雷神技術公司 (RTX) 2012 Q3 法說會逐字稿

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

On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer, and Jay Malave, Director Investor Relations.

This call is being carried live on the internet and there is a presentation available to download from UTC's website at www.utc.com.

Please note, the company will speak to results from continuing operations except where otherwise noted.

They will also 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 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 yourself the first round to one question 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.

Okay, thank you, Stephanie.

Good morning, everyone.

You saw in the press release this morning third quarter earnings per share of $1.37, that's down 4% versus 2011.

The Goodrich acquisition, previously anticipated to be about $0.10 dilutive in the quarter, did not have an impact on EPS due to lower one time deal related costs, lower amortization, and better underlying performance of the business.

IAE also had a solid performance in the quarter and contributed $0.03 of EPS.

Restructuring charges were also lower than we expected due to a shift in the timing from the third to the fourth quarter and were completely offset by one-time gains.

There was also a $0.04 benefit versus prior year on the tax line in the third quarter which we talked to you about in our September investor meeting.

Year over year benefit from restructuring and taxes nearly offset a $0.07 adverse impact from foreign exchange and a 2% decline on organic sales driven mainly by the slowing global economy and a decline in US defense spending.

Organic sales declined 12% at Sikorsky and were down 1% and 2%, respectively, at Otis and Climate, Controls, and Security.

Organic sales at Aerospace Systems were up 6%.

But, as you heard from Dave Hess, we've yet to see a recovery in Pratt's large commercial engine after market business.

Organically, Pratt & Whitney's large spare sales declined 25% in the quarter and we now expect the full year to be down high teens.

For UTC, we now expect full year sales of approximately $58 billion.

At the low end of our previous guidance range driven by lower organic sales and partially offset by favorable FX compared to our last forecast.

In spite of the top line softening, we continue to expect earnings per share of $5.25 to $5.35 for 2012.

With a solid start at Goodrich, better visibility on the amortization, and lower than expected deal costs, we estimate that Goodrich dilution, excluding the impact of share repurchase, will be approximately $0.10 for 2012 as opposed to our prior expectation of $0.20.

That's about $125 million better.

And, we expect a $50 million pretax benefit from a full year tax rate of 29%, that's 50 basis points lower than our previous guidance.

Against an uncertain macroeconomic environment headed into 2013, we are preemptively increasing restructuring by $100 million in the fourth quarter.

We now plan to invest $600 million this year, up from our previous estimate of $500 million.

And, for the full year, we now expect restructuring to be equal to one-time gains.

And, as spare order rates have remained depressed at Pratt & Whitney, we're also lowering Pratt's operating profit estimate by $75 million for the year.

So, let me sum it all up.

There's $175 million of upside, that's Goodrich $125 million and the tax rate of $50 million offset by $100 million of additional restructuring and $75 million of headwind from Pratt commercial spares.

There's also some favorability from the weaker dollar versus our previous FX guidance.

And, this should help offset potentially softer top line of some of the commercial units.

Okay, now on to Slide 2, the third quarter.

Total sales were up 6% with acquisitions net of divestitures contributing 11 points of growth.

The net acquisition benefit more than offset 3 points of unfavorable FX and 2 points of organic decline.

The drop in organic sales is just a reflection of the global economic environment.

North America is still struggling to gain traction, a slight recession in Europe, and slowing growth in emerging markets.

At the commercial businesses, North American organic sales were flat in the quarter and are only up 1% year-to-date.

In Europe in the commercial businesses, sales are actually down 3% while sales in the BRIC countries grew 2%.

That was driven by double digit growth in Russia and India.

In Aerospace, robust commercial OEM organic growth was more than offset by weakness in the commercial after market and military businesses.

Commercial OEM sales were up 14% led by double digit growth in Aerospace Systems and Sikorsky.

Commercial after market, however, was down 14% with a mid-teens decline at Pratt & Whitney more than offsetting mid-single digit growth at Aerospace Systems and 20% growth at Sikorsky.

Sikorsky continues to feel the impact of reduced DoD spending with military sales down nearly 20% while Pratt & Whitney saw military sales up 20% on the back of F119 spare engine deliveries, which will wrap up later this year.

Excluding Goodrich and the incremental IAE shares, segment operating margin was 16.1% so, actually up 10 basis points versus the prior year.

Our focus on cost reduction and productivity more than offset 80 basis points of headwind from pension, E&D, and FX.

Free cash flow, very good in the quarter, 105%, and that included a $200 million contribution to our domestic pension plan.

We've taken the tough actions on our pension plan and we are well positioned with a funded ratio of 84% even with the impact of Goodrich at historically low discount rates and we have no ERISA funding requirements until at least 2015.

Okay, moving on to Slide 3 looking at order trends.

Similar to sales, order trends in the quarter were generally in line with the global economy.

CCS's North American residential HVAC orders were up 3%.

OTIS new equipment orders were up 11% in constant currency including strength in North America.

China new equipment orders contracted 2% in constant currency in the quarter following a 16% decline in the first half as we steadily regain momentum.

I'd also note that the Q3 2% drop in orders is off a very tough compare with Q3 of last year when orders were up 31%.

Across the Aerospace businesses we continue to see the impact of cash conservation at the airlines.

Pratt & Whitney's large commercial spare orders were up 14% in the quarter including the additional share of IAE.

Excluding the incremental share, Pratt's orders were actually down 21% due to weakness primarily in the wide body fleet.

Legacy Hamilton Sundstrand commercial spare orders were down 6%.

So, despite some weakness in our end markets we continue to leverage our global scale and product innovation to strengthen the position of our industry leading franchises.

Backlog for our base businesses increased by $3 billion so far in 2012.

And, with the addition of Goodrich and IAE, total backlog now stands at $81 billion.

Let me stop it there and turn it over to Jay to take you through the business units and I'll come back and wrap up '12 and talk a little bit about '13.

Thanks, Greg.

Turning to Page 4. At Otis, operating profit was down 10% on a 6% decline in sales.

Foreign currency translation reduced sales and profit by 6 points.

Operating margin was 22.7%, 1 point lower than prior year.

At constant currency, new equipment sales were down low single digit with mid-single digit declines in Europe and China, partially offset by mid-single digit growth in the Americas and the rest of Asia.

Service was up slightly with higher contractual maintenance more than offsetting a slight decline in repair.

The operating profit decline was driven by pricing pressure and lower volume in Europe and the absence of favorable real estate gains in last years third quarter which more than offset the benefit of cost reduction actions this quarter.

At constant currency, new equipment orders were up 11% with over 20% growth in North America and in Europe which benefited from a major contract award in the UK.

Although orders in China were down 2% in the quarter, the rate of decline improved from the previous two quarters and Otis had solid order growth in September.

Guidance for the full year remains unchanged with profits expected to be down $175 million to $225 million on a mid-single digit sales decline.

On Slide 5, UTC Climate, Controls, and Security once again saw a sharp increase in margin, up 270 basis points from prior year to 15.4% as profits increased 5% on 13% lower sales.

Organic sales were down 2% as many of our end markets have not rebounded as we had previously expected.

While there were pockets of growth, such as the Americas residential HVAC business and China, each up mid-single digit the balance of the business generally saw low single digit declines.

Transicold was down high teens, organically, led by a 60% decline in container sales.

Despite the lack of organic sales growth, CCS grew earnings 5%, or 8% at constant currency.

Profit growth was driven by restructuring and productivity including savings from the consolidation of Carrier and Fire and Security and favorable net commodity costs.

Global commercial HVAC orders were flat with growth in North America offset by a decline in Asia.

Transicold orders were down about 25% with container down about 90% partially offset by over 40% growth in North America truck trailer.

Orders for global Fire and Security products were up low single digit.

Given current market softness, fourth quarter organic growth could be softer than previously anticipated.

The CCS team continues to take preemptive action to offset the impact of lower organic sales, while full year earnings guidance is under pressure.

Margin expansion for the year, however, will still be strong given the benefits from productivity, cost reduction, and portfolio transformation.

Turning to Aerospace on Slide 6. At Pratt & Whitney, sales were up 16% in the third quarter driven by the consolidation of IAE and the auxiliary power business transferred from Hamilton Sundstrand.

Organically, sales were down 1% year over year as higher military and power systems sales were more than offset by lower commercial after market.

Lower commercial spares -- large commercial spare sales were down 25% year over year.

On a reported basis, large commercial spare sales were up 9% including consolidated IAE sales.

Operating profit in the quarter was down 10%.

The impact of lower organic sales, including large commercial spares, higher E&D and pension costs, as well as unfavorable currency at Pratt Canada, were partially offset from the benefits from the IAE consolidation, restructuring savings, and a supplier settlement of about $0.04 per share.

For the full year, we now expect Pratt & Whitney operating profit to be down $175 million to $200 million on sales up mid-single digit.

On Page 7, our new segment, UTC Aerospace Systems including Hamilton Sundstrand and two months of Goodrich posted sales in the quarter of $2.7 billion with operating profit of $306 million.

Organic sales in the quarter were up 6% with OEM sales up high single digit, commercial after market up mid-single digit, and military after market down 10%.

Total after market trends at Goodrich business units were slightly below legacy Hamilton Sundstrand.

As Greg mentioned, Goodrich had better than expected results in the quarter.

Organic operating profit at Aerospace Systems was down 5% after a strong first half which was up 16%.

The benefit from higher volume was more than offset by higher E&D and pension costs and lower license fees.

With the benefit of approximately $50 million from lower than expected amortization, we now expect UTC Aerospace Systems operating profit for the full year to be up $275 million to $300 million on approximately $4 billion of higher sales.

Turning to Sikorsky on Slide 8. Operating profit decreased 6% on 6% lower sales.

During the quarter, Sikorsky shipped a total of 62 aircraft, 54 aircraft were based on military platforms and 8 commercial.

Lower sales were driven by fewer international military aircraft deliveries.

On profit, the impact from lower international military aircraft and transition to the new multi-year contract more than offset favorable commercial aircraft mix, lower E&D spend, and restructuring benefits across the enterprise.

Of note, Sikorsky has received FAA certification for the S-76D.

Deliveries will commence in the fourth quarter and Sikorsky already has a backlog of over $400 million for this aircraft.

For the full year, we continue to expect profit growth of $50 million to $75 million on mid-single digit sales decline.

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

Okay, thanks, Jay.

Businesses are clearly seeing softening on the top line from these tough end market conditions, but we remain focused on program execution and cost reduction, the things that we can control.

At CCS, we continue to make very good progress on the integration of legacy Carrier and F&S businesses.

We're consolidating locations in back office functions and streamlining customer service processes.

We've saved over $50 million year-to-date without an impact on the customer.

And, CCS continues to stabilize the UK Fire and Security business which grew profits for the second straight quarter.

Otis China is also making progress in regaining its leadership position.

On the Aerospace side, the Goodrich integration is off to a very good start.

And, as you heard from Alain Bellemare in September, we are realizing synergies sooner than expected and there will be opportunities for more.

Pratt continues to win orders for the GTF and with an additional 546 firm and option orders in the quarter, Pratt now has a backlog of nearly 3,000 engines.

And, Sikorsky, as you just heard from Jay, achieved a major milestone this month certifying the S-76D with deliveries starting here in the fourth quarter.

The end market challenges are putting pressure on the business unit expectations for 2012.

But, with lower dilution from Goodrich, we're confident in our guidance range of $5.25 to $5.35.

We continue to negotiate towards a win-win solution with the Canadian government for the Sikorsky Maritime Helicopter.

And, we expect to provide you with an update at our December meeting.

And, with strong cash generation you've come to expect from us, we now anticipate free cash flow will exceed net income for the year.

Okay, slide 10.

Let's talk a little bit about 2013.

The earnings framework for next year is the same that we laid out in September with the exception of the Goodrich amortization.

With about $100 million of lower full year amortization, we now expect nearly $0.60 of accretion next year from Goodrich compared with the $0.10 of dilution in 2012.

and we continue to expect an incremental $0.05 benefit from a full year of IAE.

Turning to the base businesses, we've got great products and we're well positioned in the right markets for long term growth.

In addition to continuing growth from emerging markets, we should see solid growth in 2013 in the commercial aerospace OEM and after market and the US residential HVAC business and in the US commercial construction businesses.

We expect Europe to be essentially flat next year.

And, we expect the declines in the US defense spending to continue even without the impact of a potential sequestration.

Bottom line is that we're confident in our cost reduction and program execution and we have significant operating leverage should we see better than expected end market conditions.

Of course, we still face some other significant headwinds in 2013.

As you heard from Mick Maurer back in September, Sikorsky expects lower sales next year and 100 to 200 basis points of margin headwind before CMHP.

Now, that's primarily due to the new multi-year eight and the lower DoD spending that we've been talking about.

And, of course we'll have about $300 million of pension headwind at the current discount rate of 3.8%.

We won't actually set the rate of course until year-end, but you know the math.

Every 10 basis points change in the rate costs us $28 million.

To sum it up, we've taken proactive aggressive restructuring actions this year.

Savings from these actions combined with lower engineered and development will drive earnings growth in four out of the five business units before pension.

And, we will see about $0.75 of accretion from Goodrich and IAE year over year.

We feel well calibrated for this year.

The large deals are done and we're focused on integration and execution.

With our transformational deals, the new organizational structure, global industry leading franchises, and sustained structural cost reduction we're well positioned for long term earnings growth and strong cash generation.

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

Stephanie?

(Operator Instructions)

Joe Nadol, JP Morgan.

Thanks, good morning guys.

Just to start out over at Pratt and Greg, just wondering, you had your meeting September 27.

Obviously, very late in the quarter and your lowering here by $75 million, I think all due to spares.

So, is it really -- I mean, can we infer from that that really two weeks at the end of the quarter was responsible for the change in guidance?

Or is it maybe just looking more into the fourth quarter?

And, also at Pratt, if you could quantify that supplier payment?

Yes, so, I think Dave laid it out pretty well back in September.

He said that we are not seeing the order rates to actually support the spares only down 10%.

So, I think Dave was pretty forthright with everybody to say that we're not seeing it.

And, clearly the last couple of weeks of September we did not see any recovery in spares and we haven't seen it as we sit here today.

So, the take down is all spares.

And, I think, again, it's unfortunate to take down the guidance late in the year, but it is what it is on commercial spares.

I think the good news is we dissect the data.

The narrow body platforms, the V2500s and the 757s are actually -- have been recovering for a couple of quarters.

And, where we see the weakness is primarily on the wide body fleet and also in Europe.

So, again, not a surprise, I think, but it's clearly a tough market right now.

As far as the supplier payment, that was about $45 million, $46 million, I think.

That's actually a settlement.

It was a legacy claim between Pratt and Goodrich which relates to the nacelle on the C-Series.

This had been in arbitration.

We had an independent arbitrator come in and we settled the claim.

And, that was actually recorded on Goodrich's balance sheet as of the close and Pratt recognized the benefit in this quarter.

Okay, and then, secondly, on Goodrich, you mentioned that Goodrich earnings were better than expected.

Is that due to less amortization?

Or is that real underlying performance?

And, what was -- I don't know if I missed it, but what was the organic aftermarket growth at Goodrich during the quarter?

Joe, organic aftermarket for sales was slightly below HS.

HS had about mid-single digit growth in commercial aftermarket and Goodrich is a little bit below that.

As far as military aftermarket, HS was down around 10% and Goodrich was down a little bit but below that at close to mid-teens.

While we have the chance, I just want to correct a statement that I made before related to Sikorsky on Slide 8. Just want to clarify that operating profit decreased 6% on 12% lower sales.

Okay.

To get back to the first part of your question.

As far as the underlying business, Goodrich did do a little bit better than what we had expected.

It was primarily Aero Structures at the end of the quarter, things actually looked better.

But, amortization is clearly better.

The big piece in the quarter was really these transaction related costs which were better than we expected.

We took a, I'd say, a very conservative view as we were looking at all of these costs.

And, we had expected to expense some things that ended up on Goodrich's balance sheet.

So, that helped by about $100 million.

And then, you had better performance and a little bit better amortization.

Okay, thank you.

Thanks, Joe.

Jeff Sprague, Vertical Research Partners.

Thank you, very much.

Good morning.

Good morning, Jeff.

Was wondering if you could elaborate a little bit on the Otis order strength in North America.

Sounds like Europe, maybe driven by the big metro project, maybe there's something else there, elaborate on that also.

But, what was going on in North America and is it more than a one off?

No, I think it's a trend that we have seen a recovery in North America.

And, we've seen the ABI, Architectural Billing Index, be above 50 for the last couple of months here and actually seeing good traction in quarters there.

We've got, of course, some new product introductions also that's helping on the -- in the North America, it's attacking some of the high growth markets.

So, I think it's product introduction and a recovery there.

So, that actually feels pretty good.

Europe, well Europe is Europe.

We did get good traction out of the Crossrail project, I think that's over 107 escalators for that -- for London Crossrail.

But, the rest of Europe is not a great story.

We saw down markets in France and Spain and Italy.

A little bit better in Germany but on the whole a pretty tough Europe market outside of the UK.

And then, when you look at China down 2%, are you in position given the comps and the trajectory to actually flip positive on orders in Q4?

Or when do you see that happening, if you can in fact crystallize a view?

Yes, my crystal ball is not terribly clear but I would tell you we should see order growth resume in Q4.

As I said earlier, orders were down 2% but that was off a very tough compare last year where orders were up 31% at constant currency.

So, we are seeing a recovery.

Last year, you'll recall, China only grew 7% in the fourth quarter.

So, again, I think the trajectory that we saw in the -- coming out of the third quarter should continue into the fourth quarter.

I think Pedro and team feel very confident we're getting share back and they are on track for a full recovery there.

And, just can you give us a little more granularity on China?

Is it high rise residential, is it bigger projects, central country?

Just any other detail on what's going on would be helpful.

Yes, I think it's actually really across the business we are seeing a recovery there.

The commercial HVAC business remains soft there, I think.

So, some of the slowdowns that we've seen are actually playing out on the CCS side.

On the flip side residential is getting a little bit better.

We saw that at CCS on their GST business getting us some traction on order rates.

For Otis, again, I think the property market has started to stabilize and come back a little bit, still seeing good growth in the tier 2 & 3 cities.

Tier 1 is still pretty challenged, but, again, that's not a surprise.

It's a very uneven recovery in China.

Right.

And, just finally, just flipping over to Carrier, it looks like your residential business underperformed from what I can see from a couple others who reported in the quarter.

Can you just give us some color on how you thought you did relative to the broader market and what's going on in the channels?

Underperformance is a relative term, Jeff.

I think -- and, again, we saw, I think, one of the competitors reported the other day they had what looked like mid-teens growth in the residential business.

But, I think that was off of a very tough -- or very easy compare from 2011.

Carrier thinks they've held share here this year, they've done pretty well.

Channel inventories are very, very light.

I think nobody wants to get stuck with inventory this time of year given all of the uncertainty in the global economic situation of the fiscal cliff coming up.

So, channel inventories are probably at some of the lowest levels we've seen.

Great.

Thank you, very much.

Thanks, Jeff.

Carter Copeland, Barclays.

Good morning guys.

Hi, Carter.

Just one quick one.

Actually a couple of quick ones.

On the transport refrigeration on the container side, you said down 90% which is where you were at your analyst meeting.

Did you see any incremental order activity besides that little blip you called out in the meeting?

Or are we still bouncing along the bottom in that business?

Actually, bouncing along the bottom is a relative term.

I think we saw a little bit of good news post the investor meeting.

And, we've seen some good news here in the fourth quarter.

We're almost 50% booked in the fourth quarter.

So, orders, again, they were very lumpy, as we know in this business.

But, I think it looks achievable in terms of the forecast we've got out there right now for this year.

Okay, and on the spares side, I wondered if you might elaborate on a couple of other points.

In terms of the wide bodies, what you're seeing in terms of shop visits year-over-year and also what you're seeing at Pratt Canada.

Yes, so shop visits are a little soft on the wide body fleet and this is, again, the PW4000 fleet.

I think the biggest impact is on the 747 fleet, there's probably a lesser impact than the 777 and A330 fleet out there.

But, clearly we've seen lower shop visits.

But, I think more importantly, the average cost per shop visit is down substantially like 25% now.

So, that's just gotten worse and not better from what we had seen earlier this year.

We're getting good traction as I said on the narrow body fleet.

V's are up very strong, the spares in the quarter, and even the 2000s have had a nice recovery for the last couple of quarters.

Pratt Canada spares were down low single digit in the quarter, Carter.

Okay, great, and one final one.

You said Europe flat for next year is your base case assumption.

Does that assume anything different in terms of FX for next year than what's baked into this year's guidance?

No, I think, again, FX is around $1.30 today.

We've actually put our plan together at $1.25 right now as we're looking at guidance for the last couple of months.

So, FX could actually be sort of a tail wind next year versus what we've seen this year.

I think we're going to average $1.26 or something year-to-date, I think.

So, it could actually be a little bit of tail wind out of FX, but who the heck knows.

Yes, exactly.

It's early.

All right, thanks guys.

Thanks, Carter.

Doug Harned, Sanford Bernstein.

Good morning.

Hi, Doug.

On CCS, you had good margins there for the quarter.

Could you talk about where -- what the puts and takes were with respect to margin?

You didn't change guidance for the year.

And, I was also wondering if the margins, were those above your expectations but being offset by weakness in the top line for the year?

I think that's exactly it.

Margins were very strong.

We got about a third of that came from the portfolio transformation.

But, the rest of it really came from cost reduction, product cost reduction, and restructuring and cost take out in the base business.

So, I think again, it looks like the margins for this year will be at least 14% or so.

So, well on their way to the 15% goal we've got out there.

And if you look across the business, the Fire and Security businesses and the individual parts within Carrier, are there some that you would point to where you saw more improvement than others?

Well, in the field, Doug, both Europe and Asia were relatively flat from sales perspective.

Orders for products were actually up low single digit this quarter.

I think what you're seeing though, Doug, is really broad based cost reduction.

I think, again, the structural cost take out that we talked about is helping.

But, we're also seeing good news out of the factories, we're seeing good cost reduction out of the factories and that's both legacy F&S as well as legacy Carrier businesses.

I think margins are holding up quite well on the commercial side as well as on the residential side here in the US.

Obviously margin is under a little pressure at Transicold with volumes down as much as they are.

And then, on the restructuring, the increase in restructuring cost for the year.

Can you talk about where that's focused, Aero versus the commercial businesses?

We've got a lot of programs lined up here.

I think the biggest piece you'll probably see is going to be related to what we see as this decline in defense spending.

So, Sikorsky will have a good share of that.

Pratt will pick up a big piece as well as UTAS, or our Aerospace Systems business.

But, again, I would tell you there's restructuring appetite across all of the businesses.

Otis continues to find ways to take cost out.

CCS, again, they're just starting on their journey from this structural cost reduction.

So, you will see additional restructuring from each of the businesses.

And, I would tell you when we started the year I didn't see the appetite for $300 million let alone $600 million for restructuring.

And, today there's appetite for more than $600 million.

So, again, I think that just tells you how focused these guys are on cost reduction.

Okay, good, thank you.

Thanks, Doug.

Howard Rubel, Jefferies.

Thank you, very much.

Greg, I realize how challenged its been to forecast earnings and still stay within the range.

And so, the harder question is could you help us a little bit with cash and give us a walk as to where you are with the debt paydown plans please?

Sure.

So, cash actually came in about what we expected.

We got about 105% of net income.

We're at 100% of net income year-to-date.

The cash machine continues to chug right along and I think for the year we have solid visibility.

We will nicely exceed net income in cash flow for the year.

As far as the debt pay down, I think we're still on track.

We expect to close on the Hamilton Industrial businesses early December time frame.

We've got a $2 billion term loan that we'll pay down.

We've got about $4 billion of commercial paper.

And then, we'll pay down probably another $1 billion of other debt this year.

And, most of that -- the rest of that cash will come from overseas.

So, we've got line of sight to about $7 billion of debt pay down by the end of the year.

And, something might slip into the first quarter but I think, clearly, line of sight to the $7 billion.

And, related to that it looks like you did -- you had a terrific number on, well you haven't closed yet, on electrical products.

But, based on the filing it would seem to me that you're going to more than exceed your forecast on some of the other divestitures, is that a fair way to think about it?

Yes, I think the market for these businesses is much stronger than was originally anticipated.

And, it's not -- I guess I shouldn't be surprised because these are really good franchises.

And, franchises like the EPS business, like the power business at Goodrich don't come on the market very often.

So, we had a very robust bidding process for that business as well as for the engine and controls business, it's located here in West Hartford.

That bidding process is also robust, it's moving right along.

So, I'd say we'll be at the high end of our expectation range for both of those businesses.

But, again, good solid businesses, great products and technology, hate to lose them but again part of the regulatory process.

And then, related corporate overhead, I mean it looks as if you've been able to put together United Technologies and Goodrich and not really increase the overhead a whole heck of a lot.

Have I -- are there some other gains or anything in there?

Or what should we think about that in terms of going forward?

Yes, clearly, as we've put the Goodrich business together with Hamilton, we have seen, or will see, about $50 million of cost synergies this year.

A big piece of that is the public company costs.

So, I think Alain, as you would expect, is focused on a lean organization, that we're not adding a lot of overhead.

And, you're going to see that, I think, play out next year as well as we continue to see solid cost reduction out of the Goodrich business.

And then, finally, you'd talked about avoiding a lot of transaction costs in the quarter and that was pretty helpful and then you're talking about increasing restructurings.

Did those two items in the end offset each other?

Yes, I think if you think about it we've picked up about $0.10 on the Goodrich dilution this year and we picked up about $0.04 on the tax rate.

You can offset that, we lost about $0.08 on restructuring and we lost about $0.06 on the Pratt guidance reduction.

So, $75 million.

So, $14 million good, $14 million of bad, it just offset, just naturally, if you will.

Well, thank you, very much.

Thanks, Howard.

Heidi Wood, Morgan Stanley.

Yes, I want to go back to CC&S for a minute, Greg, and again put a little finer point on it.

It looks like you're saying to an earlier question that you anticipate maintaining profitability going forward.

But, then, you have some of the more profitable businesses which have been rather weak.

So, wouldn't that intimate that you could do, even on potentially very slow revenue upside next year, better margins?

Yes, I think you will see better margins next year at CCS.

Again, it's a little early to call the markets next year.

But, generally, I think Geraud and team feel pretty confident we should see a recovery at Transicold next year, especially on the container side.

I think the US residential business, again, with housing starts up, should recover next year.

On the commercial side, the US ought do better.

So, I think we're well on track.

Again, I said 14% this year, 15% is the goal by '15.

They're well on their way to getting there.

Well that's what I'm trying to drive to.

You could get there quite a bit earlier.

Again, just given that you've had some of the more profitable stuff down and you've been doing the restructuring on an ongoing basis so you'll start to get those benefits as early as next year.

Is there some part of that I'm not getting right?

No, I think you're right on.

Again, I'm hesitant to say we're going to get to 15% next year because again, who knows what happens in the end markets.

I think Geraud and team have done a great job this year managing in what is a very, very tough macro environment.

They've taken out cost, they've driven up margins, they've done their portfolio rationalization and they're going to hit that 14% this year.

Can they hit 15% next year?

Maybe, but I think again it's a great question for Louis in December or better yet, for Geraud next March.

All right.

And then, on turning on to Sikorsky, I just want to tease those businesses out a little bit better to understand the kind of puts and takes you're seeing there, Greg.

Can you give us a little color on your aftermarket expectations in military and your outlook for international military orders looking ahead?

International military orders --.

Let's just talk about military spares.

Military spares, obviously, it's a tough market right now down at Sikorsky.

And, we expect that that will be headwind again next year.

And, again not a surprise with the op tempo coming down in Afghanistan.

And, the uncertainty down at DOD, I think we've seen a reluctance of the procurement officers to go out and make advanced buys with all of the uncertainty out there coming to a head in January.

So, military spares have been under pressure and they will remain under pressure next year.

As far as military aircraft, you'll recall that Mick, during September, said that part of the international military deliveries got pushed into 2014 because of the finalization -- delay in finalization of the multi-year 8 contract signing.

Jay, what I meant was orders.

Do you guys have a number of campaigns out there?

Can you bring us up to speed on the campaigns?

Actually, I would tell you that there is a robust process there on the international side.

I think we're seeing good traction in South America, we're seeing good traction in the Middle East, we're seeing traction in India.

I think, again, you'll see international Blackhawk, the S70i, out of Mielec start to pick up next year.

And, the deliveries, really, I think make as clear line of sight to 2014 to see a large increase in these international Blackhawk deliveries.

Good, thanks, very much, guys.

Thanks, Heidi.

Myles Walton, Deutsche Bank.

Thanks, good morning.

Good morning, Myles.

Greg, I was hoping you could make it a little simpler for me in terms of into 2013 with Goodrich and IAE.

You increased -- or lowered the dilution for Goodrich for 2012 and you previously talked about a $0.75 EPS swing '12 into '13.

Is that $0.75 still intact or are we now talking about a lower swing because 2012 showed up better?

No, well, I think the math is, I would say -- I know, it's complicated.

But, the fact is we have $0.10 of dilution now on Goodrich this year and $0.60 of accretion.

So, net-net year-over-year you ought to get a $0.70 benefit because of Goodrich plus $0.05 on IAE.

We previously had talked about $0.20 of dilution this year and $0.50 of accretion next year.

The fact is next year it gets better because of lower amortization costs, lower than expected.

So, that gets you the extra from the $0.50 to the $0.60 and that benefit also helps this year.

Okay.

And then, on spares, Greg, I think you said high teens organic declines.

Could you separate -- create the differential on the organic declines between for the full year what you're seeing on the 2500s versus the wide bodies?

And then, also, the wide bodies, can you parse out what's just been retired and taken out of the fleet that never comes back?

Yes, I can't give you the kind of granularity in terms of what may have been retired.

I think it clearly is, as we were talking earlier, is the 747-400s, the PW4000s, those have been probably the hardest hit.

Whether some of those have been retired or not, I couldn't tell you.

Clearly, flying hours are down on that fleet.

On the other hand, you see 777s, again the 4000, those are 112-inch, those the flying hours are actually up.

We just have seen the airlines be very reticent to spend a lot of money at repairing the engines as they've come back.

So, again, I think 747-400s are probably the hardest hit and then 777s less so.

And then, real solid recovery on the Vs as we had expected when we bought IAE.

So, it's full year '12, though, for the V's mid-single digit declines?

Say that one more time?

If you just separated out the V2500 organic spares for 2012, what did that look like?

Oh, I think you'll actually see an increase.

Yes, for the full year, Myles, you should probably see an increase anywhere between low to mid-single digit.

Okay.

And, really, we're benefiting, again, from the higher cycles as you know on narrow bodies.

And then, last one.

Was the Pratt settlement previously in the guidance or was it concluded post the guidance?

No, I think we had known about this for some time so that was contemplated in the numbers.

Okay, great.

Thanks, guys.

Thanks.

Cai von Rumohr, Cowen & Co.

Thanks, so much.

So this year, the Goodrich, maybe you could walk us through.

So, you said like $50 million lower intangibles.

Maybe -- but, you had -- R&D was $101 million.

So, presumably that was an accounting conformity negative.

So, maybe walk us through what are the step up in intangibles this year for Goodrich?

What should we think about for next year?

You said $100 million lower, but from what to what?

What should the accounting conformity be this year and next year?

And, you mentioned synergies, $50 million.

What is it next year and what is the restructuring?

Is any of the incremental restructuring there at Goodrich?

Okay, let's start out with the amortization for this year.

I think we have seen lower amortization.

I think it was $140 million of amortization we now expect for the year.

Is that right?

I'm sorry, that's for the quarter?

$140 million?

$140 million was the absolute number of amortization in the third quarter.

In the third quarter.

$130 million of that was from inventory step up.

About $10 million of that was the net of inventory intangible amortization.

So, again, you should see that inventory will repeat again in fourth quarter as well as the intangible amortization.

Next year there's no inventory amortization.

That's all behind us.

So, what you're down to is about $50 million of intangible amortizations net next year.

Cai, the best way to look at it, if you recall the charts that we've shown we've lumped amortization and accounting conformity together.

It was $500 million previously.

The best way to look at it is that now goes to $400, the combination of those two items.

But so, let's just stick with this quarter.

So, we have $100 million this quarter of accounting conformity, because I guess I'm a little confused.

If you had $140 million of accounting intangibles and step up, $100 million of accounting conformity and synergies, a little tough for me to see how you got to breakeven.

Well, again, I think the $100 million is really the run rate for the accounting conformity.

Yes, Cai, $100 million is the total E&D at Goodrich.

Part of that E&D always went to the P&L, it was just put into SG&A in their former reporting.

Okay.

So, the piece -- I can't tell you, I don't know what that piece is just on an accounting conformity basis.

Got it, okay, that's helpful.

And then, so we're really going to get like a $280 million swing next year because you're going to lose -- the inventory step up is all this year, correct?

That's right.

And then, on the restructuring, you said $100 million given you've taken your total restructuring up.

Is Goodrich still is $100 million and what should we think about for next year?

If Goodrich for restructuring this year is closer to about $150 million, we've said, I think, next year in the range of $100 million.

As far as amortization, though, Cai, we just have to recall that next year is 12 months versus five months this year on amortization.

So, what is the number?

I think Greg said, what was it --.

Yes, $50 million of amortization next year.

For the whole year?

The whole year.

Terrific, thank you, very much.

Ron Epstein, Bank of America.

Good morning.

Good morning, Ron.

When we think about going into the fourth quarter and we think about what you guys are implying about where the fourth quarter numbers will be compared year-over-year, I think it really accelerates into the fourth quarter.

Is that how we should be thinking about it?

Or are you just being conservative or how should we think about the fourth quarter number?

I think what you're going to see is you see pretty good acceleration in the base businesses.

The segment results should be better.

I think you'll see solid growth at CCS, should see over $100 million of earnings growth there.

You should see a little bit of growth coming back at Otis.

Sikorsky should have a very big fourth quarter, they've got almost 100 helicopters to deliver.

So, base business is actually going to do very, very well here in the fourth quarter.

We've got confidence that we're going to hit that number.

The downside, I think, as you think about fourth quarter actual EPS is you've got about $0.25 of headwind in the fourth quarter from restructuring.

And, not surprising, we've got about $270 million of restructuring to go.

We spent $330 million so far.

So, you're going to see a big nut, $0.25 or so, of net restructuring in the quarter.

Okay, great.

And then, maybe over to Sikorsky real quick.

Anymore color on what's going on with the Canadian Maritime Helicopter and where that negotiation with the Canadian government is?

Yes, I'd like to say we're making good progress.

What we want here, and I said it before, is we need a win-win on this with the Canadian government.

Obviously, we're disappointed we haven't been able to deliver the helicopters.

We're building them right now down in West Palm.

We expected to build and deliver five this year, build and deliver 19 next year.

And, we're well on our way for all of those helicopters.

But, until we have an agreement with the Canadian government in terms of the final configuration and an interim configuration, we really can't ship anything.

So, as I sit here today I tell you we don't have a solution.

I certainly hope by the time Louis stands up in early December we can give you guys some more clarity on it.

But, right now all I know is that we need to continue to work with the Canadians to find a win-win here.

We're ready to deliver the five aircraft.

It's just a matter of letting this negotiation play out.

Okay, and then, maybe just one last quick one on Aero after market.

Do you have a sense for what impact cargo has had versus passenger?

Meaning is your cargo business much more off than your passenger business?

Ron, I really don't have a lot of granularity between cargo versus regular.

I would tell you that cargo is not a big piece of the fleet and the hours on cargo are much lower than the hours that we see on the regular commercial flight.

So, the overhaul cycle is much, much longer.

So, haven't really seen a pronounced impact from cargo versus commercial.

The reason I ask is if you go back a couple years after '08, Goodrich had a couple rough quarters largely due to cargo.

So, I'm trying to get a sense for what impact it's having now.

I have not heard that either from the Pratt team or the Aerospace Systems team.

We'll check it out and we'll get back to you.

Okay, great.

Thank you.

Thanks, Ron.

George Shapiro, Shapiro Research.

Thanks.

Greg, I just wanted to get to this Goodrich dilution a little differently.

In the 8-K, you said the pro forma for '11 was $0.50 a share accretion and now you've upped it to $0.60 in '13.

So, what are the variables that go into that added $0.10 from '11 to '13?

Obviously there's cost saves and whatever, there's some growth in the business, but if you could spell out the differences.

I think, again, if you think about that $0.50 versus the $0.60 really the only difference is lower net amortization for next year.

I mean, this year we had deal costs and a little bit of performance in the business as well as lower amortization.

But, next year, really, we're getting about -- we're getting north of $100 million of lower amortization more like about almost $0.10, I guess, of lower amortization costs.

So, it will be $120 million to $130 million of lower amortization costs.

Now, that's relative to 2011 I'm asking, not '12.

Because you provided the pro forma numbers in the 8-K you disclosed a couple weeks ago and that showed $0.50 accretion in '11 on the pro forma.

So, I was asking for the comparison '11 to '13.

We're just looking at it here.

George, I think we'll have to get back to you on that.

I have not gone back into these pro formas.

I haven't focused on 2011 very much since last year.

But, we can go back and take a look and get an answer for you.

Okay, and then, the other one is you said IAE will be accretive $0.05 next year but it was accretive $0.03 this quarter.

So, why is it only $0.05 next year?

Because you get another half a year.

So, you're going to get $0.05 of accretion this year and another $0.05 next year.

So, $0.10 in total next year.

$0.05 incrementally.

Okay.

Those were my questions, thanks.

Thanks, George.

Robert Stallard, Royal Bank of Canada.

Good morning.

Hi, Rob.

Greg, just on the 2013 outlook, you've put the commercial Aerospace aftermarket as a positive.

Is that looking at it on a reported basis because of the inclusion of IAE or is this looking at it on organic basis?

No, that's on an organic basis, Rob.

Again, if you think about Pratt spares being down high teens, we've seen Hamilton Sundstrand legacy down, we've seen Goodrich down a little bit.

I think just based on what we're seeing from a flying hours perspective, we know that we're going to see these spares come back.

And, I think it's just a matter of time.

And, I don't know if that's first quarter, second quarter or third quarter of next year or even fourth quarter of this year.

But, spares will come back.

So, we've got high confidence we'll see good news on the commercial Aero aftermarket organically next year, not just the addition of the acquisitions.

Okay, and then, just follow-up on the aftermarket.

You've given us quite a lot of detail on what your seeing at Pratt with the wide bodies.

I was hoping you could explain what's going on at Hamilton Sundstrand and Goodrich and why the orders there and the spares are a bit soft relative to flight hours maybe?

Yes, I think that's the $64,000 question in Aerospace.

Again, Pratt we've got much better visibility because it's all time based overhauls primarily.

So, we know the schedule when these engines are supposed to come back.

And, for the most part they're coming back as we had expected because they are putting the flying hours on.

On the Goodrich and the Hamilton legacy, that is all condition based or on condition repair.

So, in other words if you have a failure in the field you're going see the units come back in.

And, quite frankly, these LRUs, the line replaceable units, the airlines do have inventory of these various parts that Hamilton and Goodrich make.

And, they are burning down inventory, we believe, and not sending everything back for repair.

So, again, I think we will see, just based upon flying hours a recovery there to a more normal 5% to 7% growth year-over-year starting next year on the Aerospace Systems side.

But, this year I think it's just all about airline cash conservation.

Great.

Thanks, Greg.

You're welcome.

Shannon O'Callaghan, Nomura.

Hi guys.

Greg, in terms of next year when you think about the non-cash and the cash items, I mean you're going to have a fair amount of non-cash stuff running through with the pension and amortization.

Are there any big cash offsets in terms of pension contributions or working capital dynamics in the businesses?

I think there's two offsets that we have to keep in mind that we still have to manage.

One is there's an appetite for additional inventory to support the build on the commercial OE side.

So, again, I think we see pressure at Pratt & Whitney, we see pressure at the Aerospace Systems side for inventory.

And, we also see an appetite for those businesses for CapEx.

And, I think that's again something we need to meter out effectively.

We need to make sure that we take full advantage of all of the facilities that we now have between Pratt and legacy Hamilton and Goodrich.

So, I think initially, everybody wants to build everything new, buy everything new.

We just need to think about that and we'll come back with specific guidance.

But, I would tell you there's pressure on CapEx and pressure on working capital, specifically inventory.

Okay, and pension contributions?

No, again, we made $200 million of pension contributions this year because cash has, as I said, has been very strong.

It's actually a good place to put our money.

We get an 8% return on it in the pension plan.

But, we have no funding requirements under the ERISA rules until at least 2015.

And, quite frankly, we're 84% funded in the pension plan today.

And, if I get to a discount rate of 5.5%, which is where we were two years ago, we would be fully funded.

So, last thing we want to do is throw more cash into the pension plan.

And then, just can you explain a little more why the Goodrich amortization went down?

Did you assign a lower value to something that would have been amortized?

Or just explain that a little more.

I think what we found is that there were some -- several contracts in the legacy Goodrich business which were in loss making positions.

And, as we changed the accounting to our accounting conformity, we had to recognize those losses up front.

So, we actually provided for that as a liability, if you will, going forward.

That's now getting amortized and offsetting some of the other intangibles.

Again, we initially had not expected to set up this liability, if you will, for these loss making contracts.

Remember, under Goodrich accounting they took a look at the contract over its life and had a very, very long term view.

We've got like an eight year life of looking at these contracts that are loss making.

So, we amortize the intangibles on these loss making contracts over that eight year period.

Okay, thanks a lot guys.

Thanks, Shannon.

Julian Mitchell, Credit Suisse.

Thanks a lot.

My first question was just on the Otis operating profit progression, so I guess you had pretty high incrementals in the mid-high 30% range in Q2 and Q3.

You're saying profits should grow, though, year-on-year in Q4 even though your revenues are probably down.

So, I guess I'm trying to figure out what's going on in the cost base.

Is it to do with mix that you think European aftermarket maybe is now stabilizing in Q4?

Or is it that you've added a lot of costs in places like China and that kind of hiring is now coming to an end so you get a natural lift on incrementals or something?

Really there's two things that impacted first half of the decreasing margins.

Part of that was pricing.

We've talked about that.

I think we've probably seen $75 million year-to-date of pricing impacts, about half of that in Europe.

We've also had commodity headwind in the first half of the year related to the rare earth.

Again, that was something that probably started playing out last year and, really, by the middle of this year by third quarter had gone away.

But, certainly hurt first half margins.

We've added a little bit of cost on the SG&A line but, again, that's just positioning Otis to take advantage of what's going on over in China.

We've moved the business and strategy development to Shanghai, we've opened up the high rise CLC in Shanghai.

So, a little bit of investment but really the story is, in the first half, has been pricing and its been commodities.

Okay, thanks.

And then, just lastly, switching to your 2013 outlook.

I just wondered, the commercial Aero OEM side, that comes up in a plus and a minus.

Is that just the difference between regions or wide body versus narrow body?

No, the reason we put commercial Aero OEM up there as a positive, certainly on the revenue line it will be a positive.

There will be some headwind from negative margins on some of the -- especially on the engine side, I think especially probably on the, that would be the A380, the GP7000 engine that will eventually ramp up production at Airbus.

We'll see headwind there.

So, good news on the top line, not as much on the bottom line.

Got it.

Thank you.

Sam Pearlstein, Wells Fargo.

Good morning.

Hi, Sam.

Just a clarification, once again on Goodrich.

You had said in your prepared remarks that it's $125 million better.

But, then the Aerospace Systems business you're saying is only $50 million better for the year.

What's the gap in there?

Did you bring down the core at Hamilton?

The other piece, Sam, is related to the deal costs that Greg mentioned.

And, that is in corporate elims.

So, the $125 million, a piece of it is in the segment and a piece of it is in UTC corporate elims.

Okay.

And then, the growth in the receivables of about $1 billion and inventories almost $2 billion, how much of that would be the core business versus just layering in Goodrich and, I guess, IAE as well?

Yes, most of that build is actually Goodrich and IAE.

I don't know if I've got the exact numbers down here.

But, actually let us get back to you, Sam, on that.

But, again, I think the large majority of those additional AR and inventory, all that working capital, is related to the acquisitions.

Okay, and then just the last thing is on the order rates.

As we look into the fourth quarter you've already mentioned North American or just CCS easy comps, it looks like Pratt large commercial also has pretty easy comps.

And, even though Otis new equipment isn't that bad.

Should we be seeing positive bookings across all the segments in the fourth quarter?

I would think so.

With the exception perhaps at Transicold.

Again, I think last year fourth quarter was still pretty strong at Transicold.

So, that's a pretty lumpy business, as I said.

So, that would be the one caveat I would say to order rates.

Everything else, again, I think we had seen a pretty slow fourth quarter last year on the order intake side.

So, should be pretty easy compares both at Otis and the Aero businesses.

And, Pratt commercial spares, if you had the same dollar amount in this third quarter versus the easy compare in fourth quarter would we actually see bookings up next year -- I mean next quarter?

I'm sorry if we had orders in the --.

Similar dollars.

If it was just sequentially flat in the December quarter from the September quarter do we end up with a positive comparison?

No, Sam.

You would be down.

Last year was pretty flat throughout the year.

Okay, thank you.

Thanks, Sam.

Okay, I want to thank everybody for listening.

I know it's, again, a lot of stuff going on at UTC here.

We'll see you guys all in December next for Louis' annual guidance.

We're going to continue to focus on what we do best.

We're going to focus on integration, we're going to make sure we're accelerating on cost reduction, and we're going to focus on outperforming the peers.

And, that's what we do every day here.

So, thanks everybody and have a great day.

Ladies and Gentlemen, that does conclude today's conference.

You may all disconnect and have a wonderful day.