American and we will put forth our best foot and I think we've got a great engine and we will hopefully have a good opportunity here.

Do we have a sense of when this will happen?

I think it will be sooner rather than later.

I asked Louis that question this morning; I think he mentioned before the end of the summer we would expect to have some type of decision on the engine selection.

But not, not days or weeks (multiple speakers) --?

Not tomorrow.

Yes, but I would -- again, where we are seeing it, mid July, again, probably before the 1st of September.

Okay, great, terrific.

Thank you very much.

Okay, thanks, Joe.

All right, let me just close out.

Again, solid results in the quarter, continued momentum in order trends.

All good news.

We are confident in our improved outlook and in our ability to outperform peers.

So, I want to thank everybody for listening to the earnings call this morning.

Akhil and team will be available for you throughout the remainder of the day.

So, thank you again and have a wonderful day.

Again, that does conclude today's presentation.

We thank you for your participation.