United Technologies (UTX)

Q4 2010 Earnings Call

January 26, 2011 9:00 am ET

Executives

Akhil Johri - VP, IR

Gregory Hayes - Chief Financial Officer and Senior Vice President

Analysts

Roger Johnston - Edison Investment Research Limited

Cai Von Rumohr - Cowen and Company, LLC

Robert Stallard - RBC Capital Markets, LLC

Douglas Harned - Bernstein Research

Richard Tortoriello - S&P Equity Research

Terry Darling - Goldman Sachs Group Inc.

Shannon O'Callaghan - Lehman Brothers

Ronald Epstein - BofA Merrill Lynch

Joseph Nadol - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Jeffrey Sprague - Citigroup

Julian Mitchell

Samuel Pearlstein - Wells Fargo Securities, LLC

Deane Dray - Citigroup Inc

Nigel Coe - Deutsche Bank AG

Presentation

Operator

Good morning, and welcome to the United Technologies Fourth Quarter Conference Call. On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer; and Akhil Johri, Vice President, Financial Planning and Investor Relations. This call is being carried live on the Internet, and there is a presentation available for download from UTC's home page at www.utc.com. The company reminds listeners that the earnings and the cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. UTC's SEC filings, including its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round of questions to two per caller to give everyone the opportunity to ask questions. You may ask further questions by reinserting yourself into the queue, and then we will answer those questions as additional time permits. Please go ahead, Mr. Hayes.

Gregory Hayes

Thank you, Michael, and good morning, everyone. As you saw in the press release this morning, a strong close to the year with 6% organic sales growth in the quarter. Solid margin expansion on the back has sustained cost traction and of course excellent cash flow.

Our short-cycle markets are recovering as expected. Emerging markets continue to gain traction, and we are finally starting to see a modest recovery in the commercial construction markets in the U.S.

We also continue to invest in new platforms and new markets that position us well for long-term growth. As always we remain focused on structural cost reduction, operational excellence and disciplined cash redeployment, nothing new here.

Just a reminder, as we go to the numbers today, we'll talk to the segment results adjusted for restructuring and one-time items as we usually do. So if you look at the segment results, you'll see that UTC delivered exceptional segment operating margin expansion for the year of 100 basis points to a record 15.4% even as we increased investment in E&D by $188 million or 12% over 2009. Importantly, all six businesses expanded margins in 2010 and all six businesses achieved double-digit operating margins for the first time in UTC history, quite a milestone.

Otis led the way with an operating margin of 23%, interior led the margin expansion story with 240 basis points of growth. The operating margin performance at Carrier, Fire & Security and Sikorsky put them all firmly on track to achieve their margin targets.

For the full year, sales were $54.3 billion. That's up 4% year-over-year. Earnings per share were $4.74, and that's up 15% versus 2009. Absent restructuring and one-time items of $0.29 in 2010 and $0.46 in 2009, earnings per share were up 10%.

Free cash flow, 115% of net income attributable to common shareowners. And we made over $1.5 billion of cash and stock contributions to our global pension plans. UTC's pension funds are at good position. We're 92% funded on a PBO basis at year end and that's up from 87% in 2009, despite the fact that the discount rate has declined about 60 basis points.

Turning to Slide 2 now. Fourth quarter performance was solid across our businesses. Total segment operating profit grew 11% and organic sales growth of 6%. Pratt & Whitney and Carrier led the way with organic growth in the quarter of 12% and 9%, respectively.

Five of the six business units expanded operating margins in the quarter led by Carrier, Fire & Security and Sikorsky, each with over 100 basis points of margin expansion, evidence that our structural cost reduction efforts continue to pay off.

Debt restructuring and one-time items in the quarter were a headwind of $0.03. Restructuring charges in the quarter were $233 million or $0.17. Pratt & Whitney continues its push to reduce footprint in high-cost locations and to reduce overhead in the face of increasing investment in new technologies and programs. Hamilton continued to work on its low-cost sourcing initiatives and the commercial units remain focused on footprint and overhead reductions in both the domestic and international markets.

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

We also recorded a net tax benefit of $38 million or $0.04 from the repatriation of foreign earnings. Earnings per share for the fourth quarter were $1.31, that's up 14%. Excluding restructuring and one-time items on both 2010 and 2009's fourth quarter, earnings per share increased 9% on 6% higher sales.

Foreign currency was a tailwind with an impact of $0.02 from net hedging activity at Pratt Canada, more than offsetting unfavorable currency translation. Fourth quarter short-cycle shipments order rates were robust and consistent with our expectation for sales growth in 2011.

Carrier's U.S. residential gas price and split unit shipments were up nearly 10%. In Aerospace, fourth quarter commercial spares orders at Pratt & Whitney and Hamilton Sundstrand were up 45% and 31%, respectively.

Otis new equipment orders grew 11% in the quarter, and Carrier's global Commercial HVAC new equipment orders were up 20%. Lend markets are recovering in line with our expectations for 2011.

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