United Technologies Corporation (UTX)

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United Technologies (UTX)

Q4 2011 Earnings Call

January 25, 2012 9:00 am ET

Executives

Gregory J. Hayes - Chief Financial Officer and Senior Vice President

Unknown Executive -

Analysts

Robert Stallard - RBC Capital Markets, LLC, Research Division

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

Heidi R. Wood - Morgan Stanley, Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Terry Darling - Goldman Sachs Group Inc., Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Deane M. Dray - Citigroup Inc, Research Division

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 Maria Lee, [ph] 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 onetime 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. [Operator Instructions]

Please go ahead, Mr. Hayes.

Gregory J. Hayes

Thank you, Trinita, and good morning, everyone. As we all know, there's 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 U.S. 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 U.S., and the commercial aerospace market continues to have good growth prospects. Here at UTC, we know how to operate in this uncertain and uneven global economic times and we continue to be well positioned to meet our commitments.

As you saw on 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 6 of our businesses growing organically. Earnings per share were $5.49 and that's up 16% year-over-year. And free cash flow was very strong at 113% of net income, with 67% return to shareowners through 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 continue to develop 4 separate geared turbofan platforms. As well, total restructuring was $336 million, of 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 headwind. That headwind is going to come from foreign exchange, pension and additional DND investments.

Okay. On Slide 2, turning to fourth quarter results. Fourth quarter earnings per share was $1.47, 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.

Full 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 with the benefits from cost reduction more than offset a $95 million increase in E&D. Restructuring and net onetime items were a benefit of $0.01 in the quarter, as restructuring charges of $0.11 were more than offset by net onetime 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 decline in military volume in 2012.

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

The $0.12 benefit from net onetime 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 the equity investment in Asia at Fire & Security, and a $0.05 reserve related to legal matters. These legal matters concern potential penalties that the State Department and the DOJ might impose as a result of self disclosures that we've 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 onetime 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 the $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 is no share repurchase. If 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.

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