雷神技術公司 (RTX) 2011 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 Maria Lee, Director, Investor Relations.

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

Please note the Company will speak to segment results adjusted for restructuring and one-time items, as they usually do.

The Company also reminds listeners that the earnings and cash flow, expectations, and any other forward-looking statements provided in this call are subject to risk 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 begins -- becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate.

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

Please go ahead, Mr.

Hayes.

Thank you, Tranetha, and good morning, everyone.

As we all know, there is plenty of uncertainty out there in the world economy.

On the one hand, of course, you hear about the ongoing European debt crisis, continuing weak US housing market, and the high unemployment in key developed markets.

On the other hand, there are some positive signs that the economic recovery looks to be gaining traction, especially here in the US.

And the commercial aerospace market continues to have good growth prospects.

Here at UTC we know how to operate in these uncertain and uneven global economic times, and we continue to be well positioned to meet our commitments.

As you saw in the press release this morning, UTC closed out a strong 2011.

Full-year sales were over $58 billion, up 7% from 2010 and 6% organic growth with all six of our businesses growing organically.

Earnings per share were $5.49 and that is up 16% year over year.

Free cash flow is very strong at 113% of net income with 67% returned to share owners for dividends and share repurchase.

And, we achieved all of this while continuing to invest for the long term.

Company-funded engineering and development spend was $2.1 billion last year; that's up $312 million versus 2010, primarily at Pratt & Whitney as we continued to develop four separate geared turbofan platforms.

As well, total restructuring was $336 million, which $148 million was in the fourth quarter as we preemptively positioned the Company to grow earnings this year despite over $0.40 of anticipated headwinds.

That headwind is going to come from foreign exchange, pension, and additional E&D investments.

Okay.

On slide 2, turning to fourth-quarter results, fourth-quarter earnings per share was $1.47 and that was up 12%.

A continued focus on cost reduction and productivity drove segment margin expansion, even as we increased E&D investment.

Organic growth of 2% was slightly better than our expectation and we once again had robust free cash flow.

Total segment operating profit grew 2% on flat segment sales.

Hamilton Sundstrand had another very strong quarter with 11% sales growth and 12% operating profit growth on strength in both the aerospace and industrial businesses.

Sikorsky's profit grew 2% in the quarter, approximately $35 million below expectations, primarily due to fewer than expected military shipments.

Segment operating margin expanded 20 basis points in the quarter as the benefits from cost reduction more than offset a $95 million increase in E&D.

Restructuring and net one-time items were a benefit of $0.01 in the quarter as restructuring charges of $0.11 were more than offset by net one-time items, which were a benefit of $0.12.

The $0.11 of restructuring was spread across most of the business units.

Sikorsky is taking proactive steps to position the business to grow operating profit despite a declining in military volume in 2012.

Fire & Security continues to drive cost reduction and operations transformation to offset declining markets, particularly in the UK, and to address continuing performance issues in their business.

The $0.12 benefit from net one-time items included favorable tax settlements of $0.13 and a gain from Carrier's ongoing portfolio transformation of $0.09, which more than offset a $0.05 charge related to the impairment of an equity investment in Asia at Fire & Security and a $0.05 reserve related to legal matters.

These legal matters concerned potential penalties the State Department and the DOJ might impose as a result of self-disclosures that we have made over the last several years concerning certain export compliance matters.

As I mentioned, earnings per share in the quarter were up 12%.

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

FX did not have an impact in the quarter year over year.

In the quarter, we also had a benefit from the operational tax rate of about $0.14 and that was partially offset by $0.04 of Goodrich deal costs and $0.05 associated with minority joint ventures.

Free cash flow in the quarter was 123% of net income -- that's great performance -- even as we contributed $304 million in cash to our international pension plans.

Even with the additional drop in discount rates this year, our global pension plans are 87% funded on a PBO basis.

We spent $128 million on acquisitions in the quarter and there was no share repurchase.

You'll recall we suspended share buyback in September as a result of the Goodrich transaction after having already spent $2.2 billion in the year.

On slide 3, looking at orders for a second, at Pratt Whitney, large commercial engine spares were down 16% for the quarter, following a 45% growth in last year's fourth quarter.

That's really in line with expectations.

For the full year, Pratt spares orders were up 8%.

Hamilton Sundstrand commercial spares orders were up 17% in the quarter, after 31% in last year's fourth quarter.

For the full year, Hamilton's commercial spares orders were up 22% -- a very strong performance.

So, orders for Pratt and Hamilton were about in line with what we expected, while Carrier and Fire & Security were a little bit off.

Carrier's North American residential HVAC orders were down about 20% in the quarter, roughly in line with the market.

You will recall that fourth quarter of 2010 grew about 30%, driven by the expiration of the tax stimulus rebate.

But Carrier did see orders decelerate over the quarter to lower-than-expected levels.

And, we continue to see a preference for the customers' buying pattern for lower-featured, lower-efficiency products.

Fire & Security orders were down 2% organically, driven by both our own products and service installation businesses.

At Otis, new equipment orders were up 2% at constant currency, on tough compares in North America and slower growth in China.

Otis new equipment orders in China grew 7% at constant currency in the fourth quarter, after growing 31% in the third quarter.

For the full year, China's new equipment orders were up over 20%.

We continue to see strong but moderating growth in the emerging markets, consistent with our expectations.

Combined BRIC orders for the commercial businesses were up 8% this quarter, after growing 23% in the third quarter.

So, despite a slowing world economy, 2011 was still a strong year for UTC, with 6% organic sales growth, EPS up 16%, and robust free cash flow, all while we continue to make investments in this game-changing technologies and cost reduction.

I'll be back to talk about 2012, but first, let me turn it over to Maria to take us through the details of the business units.

Thanks, Greg.

Turning to page 4, Otis delivered another solid quarter with profit increasing 5% on 3% higher sales.

Operating margin reached 23% in the quarter, 40 basis points higher than prior year.

The positive impact on operating profit from higher sales volume and continued cost reduction were partially offset by pricing and commodity headwinds.

Favorable currency translation contributed 1 point of profit growth.

New equipment sales increased 6% at constant currency, led by continued growth in emerging markets.

Service sales were also up, with growth in contractual maintenance and repair.

At constant currency, new equipment orders were up 2% in the quarter with 7% growth in China, low single-digit growth in Europe, and a decline in North America from last year's strong fourth quarter, which included the order for the World Trade Center transportation hub.

Otis new equipment backlog is up 8% year over year.

For the full year, operating margin expanded 20 basis points to a record 23.2% with 9% profit growth on 7% sales growth.

At constant currency, profit increased 4% on 3% sales growth.

On slide 5, Carrier profits increased 10% on 9% lower sales, resulting in record Q4 margin of 9.8%, up 170 basis points from prior year.

Organic sales were flat on continued moderation of growth in Transicold and the shutdown of our Toshiba Thailand factory due to the extensive flooding.

The North American residential market is off to a slow start to the heating season and faces tough compares, as Greg mentioned.

North American residential unit shipments of gas furnaces and split systems were both down double digit in the quarter.

The earnings headwind from lower North American residential volume, combined with the absence of earnings from Latin America following the fourth-quarter transaction with Midea, was more than offset by non-recurring credits to warranty and benefit expenses.

Commodity headwind in the quarter was completely offset by pricing following the recent price increase in the US.

For the year, Carrier grew earnings by $315 million, or 28% on 9% organic sales growth.

With operating margin at 12.2%, up 220 basis points from prior year, Carrier has reached its 12% margin target a full year ahead of expectations.

UTC Fire & Security profit contracted 13% in the quarter on 2% lower sales.

Organic sales were up 1%.

Product businesses were up mid-single digit, and service and install businesses were down low single digit due to continuing softness in the UK and America's businesses.

Organic orders were down 2% year over year.

Operating profit in the quarter contracted 13% at constant currency.

Benefits from cost reduction, as well as a gain on the sale of a guarding-related business in the UK, were offset by continuing profit decline in the UK from lower sales and performance combined with unfavorable sales mix.

For the full year, operating profit was up $46 million and operating margin was 12.2%.

Turning to aerospace on slide 7, at Pratt & Whitney, sales were up 1% in the quarter including 2 points of unfavorable foreign currency at Pratt Canada.

Sales growth was driven by higher large commercial engine deliveries and industrial volume at power systems, partially offset by lower large commercial spares and reduced volume at Rocketdyne.

As expected, large commercial spares were down 7% in the quarter on tough compares.

Operating profit in the quarter was down 2%.

Higher E&D and unfavorable currency at Pratt Canada more than offset a favorable adjustment of about $0.04 due to a contract termination.

The restructuring savings offset higher pension costs.

For the full year, sales were up 4% and operating profit was down $100 million, in line with guidance.

Hamilton Sundstrand posted a strong quarter, with profit growth of 12% on 11% higher sales.

Organic sales growth of 12% was the highest since Q2, 2008.

Sales growth was led by aerospace OEM and industrials businesses, both up about mid-teens.

Commercial aftermarket was up mid-single digit versus a strong fourth quarter 2010.

Profit growth in the quarter was driven by benefits of increased volume, partially offset by unfavorable mix from higher OEM sales.

Operating margin was up 10 basis points year over year, to 17.9%.

Commercial spares orders increased 17% year over year, with book to bill at 1.1.

Industrial orders were up 16%, with particular strength at Sundyne's oil and gas business.

For the full year, sales were up 10%, profit was up $115 million, and operating margins expanded by 40 basis points to 17.9%.

2011 was a record year for sales, earnings, and operating margin at Hamilton Sundstrand.

Turning to Sikorsky on slide 9, operating profits grew 2% on 1% higher sales.

During the quarter, Sikorsky shipped a total of 73 aircraft, 3 less than the fourth quarter 2010.

61 aircraft were based on military platforms and 12 commercial.

On profit, strong aftermarket volumes and lower manufacturing costs more than offset the unfavorable impacts of lower commercial aircraft deliveries and two Canadian maritime helicopters.

Of note during the quarter, Sikorsky signed a contract with the Brunei Ministry of Defense for 12 firm and 10 option S70I aircraft, marking the largest order value to date for Sikorsky's international variant of the Black Hawk.

For the year, Sikorsky delivered 274 aircraft.

Operating profit of $820 million was up 12% on 10% higher sales.

Operating profit was lower than expected, primarily due to lower military aircraft deliveries.

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

Okay.

Thanks, Maria.

So, a strong 2011 -- organic sales growth; record segment operating margin, including double-digit margins at all six of our business units; EPS growth of 16% on top of robust cash generation; and we continue to expand UTC's presence in emerging markets, which now represents 21% of UTC sales.

We also announced two transformational deals in 2011.

First, of course, the acquisition of Goodrich, with complementary products and high aftermarket content, which will expand our presence in the fast-growing commercial aerospace market.

Integration and planning is going well, and there's no changes in our expectations for a mid-year close of the deal.

The agreement to purchase Rolls-Royce's share of IAE joint venture and to partner with them on the next-generation mid-sized aircraft ensures a smooth transition from B2500 production to the GTF, and further validates the GTF technology.

With the creation of the new propulsion and aerospace systems organization, we will better coordinate our technology development and take advantage of synergy opportunities across all of these businesses.

Pratt & Whitney completed the first test program for the C-Series engine.

Overall, six GTF engines have now completed more than 1500 hours of testing and the engines continue to validate our performance expectations.

Of course, our customers see the value in our engine and have ordered or taken options for more than 2000 engines.

We continue to deliver production engines for the JSF, and during the year we removed any doubt concerning the extra engine for the Joint Strike Fighter.

Hamilton Sundstrand, last year, supported entry into service of the 787 with our nine systems all performing extremely well.

And, at Sikorsky, the Black Hawk continues to gain traction in the international marketplace, with over 50 orders from international customers in 2011.

We also announced, last year, the creation of the Climate Controls and Security segment, and we will begin reporting that segment in 2012.

Geraud and his team are going to leverage their experience with Carrier's portfolio and operations transformation to drive continued productivity and margin expansion at the combined businesses.

At Otis, operating margins of 23.2% were again a record and will continue to lead the industry.

The transformational deals, new organizational structure, and continued investment in game-changing technologies and cost reduction position us well for consistent, long-term earnings growth.

Okay, let's take a look at 2012 for a second.

There have been some puts and takes, but the overall economic data seems to be generally in line with our expectations that Louis laid out in December.

And so, today, I'm going to affirm the 2012 EPS guidance of $5.80 to $6.00 per share for our base business, excluding the Goodrich -- the impact from Goodrich.

That's earnings growth of 6% to 9% on sales of $59 billion to $60 billion.

Europe, of course, remains a question mark as we begin 2012, and we are seeing some pressure from the euro, which has traded as low as $1.26 versus the dollar.

We continue to keep a close eye on exchange rates, and we expect FX to be a significant headwind in the first half of 2012 as the euro averaged $1.40 last year, the first half.

As Louis pointed out, there's always volatility in interest rates, and we continue to see that in the fourth quarter.

We estimated that the discount rate for our pension plan would be about 5%.

In fact, the actual discount rate came in a little lower at 4.7%.

The impact of that was partially offset by better performance in the plan, but unfortunately, represents an additional $50 million of headwind for 2012 versus the guidance that Louis gave in December.

Also, back in December, we had visibility of $150 million to $200 million of gains in 2012 that we planned to use to offset restructuring in our base business.

We now see an additional $300 million of gains in the first half of the year, 2012.

We expect to use these additional gains to offset a portion of the Goodrich restructuring and deal cost, and this provides us some flexibility, given the currency volatility and pension headwind.

With the additional gains, we feel even better about 2012 than we did in December, although the first quarter will have its challenges.

As I mentioned earlier, we saw a slowdown in the order rates for the residential HVAC and the legacy F&S businesses, and that will put pressure on Climate Controls and Security in the first half, which also faces tough compares.

Carrier's operating profit, you will recall, grew over 100% in the first quarter of 2011, driven by strength in Transicold and the restocking benefit of our residential HVAC business.

We also saw strength in our Toshiba businesses last year, but today, unfortunately, the Toshiba Thailand facility remains closed due to clean-up efforts related to the extensive flooding.

On the aerospace side, order rates were in line with expectations in the fourth quarter, but they also face tough compares in the first quarter.

As you recall, commercial spare sales were up over 30% at Pratt last year and up over 20% at Hamilton in the first quarter of 2011.

So, a little bit of first quarter headwind, and we will have to deal with it.

Turning to cash flow for 2012, we continue to expect free cash flow to equal or exceed net income for the full year.

We have suspended our share repurchase program, and we have a placeholder for acquisitions of $500 million for the year, excluding Goodrich and the IAE transaction.

With our industry-leading franchises, transformational deals, and sustained structural cost reduction, we are well positioned for earnings growth in 2012 and beyond.

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

Tranetha?

(Operator Instructions) Howard Rubel with Jefferies.

Thank you very much.

Two items, Greg.

First, you talk about $300 million from gains and I think some of that comes from some asset sales that you have already announced.

Could you highlight those?

I think, one of them is the Ecowash business and then, there's another Carrier related sale I believe.

No.

Good morning, Howard.

(laughter) We had identified $150 million to $200 million of gains to offset restructure, and Louis talked about that in December.

I think those things you are talking about were those gains that we had contemplated.

This is an additional $300 million of gains.

It's really related to settlement of some open tax years that we expect to happen here in the first half of the year.

So, this is truly incremental to what Louis had talked about.

So, where we had seen $150 million to $200 million of gains, we now see roughly $500 million of gains.

The just one item -- everybody dealing with Uncle Sam and the Department of Defense is facing challenges, and one of the uncertainties that you have has been with the multi-year procurement on the UH-60.

How do you see that playing out?

What puts and takes have you allowed for with respect to that issue?

Howard, it's a very good question.

I think we have pretty well calibrated Sikorsky military for 2012, given what we expect to come out in the budget tomorrow.

Blackhawks will be down about 30 units, about 15% in sales at Sikorsky on the military side.

I think we've already contemplated that as part of multi-year [rate].

We are still negotiating multi-year rate, we expect to have that done kind of mid-year.

I would point out on the military side though, it is not all gloom and doom.

You do have good news on the Pratt side with the JSF.

As I said, there's no extra engine.

As we see it right now, we see about 10% growth on the military side of Pratt in 2012 on the back of the JSF production.

So, it's actually pretty good news.

I guess C17 is doing well given the ongoing demand in Afghanistan?

Yes.

C17 is an aftermarket play as well as an OE play.

We've got the C17 going to India, and again, good strong aftermarket there.

Thank you very much, Greg.

Terry Darling of Goldman Sachs.

Good morning, Greg.

Hi Terry.

Jumping between calls here.

So, I apologize if you got into this and if you did, I will just come back.

But I wonder if you could touch base on Otis aftermarket?

Growth looked pretty anemic there.

Can you update us on your thinking on China as well with regards to the social housing dynamic over the next 12 months or so?

Yes.

If we take a look at service at Otis, in the fourth quarter, is only up about 1%.

Really, pretty decent on the maintenance side.

Where we really saw softness was in modernization, that was actually down about 4% or so.

Repair was up 4% and, I think, regular maintenance was up 2% or so.

So, a little softer than what we had expected but really on the modernization side.

Europe continues to be the drag there, where we are just not getting traction on the mod orders that we had expected.

China, it's a little different story.

Obviously, there was a slowdown where we saw growth go from 30% to 7% on the OE.

But as we think about this, we've really got a very strong backlog going into 2012, up about 20% year-over-year.

We think, again, we will see mid single digit growth at Otis this year driven by social housing; and again, the move from the Eastern seaboard to the West of the country.

I think social housing last year was about 5 million units.

Government came out recently and revised the projection from 10 million down to 7 million units this year but still pretty strong growth.

Again, we don't really have a big concern about China slowing down dramatically this year.

I think again, the fourth quarter was probably to be expected given what the government was doing, to try and rein in the property speculation in China, but 7% growth is still pretty good.

For the year, 20% growth at Otis in new equipment in China.

So, I don't think that story really changes fundamentally.

Okay.

Then with regards to the first quarter comps that you talked about at Carrier.

Does Carrier overall, have negative organic growth in the first quarter or not that bad?

No, it's not that bad.

I think the issue that you have Carrier is that last year, first quarter earnings I think were up $167 million, that's up over 100% year-over-year and plus you had F&S, which grew I think 36 or so.

It was over $200 million between the combined businesses, and F&S also had the gain on the sale of its UK man guarding business.

So, it's a pretty tough comp.

We will see Transicold down in the first quarter, we expect res to come back a little bit.

We expect commercial to be okay.

I think again with the pressures of Toshiba Thailand and the fact that we are not shipping anything there, earnings are going to be challenge.

In fact, I would think in the first quarter earnings will be down at CCS year-over-year.

First half they will probably be flat.

Then, for the rest of the year we will see the growth as we get traction on the restructuring and a continued market improvements throughout the year.

Okay.

Then Greg, just lastly some chatter out there about how you might be thinking about asset sales to help to fund Goodrich, and some chatter about strategic considerations on Sikorsky and related to that joint ventures and so forth.

Can you just address that whole issue as well?

Let me take it head on because I think there's -- Louis said this back in December.

Obviously, as part of the Goodrich deal, we had hoped to issue about $4 billion of equity and $12 billion of debt.

We all know, we hate to issue equity.

At the same time, I hate to lose my credit rating.

So, we're going to go after this in a methodical fashion.

We are looking at non-core assets to divest and we are going to continue down that path.

We will work with the rating agencies over the next couple of months and come up with a plan that will, hopefully, reduce the amount of equity that we are going to issue.

We're going to lay that out for investors at our March 15 meeting down in New York.

So, we're continuing to work it, we're looking at non-core assets across UTC, both on the commercial side and on the aero side.

Let me just say that Sikorsky, as far as I can tell, is a core asset of UTC.

So, I think we can probably put that speculation to bed.

That's helpful.

Thanks very much.

Jeff Sprague of Vertical Research.

Thank you.

Good morning, everyone.

Just wondered on Fire & Security, Greg, what you said about Q1 is fairly clear; but just thinking about moving beyond that, a number of issues there.

I think, some of what you're dealing with is maybe some stuff in backlog that you're not particularly proud of and needs to work its way through.

I wondered if you could give us some thoughts on that.

How long that drag persists, and how long it takes to get after the SG&A that is also, causing the cost headwinds relative to growth being on the light side versus expectations.

Jeff, those are all good and fair questions.

I would tell you this, while we are disappointed with F&S' performance last year, I have to point out that we still had 12.2% margins.

So, it is not a broken business but there are certainly opportunities for improvement.

I would tell you first and foremost, it is in the field operations in Europe and primarily in the UK.

As we dissected this and Geraud and team have been looking at the portfolio there.

Certainly, we were taking on some work at margins that were really just not acceptable and the performance on those contracts weren't very good.

I think we cleaned a lot of that up in the fourth quarter.

But it's probably going to be a tough 2012 at F&S as we work our way through the rest of that portfolio.

As Geraud is taking a look at the entire portfolio, he would expect to divest some of the non-core F&S assets this year.

I think you'll hear more about that in March.

But fundamentally, the business is not broken.

We have some opportunities.

We know how to fix things.

We go back to Collierville at Carrier back in 2006, that was a broken factory after the SEER13 transition.

I think we made no bones about it, it was a problem.

I would tell you, Geraud and the team, they fixed it.

Today that is a world-class factory, it's Ace Gold.

I think you will see the same kind of focus on the Fire & Security business in Europe that you saw on that particular problem.

We will get it fixed, it's just going to take a little bit of time.

So, I think most of the bad news is behind us, but certainly not all of it on F&S.

So, it will be a tough 2012.

Could you give us a bit more granularity on Transicold?

Obviously, down in Q1 but what's actually going on with the orders there?

Is that business on track, down for the year?

Maybe some geographic color around that also?

Sure.

So, on Transicold, if we look across the business, the orders in the fourth quarter were down low double digits, with container down the most, down about 30%.

Europe truck trailer also, saw some weakness, down low double digit as well.

What you really see there is the impact of the economic conditions in Europe and the availability of credit for some of the customers.

North America truck trailer, however, was up over 100% and there we see some of the trailer OEMs finalizing their Q1 delivery schedules.

So, we feel pretty good about that.

Just to add, the orders there are pretty lumpy.

Container orders were down.

I think the fundamental structural issue in Europe is probably a bigger concern for the year as we see creditors tighten up credit availability to our customers.

But overall, it will be down after a record year in 2011, but it is not a train wreck by any stretch of the imagination.

So, a very, very solid businesses year.

Great, thanks a lot.

Sam Pearlstein of Wells Fargo.

Good morning.

If I look at where you started in December with your contingency of call it $130 million, it seems both pension and FX probably absorbs most of that.

Should I be thinking about it now, with this additional potential gains as a cushion, in the $300 million range?

Really good, Sam.

Yes.

If you think about it, at the midpoint of the guidance range at 590, we had about $130 million of contingency.

We've lost about 50 of that to the higher pension costs with a lower discount rate.

The rest of it, if you take a snapshot of the euro today and the exchange rates, we've probably lost another $70 million or $80 million.

So, the contingency at the midpoint is essentially evaporated.

However, and we talked about this additional $300 million of gain, my own view is that we will use half of it or so, on the Goodrich, be it deal costs and restructuring.

The other half we will just build contingency for us.

Really, what I would like to think of it is I still have $150 million of contingency because the bad news that we talked about, so far on pension and FX is really covered by the other half of the gain.

So, we are kind of at the same spot that we were even though the euro is lower and pension is worse six weeks later.

Okay.

Then in your slides, you talked about a couple one-time items that weren't part of how you had it in the release.

But can you size the gain on the contract termination at Pratt and on the UK guarding business?

Yes.

The Pratt gain on the contract arrangement was about $0.04.

The piece on F&S was about $0.01.

That was a sale of -- one of our security man guarding businesses in the UK.

All right, and then the last question, how should we think about the Thailand piece of Carrier?

How big of an impact is that?

How much has that changed things in 2012?

We don't expect the factory to be back up in production until the second quarter.

I think last year, we generated about $30 million of earnings there in the first quarter.

So, those earnings will go completely away.

Obviously, we'll have an impact a little bit into the second quarter.

So, we're probably going to lose almost half a year's production out of Thailand.

So, it makes for a pretty tough first half.

Okay, thank you.

Heidi Wood of Morgan Stanley.

A question a little bit on the Cap, on the balance sheet side.

You finished the year with a debt to cap of 31% and net debt to cap of 16%.

I know you've got a matrix of ideas and you're working with the rating agencies on different alternatives, but can you give a sense as to maybe what a range of the balance sheet would look like, post facto?

Be a lot more debt.

I think as you think about, as you said, debt to cap is 31% today.

We've got a lot of cash on the balance sheet, over $6 billion of cash.

There's $1.5 billion of that cash though that's going to go to pay for the IAE transaction, which we expect to close in the second quarter.

So, that cash is somewhat spoken for.

I think, debt to cap is going to migrate up towards 50% post deal.

Again, it's really a question of how much debt we have to issue versus equity.

You can think of it in that 50% range.

Then over the next two to three years, we will bring it back down as we pay off a big chunk of this.

I think the good news is, cash generation was exceptionally strong for the year, we continue to see strong cash generation in 2012.

I think Goodrich is going to be a better investment than anybody would have thought.

I think again, we think there's nothing but upside there, especially with their aftermarket businesses.

It's going to be a little lumpy -- and again, I think once we understand what we are going to do from a portfolio standpoint in March and we lay that out for you.

You'll get to see what the real debt to cap looks like, but I don't anticipate it going north of 50% when we are all said and done.

Great.

Then a question on Hamilton.

When should we start to -- when does the provisional spares and the 787 start to tick up?

How is that going to affect margins if at all?

Yes, we have actually started to see it in the fourth quarter.

The big piece of the aftermarket growth at Hamilton in the fourth quarter was 787.

We will see some more incremental benefit this year.

It's not real big.

It's probably less than $0.02 of earnings out of that.

The big piece of what we are doing especially with some of the initial airlines is we're providing a care package, which is our kind of nose to tail support.

So, the provisioning is going to be a little bit muted versus what you would normally see on a new program.

Again, the economics of that program, we provision for the spares and the support.

We get paid for that at an hourly basis.

It actually is a pretty good deal for us.

A little bit of benefit this year, year-over-year, but it is not huge.

All right.

Then last question on the Pratt & Whitney -- on the new engine shipments, your large commercial deliveries were up 40% year-over-year in the fourth quarter.

You've, obviously, had a good surge in the third quarter.

Can you tell us a little bit on a quarterly basis, how the new engine shipments look over 2012?

I don't know that I've got a breakdown of 2012.

I think if you think about that 40% improvement or increase in 2011, a big piece of that was 44 engines -- a big piece of that was B2500s.

I think we shipped about 27 of B2500s and 14 of the GP7000s.

As you know, we only get about a third of the revenue on Bs and 50% on the GP7000.

It was nice shipments, I think we are going to continue to see that volume into 2012, but I don't know that we have -- I was looking here to see if we had that.

Does it make sense, Greg, just as we think about at it given the production ramp in 2013 that we'd start to see it more and more in the back half of this year?

I think, yes, what you're going to see is a continuation of what we saw in the third and fourth quarter at Pratt.

You're going to continue to see Vs increase with the production line increasing at Airbus; and as the ramp rate on the A380 increases again, you're going to see the GP pickup at the rates that we are seeing in the third and fourth quarter.

Okay.

Thanks much.

Just to add to that a little bit for full year, at least 2012, we do see total commercial engine shipments up low single digits, with the Vs up almost 10%, high single digit.

Okay, that's great, thanks so much.

Thanks, Heidi.

Deane Dray of Citi Investment Research.

Thank you.

Good morning, Greg.

Good morning Maria.

Good morning, Deane.

For the expected sale of these non-core assets, I know we're going to hear more about it in March but might some of these sales be completed in 2012?

And would there be gains on these transactions?

Yes and yes.

(laughter) I can't be too specific, Deane.

Obviously, as we look at this, the keys to any of these transactions is to actually get it completed this year.

Really, to fund the Goodrich deal.

Whether we're going to use it to pay down debt or reduce the amount of equity, we are still working through that.

But you would expect these businesses, although they are non-core, that doesn't mean they are bad businesses.

In fact, I think there could be some very good businesses out there -- that just aren't core, but that will generate significant interest in the marketplace.

It's going to take us some time, I would expect and we'll lay this out in a couple of months.

We'll start a process around some of these divestitures, but it will probably take us most of the year.

Our target right now is to have all of the divestitures done in 2012.

Now, but the gains there in theory, that would take you well above the contingency.

So, would that be potential more restructuring offsets?

Yes, I think, again, those gains equal restructuring math is we are going to try and continue to do that.

But it's really hard to tell you what the gains are going to be on these businesses.

It's a little early.

Of course.

And then just last question for me.

I know you've got a question mark regarding the impact on Europe, but it didn't seem to have much of an effect in the fourth quarter.

Could you just comment on what you're seeing real time, in terms of customer behavior, destocking, any color there would be helpful?

It's really an interesting thing about Europe is Carrier's business, the commercial HVAC business in the fourth quarter was actually up 8% year-over-year.

It's not related to commercial construction activity in Europe, it's really related to the push for energy efficiency in the replacement market.

Otis was not quite the same story.

Obviously, it's a bigger business for them, they had more pressure in Europe.

But the fact is, I think, Europe is going to be a tough road ahead.

Good news -- UTC balance works, it's 25% of the sales come out of Europe, we don't expect much growth but we won't expect any big surprises.

Maybe just to put it in context.

In 2009, Europe was down 14%, as was the US, and I think even Asia and emerging markets were down like 16% or 17%.

In 2010 and 2011, we saw 2% growth in Europe.

If you think about it, we are still down 10% from the peak.

There are still opportunities there, but I think it's going to be a very long, slow road to recovery in Europe.

Again, we will see how this debt crisis plays itself out.

I'm not all that concerned.

A big chunk of what we do in Europe is, obviously, service related, which seems to be pretty resilient.

Great, thank you.

Joe Nadol of JPMorgan.

Thanks, good morning, Greg and Maria.

I'm a little confused on the EPS guidance.

I just want to walk through this again.

Because your guidance -- you didn't update us on the guidance including Goodrich.

It looks like half of the new gains are offsetting deal costs, but those weren't of your ex-Goodrich EPS guidance.

So Greg, can you illuminate that a little bit?

Sorry for the confusion.

The way we have laid this out, we've got the base business of $5.80 to $6.00, 6% to 9% growth and what we've done is we have allocated half of this additional gain as contingency there -- really to cover the pension and FX impact.

The other half, call it $150 million, we will use to offset either deals cost or restructuring at Goodrich post close.

So, if you think about it, we talked about $0.50 of dilution related to Goodrich, I think that is probably $0.10 better on the low end.

So, probably only about $0.40.

So, you want to take $0.40 off the top of the low end, you can figure the Goodrich impact.

The reason we are reluctant to give guidance, specifically on the Goodrich dilution is we're still working through this equity issuance.

The impact on that versus debt as well as the impact associated with any divestitures.

We're trying to focus people on the base business for now.

In another month and a half or so, I think we will have a lot more clarity on this Goodrich.

If you're just trying to do the simple math today, I'd tell you, you can put take a $0.10 off -- or take a $0.10 off the $0.50 we give you in December.

The way to think about the of $5.80 to $6.00 is, basically you lost $1.50 from the two items you mentioned and you picked that back up with half the gains we are talking about.

Yes.

I think that is the simplest way to think about it.

Okay.

Then over at Otis, your margins -- your adjusted margins have been up something like 15 straight years.

Your guidance this year calls for a bit of a down tick and you have done that before and beaten numbers.

So, what is different this year that should compress margins?

I think the big difference this year is the growth that we expect in new equipment.

As we've been talking about for the last eight quarters is, pricing has been pretty tough on new equipment -- really across the globe.

So, as you see that growth in new equipment, which -- let me just take a look at my notes here -- it was up high single digits, call it 7% or so.

You're not going to get a lot of conversion on that.

Sales will be up, but you're just not going to see a lot of bottom line conversion on those sales as most of those go out with really low margin.

So, we are expecting service growth to be up mid single digits.

So, the new equipment growth is outpacing the service growth.

The other thing to just keep in mind is there will be some commodity headwind, as well as FX headwind next year at Otis.

So, that will also impact the margins.

Yes, we've been telling people all along that 20% plus margins are always the goal, even after the recovery.

So, when we get to a more normal split of new equipment versus service, I think you'll see a little bit of margin pressure.

Margins are still going to be industry-leading, I think it is hard to argue with the success of Otis over the last 15 years.

Okay.

Then just finally, I hear you on the China -- Otis China backlog going into 2012.

So, you have visibility there despite the reduction in the growth rate from the government side.

As we think about orders, what is your embedded expectation for Otis China orders in 2012?

I would ask the same question on Pratt commercial spares -- what order growth do you expect for the full year?

It will probably be double digit is what is in the base assumption.

So, think of that as the 10% to 12% range for Otis, for new equipment.

On the Pratt side for spares, it is about 5% growth for the year.

Again, double that at Hamilton.

I would point out, again, you've got a lot more visibility at Pratt in terms of the engine overhauls and when they are coming into the shop.

So, I think Pratt's got a lot more fidelity around that 5%.

As you take a look at Hamilton with their 10%, that really is on the back of what they consider to be a 5% growth in revenue passenger miles, or available seat miles this year, plus the price increase that went into effect on January 1.

So, a little bit better performance on the aftermarket at Hamilton, but I still feel pretty confident on the Pratt aftermarket given the visibility we have.

Okay.

Thanks.

Thanks, Joe.

Robert Stallard of Royal Bank of Canada.

I just had a follow-up on Joe's question about the Pratt aftermarket, Greg.

Is there anything changing here?

Are we seeing any fundamental slowdown in the airline demand for engine spares or overhauls?

Is this really just down to tough compares and maybe the end of initial restocking?

I think that's exactly it.

We actually, we track heavy versus light overhauls.

We continue to see -- really over the last eight quarters, airlines are starting to do more and more of the heavy overhauls versus the light.

I think, it's almost 88% now are heavy overhauls.

So, we have good visibility.

You do have of course, Pratt's got an older fleet, you see some 757s coming out of production.

You see [NVAs], of course, being retired in America and such.

I think part of this is just the natural aging of the Pratt fleet.

Also, just the fact that we have had a nice recovery second half of 2010, all the way through 2011.

So, you just have much tougher compares.

Okay.

Then the second question, on the A320 NEO, I was wondering if you could comment on how your market shares has been shaping up with the geared turbofan there?

What your expectations might be going forward?

Again, obviously, we've had a great start to 2011.

It was a little bit of a slowdown in the middle of the year.

At the end of the year, I think we are still having at least 50% of the market, and we still believe we can get 50% plus as customers look at the value of the GTF versus the [LEAP X].

So, it's going to be a long slog as you know.

I think the best news is we've got orders for over 2,000 engines now in backlog that weren't there a year ago.

Still it's a tough market out there, we've got tough competition from CFM.

Again, the technology -- the GTF technology will trump the other engine, we think at the end of the day.

We also, of course, have the benefits of the IAE transaction coming in here where we will take control of IAE hopefully here in the first half and give us a very smooth transition and allow us to work with customers that are current V customers and try and convert some of those even to GTF on the follow-on orders.

Great, thanks a lot.

Myles Walton of Deutsche Bank.

Thanks, good morning.

Hi Miles.

On Sikorsky, you mentioned the profit shortfall, fewer military deliveries in the quarter.

Maybe $25 million, $35 million of EBIT shortfall, but then on the 2012 outlook it wasn't updated.

So, number one, there's no catch-up and number two, it would imply 2012 outlook is also implicitly lower.

I would disagree with you on the second point.

The fact is, we did miss some helicopters at the end of the year, there were like six Blackhawks that did not go.

We are still 100% on contract to the US government, so this is not a big issue in terms of productions problems at Sikorsky.

We are on time, we had hoped to get these six aircraft out.

We've gotten about half of them out in the first couple of weeks of January and the rest will go here in the first few months.

So, if you think about it, last year we had their guidance up $25 million to $50 million.

We still think they are going to be up the same -- to the same net amount even though the base is lower.

So implicitly, their guidance should be up that $35 million miss that you have out there.

One thing to keep in mind is that we talked about how the pension came in with a discount rate being lower, so there is higher pension headwind going into next year.

Some of that will go to Sikorsky and that may offset some of the benefit.

Mrs.

Lee is exactly correct and I stand corrected there.

So, there's about $10 million of pension headwind out of that $50 million that we talked about.

So, if you think about it, there's probably $25 million of upside to Sikorsky on an absolute basis from where they ended last year.

Again, I think nothing is fundamentally wrong with the business, it will perform this year.

We said military is down, but we're seeing good strength on the commercial side and especially on the international military side there.

As we said, more than 50 orders last year on the Internet from international customers.

That will continue.

Okay.

Then the 2012 cash outlook, Greg, it just seems like it could be very, very strong.

Certainly more strong than the underlying EPS when the Goodrich deal is said and done.

Are there any puts and takes?

Obviously, pension it sounds like that will be a nice tailwind on a year-on-year basis from a cash perspective, D&A will be -- help cash conversion.

How are working capital and cash taxes looking?

I think, again, as we think about the base business, I think again, we'll continue to deliver strong cash flows.

It's a little early to say that we're going to exceed net income for the year for cash flows on the base business, but -- and you'll see the same kind of performance year-on-year, I think, in 2012 that you saw in 2011.

I think the good news in cash flow is, if you think about fourth quarter performance.

We actually saw inventory up, I think it was $36 million or $37 million year-over-year, a 7% increase in sales.

I think, good working capital performance, good inventory performance in the fourth quarter.

Hopefully, let's get that traction-- or hope that traction will continue into 2012.

Once we do the Goodrich transaction, obviously, there is a significant amount of amortization costs which are non-cash charges.

I think that's about $300 million for a full year, $150 million.

So, obviously, that gives us good visibility that you're going to see a stronger cash, post acquisition than the typical normal cash equal to net income.

Just a clarification, what was -- in the quarter, the $250 million of other operating activities?

Versus $400 million headwind last year?

That was primarily on the taxes side.

Taxes.

It would just be refunds on taxes that we had not expected.

Got it, thanks.

Julian Mitchell of Credit Suisse.

Thanks a lot.

Firstly, I guess within the CCS business, you talked about the moving parts inside Transicold in Q4.

What is embedded in your CCS expectations for Transicold, just the overall Transicold business in 2012?

Obviously, it's had a decent margin effect over the last 12 to 18 months.

For the year, 12 globally in that business.

Do still think sales and profits should be up?

I think, overall, for Transicold markets, we expect that they are down high single digits, with the container market down over 10%, that's where we see special strength there.

Now, we expect down over 10%, US trailer up mid single digit, and Europe trailer market down -- or flat to down 5%.

Got it, thanks a lot.

Then just within Sikorsky, you touched on it just now, but there are a bunch of restructuring announcements as we went through 2011.

Obviously, end of the year, a little bit soft in terms of the profits number in the end.

When you're thinking about the cost savings for '12 given the top line -- is there a fresh new restructuring plan being dusted off for Sikorsky?

Or will be the same thing where we'll go through the year step by step?

I think Jeff did a lot of preemptive restructuring.

I think in the fourth quarter we spent $37 million at Sikorsky to address what we saw as the coming volume declines on the military side, which I think that right sizes the business for right now.

If we see any further deterioration -- obviously, I think there is always opportunity for additional restructuring.

Again, that $37 million was really to be preemptive to position us to grow earnings in 2012.

Okay, thanks.

Ronald Epstein of Bank of America Merrill Lynch.

Good morning.

Just going back to Otis again and demand -- you talked a little bit about demand in China, but you have been adding capacity both in Brazil and India, and how are those markets playing out so far for Otis?

I think, Brazil has actually been very strong for us.

India has continued to see growth as well.

Those are big opportunities.

They don't have nearly the scale that China has, if you think about China that must be almost $2 billion of revenue.

These are our smaller businesses.

Again, I think the growth process that we have seen -- I think we were building factories.

So, we that can deliver, I'll say, 10,000 units in India this year, and I think that seems to be on track.

In Brazil, we just put in a new factory there to meet the increasing demand and I think there's been nothing on the horizon to indicate that we are not going to see that happen.

Just to note the new equipment sales in Brazil were up over 30% in the fourth quarter.

The orders were up mid to high teens.

India, the sales were a little bit down in the quarter, but we think the orders are still pretty strong there and the market's fundamentally strong.

Okay.

Then just a quick detail question.

In Fire & Security, you took this impairment on an equity investment?

What was that?

It was an investment in a manufacturer in China that, we made several years ago.

We actually took a small impairment charge in the third quarter on that.

It's a small equity investment that we have, I think we have 30% or so of the business.

It's still traded on the Hong Kong exchange.

Unfortunately, we had to really mark it down to fair market value because on the Hong Kong exchange, the stock has gone down significantly since the acquisition.

Still a good business, it's just that we had to face the reality that the publicly traded piece was trading at a significant discount to what we would consider to be fair value.

So, we had to take the write-down in the fourth quarter.

Again, we will work through that as part of this whole portfolio rationalization, whether or not that stays is part of the CCS portfolio I think we haven't decided yet.

But take a conservative accounting view towards it.

Okay and maybe just one last quick one for you.

Clipper, what is going on with Clipper?

Clipper, sales last year were north of about $300 million.

We took some orders here in the fourth quarter, we continue to deliver on the backlog.

We continue to spend on the engineering side to build the next-generation of wind farms.

It's a small piece of the business.

It's part of Pratt Power Systems now.

Peter Christman and Dave Hess continue to look at the business and work to improve that.

It is a very tough market out there.

It's just going to be a tough story for a while on the wind side in the US.

Great, thanks.

Cai von Rumohr of Cowen and Company.

Yes.

Thanks so much.

So, your legal expense of $0.05, was that -- you mentioned for export disclosure, is that an FCPA issue?

No.

It is not, no.

Good.

Then, secondly, Pratt you had huge volume in the final quarter and yet you're still talking about high single digit gains.

I assume $700 million of that is adding in IAE, but that means like 5% growth excluding that.

Can you walk us through the pieces because I think you said military up 10%?

That seems high, and so, how do we get to 5% or so excluding IAE?

You are right.

Organically it is up more mid single digit, if we exclude the IAE transaction.

We see commercial spares up mid single digits, Greg mentioned that before.

As well as Pratt Canada up high single digits and then military up to 10%, and that pretty much gets you there.

How do you get military up 10%?

Because C17, F22 are tracking flat to down.

The OEM shipments are actually down mid teens, it has more to do with mix and there's more JSF that offset the decline.

Thank you very much.

Douglas Harned of Sanford Bernstein.

I am interested in understanding what you're seeing on pricing.

If you look at 2012, the pricing increases you might be looking for both in Pratt Hamilton Sundstrand aftermarket, as well as Otis and Carrier?

I think on the aerospace side it's pretty simple.

We put our catalog out, back first of October, it took effect here first of January.

It was roughly a 5% increase in spares prices.

As you know, that typically sticks but especially at Pratt, you've got a big chunk of the business that is on maintenance -- long-term maintenance program.

So, they don't actually realize that full 5%, it's more like 3% or so.

They will probably realize net.

Hamilton will get a little bit more even though a percentage of theirs is on long-term agreements.

On the commercial side, pricing remains difficult at Otis on the OE side.

That's true in China, it's true in Europe, and it's true here in the US.

Again, that's the pricing pressure that we talked about and why you're going to see margin deterioration at Otis in 2012 on higher new equipment, just the pricing is very tough.

Carrier is a little better story.

Carrier actually increased prices back in October again, as commodities started to spike, we have seen that stick.

In fact, there was no commodity impact in the fourth quarter because of pricing offsets.

I think again, for the full year 2012 we expect a similar story.

Not a lot of commodity headwind.

So, it should be -- again, on the residential side, despite a poor market, everybody has the same input cost.

We have said this before, copper is an input, compressors are an input, aluminum, steel, everybody feels the same pressure.

So, again, I think the market remains disciplined; we are able to realize those price increases.

But I notice, are you seeing more competitive intensity on the OE side?

How has it changed?

I don't think there's any change here.

Really this is for the last eight quarters I think since we saw the downturn in 2009.

We have continued to see very aggressive pricing from all the competitors.

Be it Kone, Schindler, or all of the Chinese competitors.

It's a very, very competitive OE market.

But, Otis continues to have sound margins because we can leverage scale.

That's the beauty of Otis.

Big, big factories, leverage scale on the factories and leveraged scale on the supply chains.

Then if I can, one more, on Fire & Security, when you talk about shaping the portfolio, can you define what is core in Fire & Security?

You've got a wide spectrum of businesses there.

How do you think about what the core part is and where there might be opportunities to shape it?

I think as you think about the Fire & Security portfolio, I think there were 61 acquisitions that we did since 2003.

Obviously, I think some of the Fire & Security products are probably turning out to be much better than some of the installation businesses on the security side.

Again, I can't tell you which businesses we might divest, I will tell you that we're going to look at those businesses that have the good long-term growth prospects and have scale.

In the US, not much scale on the installation side.

We like the fire business, it's a lot like Otis, it is about life safety and that's what drives growth long-term there, drives good margins.

Fire is core and we'll take a look at the rest of it.

I just don't want to get ahead of ourselves here because we've got some good service and installation businesses around the world that perform very well and some that don't perform as well.

So, I think Geraud just needs to determine whether or not they are fixable and what the long-term growth prospects are before we make any decision.

Okay, very good thank you.

Thanks Doug.

Okay, well, I want to thank everybody for listening on the call.

We got good momentum going into 2012, and we've got the transformational deals out there.

The goal at UTC, as always, we focus on what we control and we outperform peers.

With that, look forward to seeing everybody on the 15th of March, and Maria and Jos will be around to take your calls afterwards.

Thank you very much.