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Executives

Gregory J. Hayes - Sr. VP and CFO

Akhil Johri - VP, IR

Analysts

Nigel Coe - Deutsche Bank

Joseph Campbell - Barclays Capital

Nicole Parent - Credit Suisse

Myles Walton - Oppenheimer

Cai Von Rumohr - Cowen and Company

Deane Dray - Goldman Sachs

Doug Harned - Sanford Bernstein

Howard Rubel - Jefferies & Company

David Strauss - UBS

United Technologies Corp. (UTX) Q3 FY08 Earnings Call October 16, 2008 10:00 AM ET

Operator

Please standby, we are about to begin. 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 Akhil Johri, Vice President, Investor Relations.

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

Please go ahead, Mr. Hayes.

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

Thanks you, Lena and good morning everyone. Just a reminder on the... there is a webcast slides on our website that's available and we're going to start on page 2.

We just start off by saying that in times like these, it is good to be a part of the company that makes real products the people around the world need and use everyday. Our third quarter results demonstrate once again that balanced works. Performance was strong across our businesses. We saw margin expansion at five of our six businesses in overall 60 basis points, operating margin expansion, adjusted for restructuring and one-time gains and also saw a double-digit earnings growth at four of our six businesses.

Cash flow in the quarter was strong; free cash flow at 123% of net income. We saw the strong collections at Pratt, Carrier and Otis. Is this operating performance along with continued robust free cash flows that gives us confidence in the future? Confidence you saw demonstrated by the 20% increase in our dividend last week but almost $1 billion of share we repurchased in the quarter.

The three quarters of the year now under our belt, we also remain confident in our '08 outlook. We are raising the bottom end of our EPS guidance range $4.90.

Slightly adverse headlines were all seen regularly. We now expect 2008 EPS of $4.90 to $4.95 a share. That's a 15%, 16% increase over 2007 and revenues of around $60 billion. Of course, for the full year, we continue to expect the usual UTC standard of free cash flow greater than or equal to net income.

Okay, I'll have Akhil take you through all the business unit detail in just a minute. But let me shed a couple of other highlights. Earnings per share in the quarter $1.33; that's up 10% over the last year and includes $93 million of restructuring charges, ended by strong operating performance and a small $37 million non-cash gain at Pratt & Whitney. Net of this gain, we had $0.03 on our restructuring charges in the quarter. Majority of the $93 million spending was for headcount reductions at Carrier, Pratt & Whitney.

Absent the impact of restructuring and gains in the results for the third quarter of both '07 and '08, earnings per share was up 16%.

Okay. Let's go to slide three. Organic growth in the third quarter was 4%. This is impacted, of course, by slower growth at both Pratt & Whitney and Carrier. Pratt & Whitney saw a mid-teens decline on its large commercial spares and a book-to-bill below one.

In contrast, Hamilton Sundstrand's commercial spare sales were up in single digits and book-to-bill was above one. Carrier's commercial refrigeration and international residential businesses were also weak in the quarter.

As for commercial construction activity, we saw a slowing order rates at Otis, especially rate in the quarter. On a global basis, Otis' new equipment orders were flat year-over-year in the third quarter.

Carrier's commercial HVAC new equipment orders, on the other hand, were up double digits worldwide. So we're not immune to market weakness. Balance actually does work.

Fire & Security, very strong quarter, 5% organic revenue growth, its best quarter yet. Strength in the Fire & Safety business on the back of solid presence in the petroleum, oil gas markets and the marine segments drove that result.

Our backlog remains strong at about $59 billion. For this new equipment backlog at the end September is up 18% at the end of the beginning of the year and, of course, this backlog is almost $12 billion.

For the full year, we still expect mid-single digit organic revenue growth. As you've seen currency markets have fluctuated dramatically all year, in July, you'll recall, we revised our earnings guidance to a range of $48.0 to $4.95 and the euro stood at 1.58 to the dollar.

Actual average euro rate in Q3 was about $1.52. That did provide a bit of revenue earnings tailwind into the third quarter versus 2007 and certainly not as much as we have expected.

Today euro stands at $1.35. Amazingly that's down 15% in the last 90 days. Other currencies, such as the South Korean won and Australian dollars have appreciated even more steeply against the U.S. dollar. At today's exchange rates, these currencies create approximately $0.06 of EPS headwind in the fourth quarter versus the July guidance.

So in anticipation of a slower growth environment, currency headwind, we've accelerated the cost reduction actions across the businesses. Year-to-date restructuring spending is $221 million with a small offsetting gain of about $37 million.

For the full year, we continue to expect restructuring costs of around $300 million, would offset for one-time gains of about half that amount, the largest being the further IRS tax settlement which should come in the fourth quarter.

We also had a little bit good news on the tax line in the quarter as a result of reducing our full year forecast with effective tax rate of 28.5 to 28. It's actually a result of the couple of additional international planning opportunities, probably expected impact of the recent R&D tax credit.

I'll come back to you at the end and talk about our preliminary outlook for 2009. Now let me turn it over to Akhil to take you through the business unit details.

Akhil Johri - Vice President, Investor Relations

Thanks Greg. Before I begin on page 4, let me mention that I'll talk to the segment results with restructuring added back and excluding one-time gains, as we usually do.

Otis delivered another strong quarter. Revenues increased 11% led by strong new equipment volume as well as higher modernization sales in Europe. Geographically, the increase was driven by continued double-digit growth in North America, Europe and China.

Operating profit grew 14%, as higher volume and better field installation efficiency more than offset headwind from input costs. Favorable foreign exchange contributed approximately half of the improvement in revenues and profit. Operating margin expanded by 60 basis points to over 20%.

New equipment orders were up 15% year-to-date, 8% excluding the impact of foreign exchange, despite being flat in the third quarter. In the quarter, Otis saw continued double-digit growth in Asia in the orders, offset by a significant decline in North America, influenced in part by a single large project cancellation in Las Vegas.

Order growth in China remained strong in the quarter, up around 30%, about 20% excluding the impact of foreign exchange, consistent with the first half of the year. With the impact of strengthening dollar, we now expect Otis full year earnings growth to be up mid-teens, as compared with nearly 20% in our previous guidance and double-digit revenue growth.

At Carrier, on slide five, operating profit increased 5%, on 5% higher revenues. Operating margins were flat despite difficult conditions in several of Carrier's end markets. Favorable foreign exchange translation contributed most of the revenue and earnings growth, while the net commodity headwind in the quarter was about $20 million.

Economic conditions in Europe contributed to a slowing in Carrier's residential HVAC and refrigeration sales in that region. Also, unfavorable currency shifts had pressured margin on certain refrigeration product manufactured in Eastern Europe and Asia. As expected, ongoing weakness in the U.S. residential HVAC market affected our U.S. residential business.

Although so far, this year, Carrier shipments have held up better than the market. A bright spot at Carrier was the commercial HVAC business which continued its strong performance with mid single digit revenue growth and double-digit new equipment order growth in the quarter.

Carrier continues to implement restructuring and other cost reduction initiatives to offset market softness. Given the impact of market conditions and the strengthening dollar, we now expect Carrier's full year earnings growth to be up around 7% as compared with 10% plus in our prior guidance on low single-digit revenue growth.

On slide 6, UTC Fire & Security also delivered strong performance in the quarter. Revenue grew 10% including 5 points of organic growth. Fire & Safety led the growth with solid double-digit expansion in the Americas and Asia.

FX contributed an additional 2 points of growth with the reminder from net acquisitions. Fire & Security completed the previously disclosed sales of the Australian manned guarding business during the quarter with no profit impact.

Operating profit increased 27% or $33 million. Higher organic revenues along with the benefits of restructuring, integration and continuing productivity initiative generated approximately two-thirds of the profit growth.

FX contributed only 1 point of growth while net acquisitions contributed the remainder of the increase.

Operating margin at Fire & Security expanded 130 basis points to 9.5%. With recent strengthening U.S. dollar, we now expect Fire & Security's full year operating profit to be up around 30% on mid-teens revenue growth.

Now, turning to the aerospace businesses on slide 7; revenues at Pratt & Whitney increased 3% in the quarter. High-teens revenue growth at Pratt Canada on the back of over 35% higher engine volumes was partially offset by lower military development revenues and engine deliveries.

Revenues in the Commercial Engines segment were flat with spare sales down mid-teens as Greg mentioned.

Operating profit improved 6% on higher engine volumes at Pratt Canada. Latest Commercial Engines mix reduced net commodity headwinds and the favorable resolution of a legal dispute. These increases were partially offset by lower commercial spares in aftermarket activity. Operating profits were also adversely impacted by unfavorable foreign currency impact from weaker U.S. dollars at Pratt Canada.

Commercial spares orders continued to soften with the book-to-bill ratio again below one in the quarter. Pratt's E&D expense for the year is now expected to be up around $50 million as compared with prior guidance of up to $100 million, primarily due to better definition of program schedule. We continue to expect Pratt & Whitney revenues to be up mid single digits and operating profit up approximately 10% for the year.

Before moving on, one last item to mention, you might have seen the press release, Airbus began flight testing of the PurePower Geared Turbofan engine on its A340 flight test aircraft earlier this week.

Hamilton Sundstrand revenues were up 7%, with industrial businesses up low double-digit, aerospace OEM up high single digit and aftermarket up mid single digit.

Operating profit grew 12% and margin expanded by 80 basis points, primarily from high single digit growth in commercial spares, industrial businesses volume and mix, lower E&D spend as a percent of revenues and several contract renegotiations.

For 2008, we expect revenues at Hamilton to be up double-digit, slightly lower than our prior guidance of up low-teens. We continue to see operating profit up 10% or $100 million as indicated last December.

On slide 9, at Sikorsky, operating profit grew 29% on 10% higher revenue. Operating margin expanded 130 basis points in the quarter to 9.2% from higher aircraft deliveries and favorable mix.

During the quarter, Sikorsky shipped a total of 57 large helicopters, 40 military and 17 commercial. Sikorsky continues to make progress improving its production system and remains on track to deliver more than 200 large aircraft in 2008.

Sikorsky also achieved significant technical milestones in Q3, first flight of its X2 technology demonstrator and first flight of the fly-by-wire, Black Hawk. Sikorsky continues to expect operating profit growth of approximately 25% on mid-teens revenue growth in 2008.

Now I'll turn it over to Greg to wrap up.

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

Thanks Akhil. We're on slide 10 of the webcast. But to sum it up, it's been a quarter for UTC despite some tough end markets. Revenues were up 7%, EPS up 10%. Net of restructuring gains, EPS was up 16%. We feel confident in our 2008 guidance of 15% to 16% EPS growth for the year on revenues of $60 billion, free cash flow equaling or exceeding net income.

We now expect share repurchases for the year to be around $3 billion. And we expect acquisition-related spending for the year to be about $1 billion, which is lower than our traditional $2 billion placeholder for acquisitions and it reflects the deliberate reallocation by us. The fact is with the P/E around 10 and the price where it is today, we think UTC is an exceptional buy.

We will provide detailed guidance for 2009 at our additional December Investor meeting. But let me give you some preliminary thoughts.

Our commitment to long-term double-digit earnings growth remains intact. Although I will tell you the environment is making us increasingly difficult for 2009, we know that 2009 is going to be as tough year as we have seen sometime, the obvious reasons of slowing economies around the world and the potential impact of the credit crisis on our customers, suppliers and consumer confidence in general. This will, of course, impact our short cycle businesses, specifically Carrier's residential HVAC and refrigeration businesses and the commercial aerospace aftermarket businesses at Pratt & Whitney and Hamilton.

Strengthening of the U.S. dollar will also create some tough comparison in 2009. And pension expense also now looks to be a headwind. But there are some plenty of good things on the other side of the laser [ph].

Number one for UTC is the balance of the business. And we see this with continued good growth expectations in 2009 from our longer cycle businesses like Otis, Sikorsky and the commercial and military OEM aero businesses. Significant aftermarket content at several of our businesses also provides a natural buffer times. And there will be benefits in 2009 from this year's restructuring costs and of course the continued implementation of UTC's ACE disciplines.

Lastly, and perhaps most importantly, UTC has a seasoned experience management team that knows how to deal with tough times and to deliver on investors' expectations. Our goal, as always, is to continue to outperform our peers. As we would say, you can expect UTC's style execution in 2009.

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

Question And Answer

Operator

Thank you. [Operator Instructions]. And we'll go first to Nigel Coe, Deutsche Bank.

Nigel Coe - Deutsche Bank

Good morning.

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

Hi Nigel.

Nigel Coe - Deutsche Bank

So, just can you give a bit more color on where the backlog is right now for Otis? And then secondly, if you could just maybe kind of cut back to '01, the last time we saw commercial aftermarkets trending down, did we see significant backward erosion at that point?

Akhil Johri - Vice President, Investor Relations

Nigel, this is Akhil. The backlog for Otis, as we said, is up 18% for new equipment from the beginning of the year which is still about a year's worth of new equipment orders if you'll look, new equipment revenues. Last time on the commercial market turndown, there was some impact on backlog, we haven't seen that yet in orders. Reset is pattern [ph] in the third quarter but still pretty decently year-to-date at 15% growth. So we continue to watch that closely and we'll see how things turn out in Q4.

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

I guess just to give you some comfort to Otis. Although the orders were flat around the world, we continued to see very strong order growth rate in China, up more than 30%. In the U.S. obviously, it was down... we knew it was going to be down. It was driven a big piece of that by cancellation of a project in Las Vegas, I think it was the Echelon Hotel.

So, I wouldn't draw a conclusion from I think one quarter's worth of data. Backlog remains strong. I think Otis is going to have a very good rest of this year and into 2009. We also have not seen vacancy rates increase dramatically around the U.S. although I think we saw some maybe some preliminary indications that they are up a little bit, nothing new what we saw in the last boom. So, I think the fundamentals are still there for Otis to have a very good 2009.

Nigel Coe - Deutsche Bank

Okay, and then just one more. Could you just remind us on how much margin has been lost to raw material inflation over the past 4-5 years, specifically within Carrier, and perhaps overall UTC would be helpful as well.

Akhil Johri - Vice President, Investor Relations

I can tell you a couple of years at least and then we can go back and refresh you for the older ones.

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

Well, in fact, let me... I've got some numbers on the top of my head here. Lot of the inflation over the last seven years has been part of $1 billion and about $700 million of that has been at Carrier Corporation. So Carrier has seen a disproportionate impact and really that started in 2004 when the copper first moved from $0.80 to $1.20. So if you think about Carrier ex the copper and the other materials inflation, you're thinking about another 200 basis points over time that we would have had an additional margin at Carrier ex that commodity inflation.

Akhil Johri - Vice President, Investor Relations

For overall UTC, Nigel, this year is about 20 basis points. Last year was may be about 40 to 50.

Nigel Coe - Deutsche Bank

Okay, thanks. Well thanks, very helpful. Thanks.

Operator

We will go next to Joseph Campbell, Barclays Capital. Mr. Campbell, your line is open.

Joseph Campbell - Barclays Capital

Hello. Good morning.

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

Hey Joe.

Joseph Campbell - Barclays Capital

As you mind. Sorry I haven't known to use the phone yet. Could you comment a bit, either Akhil or Greg about how the pension fund is... how the performance is? And how you see the rates which are the strength of backup on the tenure? How you see those in your plan potentially offsetting each other or not?

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

Yes it's a great question, Joe. Now the fact is as we look at pension performance through September 30th, our plan actually had a negative return of about 22%. You compare that to our expected ROA of about 8.5%, you see 30.3% delta, that's the expected performance. So that's obviously going to be a headwind next year. And maybe kind of rule of thumb, you think for every one percentage point miss it costs us about $6 million in additional pension expense. For each of the next five years, we've obviously smoothed that out offsetting that to a certain extent though is, as you know the loan bonds that with the spreads where they are today, I think with the Moody's AA that we've looked at is around 6.9%... that's versus 6.2% rate when we set the final expectations here in early '08.

So we'll get maybe half of the offset to the increased pension expense that we would see from miss in the ROA made up for by the increased discount rate. Although I've to tell you we're looking at a discount rate in the spreads as you know that are unprecedented territory. We won't actually know the AA rate until December 31 when we actually set the rate for next year. So it is a little bit of good news now and if the spreads narrow that will obviously take away from that but we'll keep an eye on it and will we update you guys in December on where that is.

Joseph Campbell - Barclays Capital

Would you contemplate Greg putting additional money into the fund or is the attractiveness of the buyback so much greater that you would wait and see whether it's a performance portfolio you've had?

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

No, I think we had always planned this year about $250 million of pension funding although we thought most of that was going to go to international side. To tell you right now with the market data as much as they are, putting UTC's stock it might be a heck of an investment for the long term. But I think we are ready to make that decision. I think we will wait and see where we are at year-end. I think the buyback for us seems to be the preferred alternative right now but again, we've set to see how these markets come back as we get towards the end of the year.

Joseph Campbell - Barclays Capital

Could I ask you to give me something with regard to what you're seeing in the credit crunch? You did mention the cancellation of a project in Vegas. But can you just give us a little more sense of what it means at a company like UTC? These last few weeks have been horrendous in the market but if your company looking at doing business, how would this manifest itself at UTC in a little blips and things that you had to work and whether they seem like they're going to be... take really a wild to work out or whether the things that are just problems to be solved and to be worked around so that you kind of keep going.

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

Yesthere was a little bit of excitement here. When your former company went bankrupt that Monday morning and we saw...

Joseph Campbell - Barclays Capital

There was a lot of excitement in our offices too.

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

We obviously saw commercial paper rates spike for a couple of days of that week. But really since then our access to commercial paper is still very strong. We continue to access to market on a regular basis. I would tell you the one place where we see a little bit of a constraint is in the long-term debt market. We don't have any maturities coming due in the next 90 days. I am not really worried about going to the market.

As we think about doing deals, I would tell you that's a little bit more expensive today with a 400 basis point spread. As far as the other impacts that we see, I think as Sikorsky saw one of their customers who had a little trouble getting financing at the end of the quarter for one aircraft. For the most part, most of the customers seem to be weathering the storm pretty well again with that big, big customers out there around the world. We also have huge and daily aftermarket business; it just goes on and on, it's not terribly impacted.

Supply base still looks good. We look at that every single day with our operations group at Hamilton to make sure that our suppliers still have adequate capital. So far, I would tell you, it's business as usual, to the exception and say the long term debt market which is just a little pricey given the spreads where they are. So I think, we'll weather this storm, we're going to keep an eye on both customers and suppliers but so far so good.

Joseph Campbell - Barclays Capital

Thank you very much.

Operator

And we'll go next in a call for us Nicole Parent, Credit Suisse.

Nicole Parent - Credit Suisse

Good morning.

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

Nicole.

Nicole Parent - Credit Suisse

I guess, first, could we actually get the new equipment orders by business and geography in the third quarter? And I guess for both Otis and Carrier when we think about North America, Europe and Asia. And I guess maybe get some color as you think about how this impacted the business in September?

Akhil Johri - Vice President, Investor Relations

Nicole, this is Akhil, let's talk Otis first. I think in Americas there was a significant decline in Q3, over 20% adjusted for that large order cancellation, spilled down over 20%. Europe was flattish while Asia was very, very strong in high-teens driven on the back of the China numbers as Greg mentioned earlier. A pretty good spread, mix spread, we don't believe the North America trend is something that the team expects to see at that level going forward. There was some lumpiness in the orders last year which brought back what looks like a dramatic situation there.

At Carrier, its large commercial business had... the commercial HVAC business had good order growth across geography, North America up a mid to high single digit, Europe up mid single digits and Asia up as well. So, they seem to have been able to get through this environment much better at this point of time in the order rates.

On the commercial refrigeration side which is another business where the orders have... you have seen some impact. North America was down and Europe was down even more, more so in that business. With regard to trends within the quarter, September was a little worse than what July and August were but it wasn't like we fell off the cliff. It was just a slight deterioration in the trends but nothing over dramatic.

Nicole Parent - Credit Suisse

Okay. And I guess if you think about the trends that you're seeing in China, as you think big picture and I don't want to front run the December meeting, there is some chatter out there of things slowing over in China. I mean as you guys sit here today and look at the strength, relative strength by geography with China, really pulling the lion share of the growth here, how do think about that as we go forward?

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

Got it. Nicole, I think that China remains the growth engine that it's always been. We did see a little bit of slowdown on the sales side in Q3 around the Olympics. I think everybody has reported that just because of the focus on the Olympic activity. But the order rates remain strong there. And the trends in urbanization still are driving the growth in the infrastructure business around China.

So, I think the question that people have in their mind is will decrease in demand in the U.S. impact China? It absolutely will. I think the good news as you got 550 million urbanized Chinese citizens that also are driving demand in this cycle which is helping to sustain some of the growth out there. So, it may slow down a little, I think overall the growth rate in China will be slower next year than this but not materially so.

Nicole Parent - Credit Suisse

Okay. And could you actually quantify how you guys are thinking about the impact of the Boeing strike on your results in '08 and '09?

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

Hope it's not much in '09. Yes right now the guidance that we just gave you for Q4 anticipates a 60-day work stoppage at Boeing. So we're assuming that by the 1st of November, they are back to work in Seattle. If that doesn't happen you can look for, again probably for each month about $10 million or so, 5 to 10 of EBIT per month of the strike. And if it drags into 2009, I guess we'll have to re-look at that, but that's a good rule of thumb. Again most of the impact is at Hamilton from a EBITDA standpoint.

Nicole Parent - Credit Suisse

Okay. And just one last on M&A. I am happy to see you guys are walking away from Diebold. I guess could you maybe update us on your perspective in terms of the portfolio, the willingness to step up going forward into new platform versus given where prices have come down, particularly on the aerospace and defense side, what your view is, where you make money to work going forward?

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

Yes, prices have certainly gotten to be very, very attractive. Although I'd tell you, our price is probably the most attractive thing out there for us. At the same time, we are actively looking at aero properties. They're way off obviously up there, peak of the cycle pricing. And the question simply, it goes to the question of willing sellers and willing buyers. We're willing buyer and will there be willing sellers? I think what you can expect, it goes more in the core. I wouldn't expect a new platform in this environment. I think we're not going to take a lot of risk, but at the same time if there's a property out there, that expands the core aerospace business, really at the core commercial businesses, we'd say we're buyers in this market. And I don't believe we're constrained with debt to cap at about 32%. We got a plenty of firepower here.

Nicole Parent - Credit Suisse

Okay. Thank you.

Operator

And we'll go next to Myles Walton, Oppenheimer.

Myles Walton - Oppenheimer

Thanks, good morning.

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

Hey Myles.

Myles Walton - Oppenheimer

I wanted to stick around here on R&D. Akhil, you said Pratt was now looking for about $50 million increase in their funded versus the prior $100 million. And I think previously for the whole company, if they are looking for about a $200 million increase in R&D what's that outlook now across the company? Is it $150 million or have you found other places to trim as well?

Akhil Johri - Vice President, Investor Relations

That's theexact conclusion you reached Myles. The change is only in Pratt guidance and that drops over to UTC level. So up $150 million now is what we are thinking. We spent in Sikorsky and Hamilton which are other big drivers of the company funded E&D continues at the same pace as before.

Myles Walton - Oppenheimer

Okay. And you said better formulation of the expected development. So you didn't actually stop any development. You just realized lower cost on the same plan?

Akhil Johri - Vice President, Investor Relations

Right. We are meeting with milestones. It is basically just that when we had set up the plan we were a little more conservative in terms of the timing of these... some of these programs. And now as those have been firmed up with the customers, this is a just recalibration based on the final timeline.

Myles Walton - Oppenheimer

Okay, fair enough. And then Greg, is there any contingencies left at the top end of your $4.95 guidance to cover ForEx continued... I guess strengthening from here?

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

If we look at the current consensus today for the year, I would tell you because of FX we are essentially line to line from a contingency standpoint. So, FX is certainly hurt; we are still comfortable with the guidance. But it's certainly not as and as easy to tap with the foreign exchange rates where they are today.

Myles Walton - Oppenheimer

Okay. And then lastly, you reiterated that delivery targets for... I am a little confused looking at the numbers. It looks like a pretty substantial run for the roses from 4Q. Can you comment on those and kind of paint pictures as to why you have confidence in the 100 or so?

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

Yes, I think yes, if you think about it, we had 57 deliveries here in Q3, 140 year-to-date. We're going to do 200 plus which would indicate we're going to do 60 plus helicopters. It should be a little bit more than that. The fact is you have got one part, one parts sales, which we'd actually build the helicopter earlier in the year. You have to shift if off to the completion center, and it gets delivered in the fourth quarter. So, wouldn't really call the run for the roses, I think it's just the way the production system down there works with these one parts sales. I think there's about 9 one-part helicopters that have to go in the fourth quarter that is helicopters we've already built is flown and they're just being the completed at the completion center.

So, I think just got a good plan there. They're on track, we're making improvements everyday down there, still not where they want to be from a production standpoint. But again I think Q4 is very, very doable. I have confidence in them.

Myles Walton - Oppenheimer

Okay, thanks a lot.

Operator

And we'll go next to Cai Von Rumohr, Cowen and Company.

Cai Von Rumohr - Cowen and Company

Yes thank you. You mentioned that you had a legal recovery at Pratt and some contract renegotiations at Hamilton Sundstrand. Could you quantify those for us and indicate any other kind of non-recurring items you might have had throughout the company?

Akhil Johri - Vice President, Investor Relations

We called out the two which was relevant, Cai. The Pratt legal dispute is an old ten-year matter which we had a settlement in the quarter. It was just over a penny impact in the Pratt segment. And similarly the contract renegotiations at Hamilton were across various customers, it's stuff that we do usually. It's nothing abnormal. It's just that it was a number slightly over a penny in the quarter and we decided to call it out just because it was significant to the segment.

Cai Von Rumohr - Cowen and Company

So it was also a little bit over pension stock [ph]?

Akhil Johri - Vice President, Investor Relations

Yes both just over a penny.

Cai Von Rumohr - Cowen and Company

And you still talk of $300 million in restructuring. It really would imply that restructuring would be lower in the fourth quarter than the second and the third. I mean given the enormity of kind of the credit crisis, what's the chance that it could be a bigger number and if not, why not?

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

Yes, it does, I think 221 year-to-date would imply, you're going to do another, let's call it, $80 million in the fourth quarter versus $93 million in the third. Fact is there are always restructuring opportunities around UTC. We know, we're managing those things within the guidance range for the year, and we continue to look at additional both gains and restructuring opportunities for not just the fourth quarter but even into the first quarter. So there are lots of things to do. I wouldn't say we're going to be done at 300.

Cai Von Rumohr - Cowen and Company

Got it. Okay, thank you.

Operator

And we'll go next to Deane Dray, Goldman Sachs.

Deane Dray - Goldman Sachs

Thank you, good morning. Can we circle back on Carrier for a moment? I may have missed it. Did you comment on the backlog, if we were thinking going into the quarters around 6 months, where does that stand today?

Akhil Johri - Vice President, Investor Relations

That's the commercial HVAC business. Right, Deane?

Deane Dray - Goldman Sachs

Yes.

Akhil Johri - Vice President, Investor Relations

Because Carrier overall backlog doesn't make as much sense since it's a very short cycle business unlike Otis. The commercial HVAC business still has a pretty decent backlog. Their orders grew nicely in the quarter. We still think that they have the visibility of the six months in that business, unlike say Otis which over 12 months.

Deane Dray - Goldman Sachs

And if Otis was twelve months, does that come down from maybe an eighteen months run-rate earlier this year?

Akhil Johri - Vice President, Investor Relations

No I think the eighteen months number that you recall Deane was, more to do with the visibility in the sense of the projects that completed between twelve to eighteen months timeframe. So we have visibility that far but the new equipment backlog has always bee a little over twelve months and it stays at that level.

Deane Dray - Goldman Sachs

Great and I know we mentioned the Las Vegas cancellation, but setting that one aside, any commentary about push-outs or cancellations at the margin?

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

In fact, Deane, we ask that question because we are obviously mindful of what's going on in the economy. And the fact is the Otis folks tell us that awards... the awards activity which are the precursor to contract signing actually still look pretty good. It's always kind of at 1% to 2% noise in the system related to cancellations or deferrals. But that really hasn't grown significantly, maybe ticked up a tiny bit but they're still all kind of in the expected range.

Deane Dray - Goldman Sachs

Great and just a follow up on Sikorsky, there was issue last quarter about inventory, how did that get resolved this quarter?

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

Inventory at Sikorsky grew, I will say, about little less than $90 million. And again I think their inventory turns are actually improving there as is working capital. Lot of what just doing down there is not just current year production results, but it is also gearing up for an increase in production next year. So, we would expect inventory at Sikorsky to continue to grow, I think again they're making a little bit of progress on the turns, still not where we want them to be.

Deane Dray - Goldman Sachs

Great, thank you.

Operator

And we will go next to Doug Harned, Sanford Bernstein.

Doug Harned - Sanford Bernstein

Hi, good morning.

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

Hi, Doug.

Doug Harned - Sanford Bernstein

On Carrier, your margins after restructuring were... looked pretty good this quarter. Could you talk about what you're doing there in terms of restructuring initiatives? I know you have made a number of management changes at the senior level. What's under way right now in terms of changing things at Carrier?

Akhil Johri - Vice President, Investor Relations

We have been... Doug, as you know, Carrier has been very aggressive with restructuring. In fact, year-to-date, they have a lot of the most maximum restructuring has been at the Carrier level. And Joe has been very focused anticipating the slowdown in the economies. He had tightened the cost side of the equation at Carrier, beyond restructuring just a discretionary cost element as well in terms of cutting back on hires, headcount freezes and things like that.

So there is just a lot of cost related focus at this point of time there. Also, the commercial HVAC business has been doing extremely well in terms of product cost reductions and driving margin expansion at a faster rate in particularly that segment. And with the top-line growth there, we're seeing some benefits from that as well.

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

Well I guess I'm not sure where you get the idea of management changes. Obviously, Ari is responsible now for the commercial businesses, but Geraud, with the exception with a couple of changes, we've brought in a few folks from Otis to help out. Now the team is pretty much in place. I don't expect big changes out there. I think they've got their arms around the problem, and as Akhil said they are attacking costs as hard as you can imagine. To hold margins flat in this environment at Carrier, I think was a Herculean task and they're not done yet. They have still got more work to do here. But I think they've done a really nice job.

Doug Harned - Sanford Bernstein

And that's... and what I was getting at were are the people that Ari had brought from Otis, and just trying to get a sense as to... in which of the four units and where you're seeing the most potential, the types of things that you are doing there? Or is just more of a just overall overhead reduction effort?

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

I think it's... it isn't over... overall overhead reduction. Obviously, I think Bob McDonough in the residential business here in the U.S.; he has been on this cost reduction kick for well over a year now as the market has slowed. But I would tell you, it's not confined to RLCS, refrigeration business. We're taking people out of both the commercial refrigeration as well as transit cold. It's really broad based G&A type reductions.

And the Otis folks, I think Ray Moncini is over there now heading up operations. He is a long-time Otis guy, knows operations. He is bringing some of the Otis manufacturing disciplines there. I think he's... again it's about putting ACE in the factories and raise the guy to do that?

Akhil Johri - Vice President, Investor Relations

Doug, if I may add, also, there is a lot of focus in the particularly DSS segment to increase the aftermarket content of that business, again more... make it more like Otis, drive more of the aftermarket particularly in that segment.

Doug Harned - Sanford Bernstein

Okay and if I can just one another thing, on Hamilton Sundstrand you're talking about some very... look to me very good numbers in terms of spares growth considering the environment, what's driving that?

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

It's actually coming... spares growth was actually just about... it's a commercial spare piece parts. I've got to be very careful here. We are about flat in the quarter where we saw a good growth Doug, was in the provisioning side. That is end item provisioning and that was up very strong in the quarter in the back of some big orders around of the world. So, again Hamilton is not going to be impacted like Pratt is with these capacity cutbacks in the U.S. nearly as much. So, the business has remained pretty good, and frankly I think the airlines are in pretty good shape now. So, we have not seen a big cutback in airline procurement here.

Doug Harned - Sanford Bernstein

Okay, great thanks.

Operator

And we'll go next to Howard Rubel, Jefferies & Company.

Howard Rubel - Jefferies & Company

Thank you very much. You would... haven't Greg... you haven't talked about the industrial gas turbine business which has been key part of Pratt, was there any change in that business in the quarter?

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

No, I think, we are still... I think shipments were actually down a little bit year-over-year. But for the full year we still expect the gas service to be above 20% as we had talked about last quarter. So still a very strong backlog there, it's still again opportunity.

Howard Rubel - Jefferies & Company

And when we go to cash flow, nice to see a bit of strong third quarter with the free cash flow well in excess of net income. And I would think that the change in commodity prices and probably a reduction in increases in production rate pretty much cross the board in aerospace that we might very well see some liquidation of inventory in the fourth quarter.

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

We sure hope. Now I think you're right, Howard. I think we still need to drive inventory down. Inventory was really flattish in the quarter. And we have a lot of work to do on inventory. I think Louis talked about taking a billion to $1.5 billion out in the next 18 months. And I think we're still on track to do that. You will see fourth quarter come down and I think it's going to come down even more.

Howard Rubel - Jefferies & Company

So I mean some of these is just due to the change in the market. And also I would think that pricing changes with inputs for, when you just think about it that way, are still we going to help better?

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

Yes, clearly the commodity cost coming down is going to help on the input side, specifically at Carrier. Where we haven't seen a big dropout, I'd tell you though, is on the steel side, although I have to believe that steel will back a little bit. But big commodity cost impacts this year have actually been in steel at Otis and most of that has been in China. Haven't seen that the flow-through yet but I think as the economies do slow down and commodities all kind of come back to more historic levels, we ought to see some benefit there.

Howard Rubel - Jefferies & Company

I just have two more. One on industrial and also on Hamilton Sundstrand rather than seeing kind of 20% growth, it's basically half of that, it sounds like?

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

It's about 10%.

Howard Rubel - Jefferies & Company

What market... I mean and then as you look at the backlogs, do you see that sustainable or do you see further deterioration?

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

The slowdown on the Hamilton industrial business really came at Sullair on their construction business. That's, again part of that's seasonal but also I think part of it just reflects in the weakness here in the U.S. International markets, specifically China, for Sullair, we're still very strong. And on the rest of the industrial side, the pump business, the backlog there remains very strong. And I think we've got good visibilities of longer cycle business, and it should have a pretty good runway into next year.

Howard Rubel - Jefferies & Company

And then last, it's my understanding that you've made real progress with the Canadian government regarding the H-92 and I mean I know that you kind of raised some issues in the second quarter and how has... how have you progressed with that mitigated the risk?

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

Obviously we brought that to investors' attention earlier this year. It is a big issue. We have been working very, very closely with the Canadian government. We think we have a go-forward path now and that we expect will have that renegotiation wrapped up by the end of the year. The fact is, we will be late delivering the helicopters as everyone knows but at the end of the day, we're going to deliver the best Sikorsky helicopter the world has known when this contract is done. So Sikorsky is committed to getting it done and the Canadian government is working very closely with them.

Howard Rubel - Jefferies & Company

So the risk has changed for the better. Is that a fair statement?

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

I would say the risk is pretty well mitigated.

Howard Rubel - Jefferies & Company

Thank you very much.

Operator

[Operator Instructions] Now we'll go next to David Strauss, UBS.

David Strauss - UBS

Good morning. Thank you.

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

Hey David.

David Strauss - UBS

Greg, looking at Otis and Carrier, their aftermarket business there. What have you been seeing? And what do you expect as far as growth over there, aftermarket side of those businesses in the environment that we're in moving forward?

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

The aftermarket business at Otis, I think we have 1.6 million units under contract. We have seen a little bit of pricing pressure, specifically in Europe for that business. But cancellation rates are really not up. Everything looks to be on track and if you think about it, even if the economic turns down here. And I guess we would all agree that it has and will. That aftermarket business is still pretty solid. Because you have to service elevators, either you have a 50% occupancy rate or a 100% occupancy rate in a building. You are going to service those businesses and those elevators.

So I think that's a... it's rock solid, no big trend line change there. As Akhil mentioned, I think, the aftermarket business at Carrier is actually an upside for us, as Kelly Romano and team and BSS there continue to press for additional services... press for additional service business there. And again, as people look for energy efficiency and environmentally friendly solutions, the Carrier product line fits right into that nation. I think they're doing a nice job of exploiting it.

David Strauss - UBS

And on foreign exchange, based on it, if you could just assume the dollar kind of hold here, what kind of a headwind from an earnings perspective are you looking at in 2009, any kind of sense with these supplies [ph]?

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

Well, if we take a look at it today at 135 euro, I think you're looking at, perhaps up to $200 million headwind versus 2008. But again, that's just a spot rate today, and as we know these markets fluctuate dramatically day-to-day, week to week and months-to-months. But if you were to model this out, I would tell we are seeing headwind next year maybe up to $200 million at the current rates versus this year.

David Strauss - UBS

Okay. And last one, the color that you gave on 2009 seems, obviously, it's going to be difficult to hit double-digit kind of range so. Based on what you're seeing you still think somewhere in the mid single digit kind of a EPS range for growth 2009, is that realistic?

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

I appreciate to try, but I am not actually going to go there. We always target 10% plus growth here. We're going to do everything in our power to drive performance here next year. It's going to be tough year as I said, Lou will come back and give us... give everybody guidance in December. I am not going to front run that. The fact is with the ACE operating system and the margin improvement that we have seen and the restructuring benefits, we're going to outperform in this market.

David Strauss - UBS

Okay. Thanks, I though I would try.

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

Thanks.

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

Okay. I think with that we're going to cut off the call here. I thank everyone for their participation. It's obviously been a very good quarter for UTC. We are going to have a very good year. Tough times ahead for the economy but I think the UTC will outperform. It is in our DNA as we say so. Thank you very much. And we'll see you all soon.

Operator

And this does conclude today's conference call. We thank you for your participation. Have a great day.

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Source: United Technologies Corp. Q3 2008 Earnings Conference Call Transcript
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