United Technologies Corporation (UTX)

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Call Start: 09:00

Call End: 10:00

United Technologies Corporation (UTX)

Q42012 Earnings Call

January 23, 2013 9:00 am ET

Executives

Gregory Hayes - Chief Financial Officer, Senior Vice President

Jay Malave -Director, Investor Relations

Analysts

Jeff Sprague - Vertical Research Partners

Howard Rubel - Jefferies

Carter Copeland - Barclays

Myles Walton - Deutsche Bank

Sam Pearlstein - Wells Fargo Securities

Cai von Rumohr - Cowen & Company

Shannon O’Callaghan - Nomura Securities

David Strauss - UBS

Noah Poponak - Goldman Sachs

Julian Mitchell - Credit Suisse

Doug Harned - Sanford Bernstein

Peter Arment - Sterne, Agee

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 Jay Malave, 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 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 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.

Gregory Hayes

Thank you, Stephanie. Good morning, everyone. We saw in the press release this morning no surprises. UTC closed out a transformational 2012 just as Louis laid out for you in December. Full-year sales were just under $58 billion, that was up 4% from 2011. That, of course, was driven by the Goodrich and IAE acquisitions. Earnings per share was $5.35 and that included about $0.50 of headwind from FX, pension and E&B.

For the year, Goodrich is only about $0.06 dilutive, a little better than what we had expected due to lower amortization, financing and one-time deal costs, and more importantly, better underlying performance in the Goodrich business.

Free cash flow was again strong at 108% of net income attributable to common share owners and we paid down about third of the Goodrich debt just as we had planned. As we all know, 2012 was a challenging global economic environment and while there is still plenty of uncertainty ahead for 2013 in both Europe and the U.S., we have seen signs of stabilization, particularly in Europe and we have started to see a gradual recovery in the U.S. Economy led by a rebound in housing market.

We continue to expect solid growth in emerging markets throughout the coming year. As you have come to expect from UTC, we just didn’t wait for the economy to recover. We proactively leveraged our scale and optimized our cost structure while we continue to invest in game changing technologies, all the while transforming the portfolio to take advantage of the growth opportunities over the next decade in our core markets of aerospace and commercial buildings. We also took the difficult actions this past year, reducing our structural overhead cost and focusing on global growth markets. In 2012, we invested nearly $600 million in restructuring of which $258 million was in the fourth quarter alone, as the businesses continued to find solid payback projects to reduce costs and position us for earnings growth this year and beyond.

Okay, slide two. Turning to fourth-quarter results. Total sales increased 14%, again driven by Goodrich and IAE. Organic sales were flat in the quarter, a slight improvement from our third quarter results. Segment operating profit was also flat, although Climate, Controls & Security had a very strong quarter with 17% operating profit growth on flat organic sales. As expected, Sikorsky did not ship any of the Canadian maritime helicopters in the fourth quarter but we did record a charge of $157 million related to costs associated with the program delay as we now expect. While we are continuing discussions with the Canadian government, we are also encouraged by the progress we have made since Louis spoke to you in December. There is nothing new to report today but we are cautiously optimistic and Mick will provide you with a full update in March. We are also maintaining our place order of eight aircraft deliveries for 2013 at Sikorsky and there is no change to the projected P&L impact of those deliveries. If you recall, that’s a loss of lot about $14 million per aircraft.

Right, back to Q4. Segment operating margins was down 200 basis points with a CMHP charge in Goodrich acquisition, each accounting for about 100 basis points of the headwind. Restructuring, savings and productivity benefits offset a $140 million of headwind from pension, E&D and FX.

Fourth quarter earnings per share was $1.04. That includes $0.25 of restructuring and one-time charges. The restructuring was spread across the business units, including $75 million of UTC Aerospace Systems, as they continue to make good progress with the Goodrich admiration.

Excluding restructuring, one-time items in the fourth quarter of both years' earnings per share decreased about 9%. The tax rate was 30.1%, a little better than we expected back in December, but still a $0.08 headwind versus last year. Free cash flow very strong 139% of net income, great performance especially as we contributed nearly $200 million in cash for international pension plans.

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