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Executives

Gregory J. Hayes - VP, Accounting and Finance

Kenneth Parks - Director of IR

James E. Geisler - VP, Finance

Analysts

Steve Binder - Bear Stearns

Joseph Campbell - Lehman Brothers

Deane Dray - Goldman Sachs

Howard Rubel - Jefferies

George Shapiro - Citigroup

Nicole Parent - Credit Suisse

Nigel Coe - Deutsche Bank

Cai Von Rumohr - Cowen and Company

Heidi Wood - Morgan Stanley

Joseph Nadol - J.P. Morgan

Doug Harned - Sanford Bernstein

Ronald Epstein - Merrill Lynch

Myles Walton - Oppenheimer & Co., Inc.

United Technologies Corp. (UTX) Q1 FY08 Earnings Call April 17, 2008 10:00 AM ET

Operator

Good day every one, and welcome to the United Technologies First Quarter Conference Call. Today's call is being recorded. On our call today will be Greg Hayes, the Vice President of Accounting and Finance; Jim Geisler, Vice President of Finance; and Ken Parks, Director of Investor Relations.

Today's 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.

And now at this time, I would like to turn the call over to Mr. Hayes. Please go ahead sir.

Gregory J. Hayes - Vice President, Accounting and Finance

Thanks you, Dena, and good morning everyone. As you saw in the press release this morning UTC had a solid start to the year driven by the strong performance across the businesses. Revenues were up 12%, including 7 points organic growth. Earnings per share were a $1.03 and that's about 26% over last year. As of the impact from the last year's Otis EU and gains and restructuring of whole periods, EPS was up 18%, really great start to the year.

FX generated a small benefit in the quarter with a positive impact from the year, partially offset by foreign exchange headwind on Pratt & Whitney's Canadian operations. We invested this benefit along with some of the good news from the businesses into restructuring about $0.02 of EPS. Adjusting for restructuring and one-time items four of the six units recorded double-digit revenue growth and five of our six businesses reported double-digit profit growth.

All three of our commercial businesses saw a margin expansion in the quarter, with Otis and Fire & Security up 50 basis points and Carrier up 40 basis points. This is the result of continuing tight cost control and good execution across the businesses. Both Pratt & Whitney and Hamilton Sundstrand saw a strong top-line growth as they continue to ramp up production and get basically a record backlog.

And Sikorsky, despite shipping only 30 helicopters in the quarter improved profits 17% and margins 100 basis points. Good quarter all around and the kind of performance you can do expect from UTC. Ken [ph] can take you through the business unit details in just a few minutes, but we'll spend a couple of minutes addressing the question we have been hearing from all of you for the last couple of months. And that question of course is have you seen any signs of the slowdown in your business as a result of the slowdown in the US economy.

As you all know we had expected there are some signs of botheration in order rates in our few of our shorter cycle businesses. But for the vast majority of UTC, the economic environment still looks very favorable. Looking now on the page three in our webcast we are trying to lay this out by major market segment. First, on the commercial aero side, we continued to see good growth on the OEM side of the business and backlogs remain very robust. Commercial aftermarket growth did slow a bit to about 6% in the quarter and high fuel prices are of course impacting the aero line.

However, we still expect RPMs to grow 3% to 4% this year on strengthened business travel and emerging markets. We are watching the RPM trends closely since they have typically impacted the growth and clearly impacting consumer spending and economic downturns.

Emerging markets; they remain buoyant in spite of the slowdown in the US economy. Foreign exchange also looks to be a tailwind for the year, although as we saw this quarter, a weak dollar is not universally advantages to all of our businesses. Commercial construction order growth while lower than last year remains solid, even in the US, where Otis saw order growth of nearly 20% in this quarter, and Carriers commercial HVAC business saw order growth of 5%.

Moving to Hamilton Sundstrand's industrial businesses, some of the most economically sensitive business continued to see solid order growth in the quarter. So, where do we see the weaknesses? Well, US residential business continues to be challenge with housing starts now expected to be down nearly 35% in the already depressed levels of 2007. No surprise there. We're also beginning to see weakness in orders in our refrigeration business, both in the US and Europe. Fire & Security's US residential business which sells through the major retail chains has also been negatively impacted. And we're also seeing a bit of a slowdown in F&S's European Electronic Security business, primarily in the UK.

Let's keep this in perspective, you should note that these markets combined represent only a little more than 10% of UTC's total revenues, so no surprises here. As you expect, as we see the US and a few of these European economies slowing, we are preparing by taking cross out of the business. We invested about $30 million this quarter in restructuring, and we anticipate additional restructuring actions throughout the remainder of the year.

Total restructuring could approach $200 million for the full year, and made by good news on foreign exchange, continued strength in the businesses and a few one-time gains in the back half of the year.

I will also point out that investment in new products like Pratt & Whitney's Geared Turbofan and Hamilton's platforms on the 787 will continue to be a priority for us. These investments will fuel continued growth for years to come. Overall, E&D was $29 million higher year-over-year in the first quarter. And we continue to expect $200 million of growth for the full year, so we would reach high [ph] some over the next three quarters from E&D.

Although, these trends will make the back half of the year more challenging, we remain comfortable with the guidance for both the individual business units as well as our overall UTC earnings and cash flow guidance for the year.

Just a word on our Q1 cash; free cash flow as you saw, came in at about 65% of net income, not unexpected given the normal seasonality in the Carrier as well as lower shipments from Sikorsky and the inventory build on the aero side. Let me also point out that these high inventory levels remain an irritant to you and to us, and fixing this problem is a priority for all of us here at UTC.

Bottom line on cash flow for the year though is unchanged. We still expect to meet our usual standard of free cash flow meeting or exceeding net income. Finally, we repurchased $801 million of UTC shares during the first quarter and we continue to expect repurchases to total about $2 billion for the year.

With that, let me turn it over to Ken to take you to the business unit details.

Kenneth Parks - Director of Investor Relations

Okay. Thanks Greg. Before I begin on page 4 let me remind you, I will talk to the segment results with restructuring added back and excluding one-time items just as we usually do.

Otis delivered another strong quarter with profit growth of 19% on revenue growth of 16%. Foreign exchange contributed approximately half of the growth. Revenues increased in all geographic regions, led by double-digit growth in North America, China and Russia, reflecting robust new equipment backlog entering the year.

Margins expanded 50 basis points, despite a continued shift in sales mix towards new equipment as the Otis team continued to execute their strategic initiatives on product and other cost reductions, new logistics acceleration, and fuel performance on new equipment installations. New equipment orders were up 20% in the quarter, reflecting double-digit increases in all geographic regions.

At Carrier, operating profit increased 15% year-over-year on 9% higher revenues. Operating margins expanded 40 basis points in the quarter. Foreign exchange contributed about 6 points to the revenue growth and 9 points of the profit growth. The commercial HVAC business with double-digit revenue and earnings growth in all regions more than offset continued housing-related weakness in North America.

Carrier has recently seen moderating growth in commercial HVAC orders and selling order rates in our refrigeration units particularly in the US. The overall moderation in order trend is consistent with our expectations as we enter the year.

At UTC Fire & Security performance was solid, as revenue was up 28% and profits were up 38% in the quarter. Favorable foreign exchange contributed about 8 points to the revenue and profit growth. Acquisitions contributed the remainder of the revenue growth. Revenue decline is approximately 30% in the US residential business and low-single digits in the Electronic Security business in the UK entirely offset growth in the other regions and segments.

Operating margin expanded 50 basis points year-over-year to 7.6%. Benefits of prior restructuring actions, primarily from the Kidde factory rationalizations and cost containment initiatives were partially offset by the impact of global US residential volume and recent acquisition and integration costs.

Pratt & Whitney revenues increased nearly $0.5 billion or 18% in the quarter, led by 30% growth at Pratt & Whitney, Canada, and power systems revenues that more than doubled. Military revenues were up approximately 15%, on favorable mix as well as higher engine deliveries year-over-year.

Operating profit improved 15% in the quarter, reflecting the higher revenues, partially offset by the unfavorable FX impact of the Canadian dollar, the entire year-over-year E&D supporting new program wins. The combined impact of these headwinds on operating margin was more than a 100 basis points in the quarter.

Hamilton Sundstrand revenues were up 11% in the quarter with aerospace OEM, aftermarket and industrial all growing at double-digit rates. Operating profit grew 3%, and margins contracted in the quarter as a lower margin commercial volume accounted for substantially all of the aero OEM growth.

In addition, Hamilton recorded incremental cost on fixed-price development programs in the quarter. Hamilton is currently accessing the risk due to the recent rescheduling of the 787 program; however, these changes clearly will put pressure on Hamilton's full year operating profit growth guidance of a $100 million.

At Sikorsky operation profit was 17% on revenues that were essentially unchanged year-over-year. As a result operating margin expanded a 100 basis points in the quarter and reached 8%. During the quarter, Sikorsky shipped a total of 30 large helicopter; 14 military and 16 commercial. Since the end of the first quarter, eight additional aircraft have been delivered, and we continue to expect more than 200 large aircraft deliveries for the year.

Now, I will turn it over to Greg to wrap up.

Gregory J. Hayes - Vice President, Accounting and Finance

Okay. Thanks Ken. So another solid quarter; 7% organic revenue growth, 18% earnings growth, continued backlog expansion, all of our businesses. In fact we ended the quarter with $60 billion in backlog, a record for UTC.

While there is always opportunity for better performance in our business, we know that the balance of UTC works to deliver superior results in good times and bad. In the face of uncertain economic conditions, we are also well positioned to reduce costs of restructuring and continued base implementation; factories, the supply chain, and in the back offices. All of this is why we remain confident of our full year guidance of earnings per share in the range of $4.65 to $4.85 with revenues of $59 billion and free cash flow equal or exceeding net income.

As you all know, UTC's Board last week elected Louis Chenevert as Chief Executive Officer of UTC. It's a significant milestone for the company, but all know, it's not a change in direction. Bringing shareholder value continues to be our number one priority under roof. We'll do it by focusing on strong top-line growth from innovative products and global market leading franchises, cost reduction and margin improvement, and disciplined cash flow redeployment, all of that executed by an experienced leadership team. We are confident we will deliver on our guidance for '08, growing top line in excess of worldwide GDP growth, and make investments in the company for a solid 2009.

Please operator, let's just open up the call for questions. Alright, Dena.

Question And Answer

Operator

Thank you sir. The question-and-answer session will be conducted electronically. [Operator Instructions]. And we'll take our first question from Steve Binder of Bear Stearns.

Steve Binder - Bear Stearns

Yes. Good morning.

Gregory J. Hayes - Vice President, Accounting and Finance

Hey Steve.

Steve Binder - Bear Stearns

Good morning Greg. Can you maybe just touch on Hamilton's performance, and I think you touched on some of the fixed price issues, may be call out what the programs were. And you talked about, it just look like disappointing incremental margin performance, I am just wondering, is there a plan... a downside plan now, given the change in R&D engagement in the first quarter performance, and then also touch on Sikorsky's performance, with all the issue, that kind of held back deliveries this quarter and what the year looks like for Sikorsky.

Gregory J. Hayes - Vice President, Accounting and Finance

Sure. Let me start with Hamilton. As you saw, margins were down a 140 basis points, not really unexpected and I think Dave mentioned that he expected that in conference back in February. The fact is OEM orders were up strong and we saw like 12% increase in OEM deliveries, and most of those, of course, went out with very low margin as they typically be on the OEM side, so no surprise.

Aftermarket was strong, as we have expected. And I think may be the surprise a little bit was on some of these fixed-price development contracts. We are working on the A400M on a fixed-priced development contract. We have got some work at one of our subsidiaries in the UK, doing some helicopter work that is also a bit of an overrun. We got big numbers. We are talking less than $5 billion or $10 billion on each of these programs, but again with only 3% growth on the quarter that kind of shine through is a little bit of a bump.

Overall though I still think, Dave is confident in his guidance. We are confidant in Dave's guidance for the quarter or for the year rather. And you will have to wait and see as going Boeing finalizes the reschedule of 787, how that impacts us. But clearly it's going to have some challenge to that, but nothing to derail us.

Steve Binder - Bear Stearns

And then if you look at you said order growth... is it order growth you touched on for commercial aircraft is

Kenneth Parks - Director of Investor Relations

We do.

Steve Binder - Bear Stearns

Mark around 6% or was that sales growth.

Gregory J. Hayes - Vice President, Accounting and Finance

Sales growth.

Steve Binder - Bear Stearns

What was the order growth for Hamilton and Pratt in the quarter for aftermarket in particular catalogue spares.

Gregory J. Hayes - Vice President, Accounting and Finance

Well aftermarket... this is right. I think overall commercial aftermarket growth is about 6% across UTC. It was flattish at Pratt, and it was up, kind of high-single digits at Hamilton. So, if you think about the Pratt, just to everybody address for a second, it was flattish. So that's coming of a 20% growth in the last year's first quarter. We also saw a lot of inductions into the engine center, just with the average repair cost is a little bit lower than we had seen last year. So I don't see any big change here. I think the engines are still coming of going as we would expect, and the orders would be here by the end of the year.

Kenneth Parks - Director of Investor Relations

And Steve, booked growth on Pratt was about one, so the order growth was more.

Steve Binder - Bear Stearns

Right. My last question is well in touch... you touched on inventories already and receivable performance, clearly wasn't great in the quarter. But if you're going to align a business within UTC in the family, where are the plusses from a cash flow standpoint and minus? Who are the generators and who are the users?

Gregory J. Hayes - Vice President, Accounting and Finance

Well,I think we had... the biggest generator was obviously an Otis, because typically they had a very strong first quarter, and then had really strong performance across their business. Fire & Security had a good quarter from a cash standpoint. The aero business is not so good, as you were expected to see inventories grow like this, and as well as Sikorsky, because they only shipped 30 helicopters and missed some shipments at the end of the quarter which ultimately had some cash associated with them. So commercial side pretty good, Carrier, just normal seasonality, I am not concerned. It's the inventory grow that obviously we have our eye on.

And Steve just touches for a second on Sikorsky because we have talked about the 30 helicopters. The backlog is obviously robust with the $12 billion of backlog at Sikorsky,

and as you look at the commitment for the year which is 200 plus large helicopters, we are shipping 30 helicopters in the quarter. These things are light [ph]. There are a couple of things to keep in mind. We're out of the factory just the other day, Jim and I walked before the pipelines is full, the parts are their, we are building these helicopters. And what we've seen really is a big mix shift. Last year we shipped eight of the L models. The L models have about $4,000 of assembly. This year we're shipping Ms.

In the quarter I think we shipped 10 Ms versus 2 last year in around $12,000. We also shipped some other models, Romeo [ph] models about $24,000 of assembly. So what we really have is this big mix shift where we got to get productivity on the floor. We have got to get these helicopters moving down the line at the right pace. And we shipped about eight helicopters so far this month. I am not concerned at all about the quarterly target. We are going to make those 200 helicopters, but it's little bit of a slow start, and we feel pretty good about it.

Steve Binder - Bear Stearns

Alright. Thank you.

Kenneth Parks - Director of Investor Relations

Thanks Steve.

Operator

And we'll take our next question from Joe Campbell at Lehman Brothers.

Joseph Campbell - Lehman Brothers

Good morning.

Unidentified Company Representative

Hi Joe.

Joseph Campbell - Lehman Brothers

I wondered if you could say a few words and I don't want to know about the tactics of it, but about the strategy and why it is that you would like to acquire Diebold.

Gregory J. Hayes - Vice President, Accounting and Finance

Sure Joe, Diebold; that is a very attractive property for a couple of reasons. It's number two in the world in ATMs. It has a great global footprint with a good presence in China and India, and it offers margin expansion opportunity. Margins right now or at least the last time they reported were down in the mid-single digits and that's where UTC businesses were back in the mid 90s. But one of the keys to that business also Joe is in growing margins and providing good service is to have a exceptionally good local service network and we have that notice. We are building some of the other businesses and maybe we can bring some of the management expertise to the business. So, I think ROIs looks very much by the UTC commercial business.

Joseph Campbell - Lehman Brothers

Great. Thanks very much.

Gregory J. Hayes - Vice President, Accounting and Finance

Alright, thanks Joe.

Kenneth Parks - Director of Investor Relations

Thanks Joe.

Operator

And we'll take our next question from Deane Dray of Goldman Sachs.

Deane Dray - Goldman Sachs

Thank you. Good morning.

Gregory J. Hayes - Vice President, Accounting and Finance

Good morning, Deane.

Unidentified Company Representative

Good morning, Deane.

Deane Dray - Goldman Sachs

I was hopping you can address the raw material headwinds, Carrier vis-à-vis, the copper versus the earlier in the year, and where that stands in terms of... might that lead into any other contingency?

Gregory J. Hayes - Vice President, Accounting and Finance

Yes, as you look at the first quarter results, really not much headwind from commodities like at Carrier net of the pricing recovery. I think our average price for copper was around $3.21 or $3.22 of the good, I think today's $3.96 or $3.97 spots. So first quarter, it's a one [ph] shipments quarter. I think where we are going to see commodity headwind would be in second and third quarter. As we already quantify that would be about $50 million of potential headwind. And the reason it's not more, as we do have a certain percentage of our suppliers on long-term agreements. So we locked in some of the copper, that's about 40%, and we've also locked in most of the steel. So as steel has rung up, since the begging of the year, we've only been protected by the LTA.

So, we don't expect it to be a huge headwind. But $50 million is still... is a third of the operating profit growth at Carrier this year. So we have got some work to do save some costs out into to contain that.

Deane Dray - Goldman Sachs

That's the same $50 million that you talked about at the beginning of years. So that hasn't changed correct?

Gregory J. Hayes - Vice President, Accounting and Finance

It has not.

Deane Dray - Goldman Sachs

Okay, good. And then just at orders for a movement, 20% order growth looks stellar in this environment. How about on the negative side? In December you talked a bit about seeing a few push-outs, a few cancellations, I felt may be that was related to some financing on smaller projects. How does that change at the margin over the course of the quarter?

Gregory J. Hayes - Vice President, Accounting and Finance

It really doesn't change at the margin. I would tell you, we still see a few of the smaller projects being deferred or delayed. The big stuff that we are still going out at the record levels, I mean 20% growth in North America, 20% order growth rate worldwide, stronger as in China. It's hard to find a soft spot outside of maybe at Southern Europe for orders right now. But again I think we are very confident that those guys are going to be work for the year, big bumps in the road.

Deane Dray - Goldman Sachs

Very helpful. Thank you.

Kenneth Parks - Director of Investor Relations

Thank you.

Operator

And we'll go to next to Howard Rubel with Jefferies.

Howard Rubel - Jefferies

Thank you very much. Just a couple of things. One; Greg is a lot of these working capital issues that you addressed, that sort of the nagging for a while, what is management team doing to sort of change the factor? We've kind of heard this for may be three quarters or so?

Gregory J. Hayes - Vice President, Accounting and Finance

Well, actually it had improved about [ph] two and a half years I think just to be fair Howard. Inventory has been growing. It's been the result of the two things primarily it's strong organic revenue growth, as well as the disruptions in the supply chain. And organic growth is still strong although it's a somewhat stable growth, and the supply chain issues are coming also under control.

Let me just lay out. I think it is the number one issue that we have in terms of working capitals, as how do we get inventory under control this year. And I would just say this a little bit back in February. So, it 33,000 suppliers, it's the 75% of our cost to sales that we don't directly control and we need to do work on our supply chain and the supply base. We get the ACE operating systems embedded in their making.

Now, down in the line of Sikorsky and we talked about 80% full rate to MRP, suppliers and 80% sounds like it's pretty good, but the fact is that means that are less than 20% of the Canadian [ph] similar helicopters station. So, there is still a lot of work to do in the supply base, and that will be I think the focus. It's not going to happen today or tomorrow. We are working on it. It's going to take some time. We think we'll get our factories where we want them to be from the productivity standpoint, et cetera, it's got to be in the supply chain next.

Howard Rubel - Jefferies

Well I mean, in the Europe almost a $1 billion in inventory, now some of that I grant you is currency, but it's almost a $1 billion in the quarter. I mean could year just articulate what you think you could do in terms of some turns for the year from where we are? And do you think you could be below year-end inventories?

Gregory J. Hayes - Vice President, Accounting and Finance

Well, the whole bunch stays same. I think the inventory is about $975 million roughly. In fact, that's just about $800 million net of inventory growth. $350 million of that is just normal Carrier seasonality, and that of course will turn into receivables here in Q2, will get back into the cash in the third and fourth quarter.

On the euro side, we got a little bit of R&D that's capitalized on the balance sheet, that's under the Sikorsky programs [ph] as well as Hamilton. Having said all that, we still have $300 million, $400 million of growth at the aero unit that what we need to address. I'll tell you, inventory turn in total was down about 10, this quarter versus year end. Our focus obviously is to improve inventory turn. I'm not going to give you forecast today because very frankly anything I will tell you, I'm not positive, we could actually need it, but it a priority for us.

Howard Rubel - Jefferies

I think that's pretty fair. Just two other things. One, we are all aware of the difference between the JTAD [ph] and newer version engine. How you're going about managing the wind down of that business. I know it's largely spares today and probably about may be 5% of your aftermarket business?

Gregory J. Hayes - Vice President, Accounting and Finance

Yes in fact, I think that the number is closer to about 10%, Howard. So I tell you we have been managing that down through the impact at the JTAH going out of inventory pretty well for the last 10 years. And it's now surprise, because it's continuing to happen. But we are still shipping 400 large commercial engines out of Pratt last year probably a similar number this year. The V2500 fleet is growing. We are also of course taking share on the aftermarket to aftermarket services. So, the growth strategy at Pratt and in the aftermarket is pretty clear. It's to capture more of our own work, and it's also to capture more equipment everybody else's work.

So, I don't see this as a huge issue. It's we have been affirming those for a long time. So, I think they are managing it pretty well in Pratt & Whitney.

Howard Rubel - Jefferies

I agree, I just wanted to make sure, I... you had bounded it. And then last with the geared fan, there will be some opportunities to sell some participation interests in that. How will we see that offset on R&D later in the year?

Gregory J. Hayes - Vice President, Accounting and Finance

We assume we... well, we would assume there is certain level of partnership as we give guidance for the year that's $200 million of R&D and a $125 million of that was at Pratt & Whitney. That assumes some level partner participation may be 30% or 35%. And I think we are pretty comfortable with that level for the year. We signed up MTU so far. I think Hamilton has now signed up for engines. We also think we are well on track and making good progress on the GTF from a technology standpoint. And we think we feel pretty good about all the programs that GTF has won.

Howard Rubel - Jefferies

Thank you very much.

Operator

And we'll take our next question from George Shapiro of Citi.

George Shapiro - Citigroup

Yes. Good morning Greg. We assume the inventory a little bit you've said $400 million in aero. How much of that would just be due to miss-shipments at the Sikorsky and how much is due to some of the tougher issues to get out.

Gregory J. Hayes - Vice President, Accounting and Finance

I think may be up to half of it... not quite half of that would be miss-shipments in Sikorsky, because adjusting about Sikorsky has been linear, delivering $50 cap rates a quarter and that's obviously not going to happen in the first quarter. But, that's about half of it, and the rest of it is maybe this is harder to get at supply chain inventory.

George Shapiro - Citigroup

And also, at Hamilton Sundstrand, how much of the inventory build maybe is reflecting not getting paid by Boeing on their 787 at this point?

Gregory J. Hayes - Vice President, Accounting and Finance

Well, it's not a huge number. We continue to obviously bring hardware in. We have been working with our suppliers to try and push their whole some of that at the supply base, and trying to be very aggressive in terms of not bring any more than we think we're actually going to shift. We didn't see inventory growth at Hamilton in the quarter. I wouldn't attribute it all to 787, I think it maybe increase, and it is really related to just big ramp up in OEM value across all of their product lines.

George Shapiro - Citigroup

Okay. And if we go back to Pratt for a minute, the Joint Strike Fighter engine problems that you had, was that as shown as R&D to crack this quarter, or how do you handle that? Or was that small number anyone?

Unidentified Company Representative

That's a cost plus contract and I would tell you, typically in their cost plus they would cost and then maybe [ph] analysis the cost to be fixed. Most of that is covered by the contract. There wasn't any incremental R&D at Pratt & Whitney that have been flown through at the bottom line as a result of that.

George Shapiro - Citigroup

And then one last thing, at Pratt Canada if... what did you see is book to bill, I mean clearly the deliveries were pretty... were very robust?

Gregory J. Hayes - Vice President, Accounting and Finance

Yes, deliveries were up 30%, I believe, the revenues are up 30%. We shipped over 800 engines. But the book to bill still remains about 1. So we got the good backlog, and it's remained pretty strong.

George Shapiro - Citigroup

Okay. Thanks a lot.

Kenneth Parks - Director of Investor Relations

Thank you, George.

Operator

And we'll take our next question from Nicole Parent of Credit Suisse.

Nicole Parent - Credit Suisse

Good morning guys.

Unidentified Company Representative

Good morning, Nicole.

Gregory J. Hayes - Vice President, Accounting and Finance

Hi Nicole.

Nicole Parent - Credit Suisse

I guess big picture as you step back and think about Greg in your initial comments you talked a little bit about slight, pockets of weakness, as you look at Europe. Could you talk a little bit about as you see the tight credit markets impacting, general commercial construction trends? And then what's your outlook, have you guys seen any slowdown in the regions, specifically China?

Gregory J. Hayes - Vice President, Accounting and Finance

I'll start with China, and I'll say there has not been any slowdown, still see very, very strong growth out of Chinese. In terms of... it's a great question because, looking... I guess it's striking to see some follow on to the credit crises in commercial construction as I said all these... that's up 20% and that is really go around the world with the exception of Southern Europe where we saw... really I think it was Spain primarily where we saw a little bit of the weakness for the year. But other than that, really have not seen much of an impact.

There has been a glow up on China, the couple of statistics for you. Now if you look at it year-over-year, fixed asset investments up about 24%, real estate investments up about 33%, large construction projects up about 22%. We don't make those numbers up, it actually comes to a National Statistic Bureau of China. That is pretty good solid growth that's in China. So most of the lower impact that we can see in our markets is in the credit crises especially in immerging markets.

Nicole Parent - Credit Suisse

Okay. And I guess with respect to Sikorsky, can we just go back and think about, I mean just given kind of the right revenue and shifts in the number... in the quarter, and you talked about how you have already shipped, I think you said eight so far this month. I mean as we sit here and look about you cited the mix shift and kind of between L and M, and the hours that it takes to get it running, presumably we knew that. Could you just give us some sense as you look back over the metrics that you've really shown up within Sikorsky in terms of past dews everything else? Where we are and how we should get comfortable that there isn't going to continue through the year?

Gregory J. Hayes - Vice President, Accounting and Finance

Well the only thing I can tell you is, maybe it's a couple of things. Obviously it's got our attention that Louie has both these partners [ph] for the last... almost two years, since we had the initial where the labor acting down at Sikorsky back in 2006. And Louie has already the sell the new airline and brought that down in West Palm Beach, and he felt very good about what was going on down there. They said, look at the line, the lines are full, and I think it's just a fraction of coming down the learning curve more quickly than we are. And so we have got a little bit of difficulty on the hours on some of these newer models. That's what you expect. But I think our outlook have a concern I think 200 for the year, just at the ACE operating system there. We are working at this. We are going to hit the goal here in the next year or so. I just get confidence in the team down there, we do have performed [ph].

Nicole Parent - Credit Suisse

Okay, great. And I guess just lastly on M&A, Jim, as you kind of step back and think about what's going on in the market. Have you seen a willingness of potential sellers to come down on price? And based on a competitive landscape, what you guys expect to be getting more aggressive, absent the both [ph].

James E. Geisler - Vice President, Finance

Sure. Right now on the call there are lot of absence to consider, but it takes a while for sellers expectations to reset some times. I might remember there is stock price or some valuation that they could have gotten last year, recently. And so based on while there is reset as well as the lot of industrial companies and folks that we might getting against or cover the same assets, we have pretty strong balance sheet. So, we look at lots of different things, but like any other deal Diebold included will stay just above.

Nicole Parent - Credit Suisse

Great. Thank you.

James E. Geisler - Vice President, Finance

Thank Nicole.

Gregory J. Hayes - Vice President, Accounting and Finance

Thanks Nicole.

Operator

And we will take our next question from Nigel Coe with Deutsche Bank.

Nigel Coe - Deutsche Bank

Thanks. Good morning.

Gregory J. Hayes - Vice President, Accounting and Finance

Hi Nigel.

Nigel Coe - Deutsche Bank

So, do you... I think inventory is mentioned about the steel and long-term agreements. I mean, steels, it probably hard [ph] to hedge. I mean how long are these agreements been based on, when you guy expose to this price again?

Gregory J. Hayes - Vice President, Accounting and Finance

As long as our annual agreements module.

Nigel Coe - Deutsche Bank

Okay. So 2009 if you are going to fuel price is moderating and then that's why we have to see that come through. Okay. And secondly, you mentioned 787... you took Pratt and Hamilton, is that a comment on E&D spend or is it supply chain or the both?

Gregory J. Hayes - Vice President, Accounting and Finance

It's all that. I think we have got a little bit of a impact on our factory as we try to move some of these ships, that has a lot of an impact. Supply base is going to have an impact on the E&D. I just can't give you a great answer today on what the overall look back [ph] is. We love the program and we continue to support it more heartedly. But it's kind of a little bit of a state of loss year having just heard the announcement or a week or so in terms of the rescheduling. We actually have had a formal modification of the given purpose over that [ph]. So, moving through that and Dave is committed to his is guidance for the year and we are going to figure out like the 77 within the guidance for the year.

Nigel Coe - Deutsche Bank

Sure. And then on refrigeration you mentioned... I mean that's in the U.S., is that comment on just the state refrigeration or was that including the transportation as well?

Gregory J. Hayes - Vice President, Accounting and Finance

It includes truck, trailer [ph] in North America which has been slowed really for the last year and half or so, I guess. But it's really both pieces. We also saw little bit of slowness on container and the order rates, and very, very strong shipment order. But all the way through down a little bit there. So, it's a really a broader comment on the refrigeration business and so.

Nigel Coe - Deutsche Bank

Okay. And then just finally then on the residential, it looks like trends turn up through 40% price increase. I think it's coming in June. Is carrier up on as well?

Gregory J. Hayes - Vice President, Accounting and Finance

No. In fact we have not yet had a residential price increase, and I think you're obviously looking at the market. But right now we're just trying to get our costs in lines to be very competitive in orders to be shipped [ph] that to be the most competitive market we have ever seen.

Nigel Coe - Deutsche Bank

Okay. And then just a quick one on restructuring, you're going to be flat in the gains offsetting the restructuring or do you expect it to be net restructuring pay off?

James E. Geisler - Vice President, Finance

I think in '08 what we are looking at probably, we have $200 million of restructuring for the year. I would expect that gains will not equal restructuring. It will probably have a little bit more restructuring. I can't give you an exact number, and I don't know what the exactly gains are. But clearly as we go throughout the year we have got good news on foreign exchange as we see at least ahead of us here in the second quarter and some strong performance in our business as I am going to take that good news where [ph] we have invested in the restructuring.

Nigel Coe - Deutsche Bank

Okay. Thanks a lot.

James E. Geisler - Vice President, Finance

Thanks.

Operator

And we will take our next question from Cai Von Rumohr of Cowen and Company.

Cai Von Rumohr - Cowen and Company

Yes, thank you. So you have mentioned the FX good news, I mean on your February meeting you were talking about above $1.44 I mean euro, it's now a $1.58, renminbi is up, the yen is up, the Canadian loonie is starting to behave. Could you quantify what you are now assuming in terms of FX and why you didn't raise your revenue estimates?

Gregory J. Hayes - Vice President, Accounting and Finance

Well, we didn't raise our revenue estimates because FX as we all know, it does move around quite a bit. Obviously as we saw this quarter, we had 4% the revenue growth came out of that FX, there probably is more big needs to come on the top line from FX if the euro stays where it is. I think one of the things that we need to keep in mind and may be the little bit of new this quarter on FX is quite Canada has become a much bigger piece of the puzzle. Their cost structure obviously is in Canadian dollars, and then back to Canadian dollar contents being going up as you have resembled the lot more engines. And their sales are denominated in U.S dollars. So they had really felt the pinch over the last year or so, because they advance over the last two years loonie depreciated versus the dollar.

Now as we look forward to the back half of the year, if you are going keep the euro where it is today, by loonie we still see good news from FX, and probably more than what we saw in the first quarter. And about half of that we had planned and the other half is probably opportunity. As we talk about opportunity, that's what we are talking about for a potential restructuring funding.

Cai Von Rumohr - Cowen and Company

You mentioned that if FX moves around which it does, so you were assuming a 1.44 on the euro in your plan. Based on your current guidance, what's the number, what are you assuming?

Gregory J. Hayes - Vice President, Accounting and Finance

Again if you play out the number today at 1.58 I believe which is where the euro is and you keep loonie, you can see may be again versus last year you might see another a $0.10 or so of additional FX good news for the year.

Cai Von Rumohr - Cowen and Company

Got it.

James E. Geisler - Vice President, Finance

May be just one other comment on that because clearly FX could be good news for the corporations to move throughout the year, particularly versus our plan, and we have seen a little bit of it in the first quarter. But I think we also have to keep in mind that the environment is tough, and I think there is probably going to be some offset to FX. They are certainly possible in the second half of the year. We know that now is a good time for overreaching or over promise, and I don't think you want us to be in that position and we don't want to be in that position.

Cai Von Rumohr - Cowen and Company

Right, right. If we look at the quarter, R&D was only up as you pointed $29 million, so that was kind of a surprise and it wasn't much. But SG&A was up 50 bps, really a huge gain about $240 million. Can you explain kind of why was the SG&A up, anything abnormal in there, and kind of how should we think about the build in both R&D and SG&A over the remainder of the year?

James E. Geisler - Vice President, Finance

Yeah let's do the SG&A first Cai. Up about $240 million as you said year-over-year in the quarter, about half of that is related to acquisition and FX combined. So you can kind of put that into one bucket. Then the other thing I'll point out to you is you remember last year we saw that the distribution for California Carrier business, that has... that had some impact in the quarter, and then the rest of the growth is really just a growth related to the volume.

Now, let's talk about R&D for just a minute. As you pointed out, that's $29 million year-over-year in the quarter. About a third of that is at Pratt I would say. But as we told you all the way along as we started in third quarter call last year going through our February meeting, we can anticipate the R&D to be more timed into the second half of the year because of the programs that we are talking about and perhaps to GTF related programs. So, I guess I'll attribute some of that to timing and we are still saying that and confident that R&D will be an increase of around $200 million for the year. So, it's clearly calendarized more to the second half.

Cai Von Rumohr - Cowen and Company

But SG&A was 11.9% of sales, is that what we are assuming for the year because it was 11.2% last year? Or what's SG&A likely to run as a percent of sales?

James E. Geisler - Vice President, Finance

I think we would not tell you to expect SG&A as a percentage of sales to creep up for the year.

Cai Von Rumohr - Cowen and Company

From what level?

Gregory J. Hayes - Vice President, Accounting and Finance

From last year's level.

Cai Von Rumohr - Cowen and Company

So therefore, it's going to be a plus going forward year-over-year in terms of percentage of sales?

Gregory J. Hayes - Vice President, Accounting and Finance

I think negative is the right word.

Gregory J. Hayes - Vice President, Accounting and Finance

Right.

Cai Von Rumohr - Cowen and Company

And can you explain that. I mean I am still... I guess I am still confused?

James E. Geisler - Vice President, Finance

Well,I will give you one data point which is European operations, right. So for Carrier, you have got European operations but their big selling season is early of the second quarter, which you got their cost infrastructure in place in the first quarter that's converting at a higher euro. So you have got more euro dollars on the front end on the cost side and you'll have the selling season after that. So, that's one reason of a long list.

Cai Von Rumohr - Cowen and Company

Okay, terrific. Thank you very much.

James E. Geisler - Vice President, Finance

Thanks Cai Von.

Operator

And we will take our next question from Heidi Wood of Morgan Stanley.

Heidi Wood - Morgan Stanley

Good morning. I wanted to talk a little bit about what have you seen in aerospace, analyzed actually with the five bankruptcies, talk about the Northwest-Delta merger. Can you us a sense of bandwidth to may be a high-low range of what you think this means for commercial aftermarket for Pratt as far if we get some retirements strictly on the Northwest Airlines fleet. And also talk about what happens to long-term service engine maintenance contract you have with Northwest?

Gregory J. Hayes - Vice President, Accounting and Finance

Well let me try and dissect [ph] again Heidi. First of all on the Bangkok Airlines, I think you have all read about that, we have all seen that, not really an impact to Pratt & Whitney or to UTC more specifically. In the small airlines, we didn't have real exposure per se in terms of receivables or anything.

And the Northwest-Delta merger, of course, those are two very important customers to Pratt & Whitney... the Pratt & Whitney power fleets. I think the good news as we look at this the potential merger and also the potential because it's not done yet, is the fact that they don't have a lot of overlap on their route structure. As a result, we don't see this as really a client to take a lot of capacity out of the combined two airlines. Obviously, their synergies would cost G&A and perhaps maintenance. But again these are both very good customers. They applied Pratt order [ph] perhaps that can be value both of them.

I think long term, it makes for a stronger industry to have a consolidation, and if oil is at a $110 or a $115 a barrel, or wherever it is today, I think there is going to be lots and lots of pressure on combined airlines to push for a new, more fuel-efficient fleet. I think that's why we are very confident with the GTF. It is going to give us a leg up in this competition going forward. We've got the procedures, we've got the MRJ, we've got potential for other opportunities there I think. Again this is long term good news for Pratt & Whitney and UTC and the airline industry.

Heidi Wood - Morgan Stanley

Does the maintenance contract list all potential opportunity or have you... I mean if they park that contract and they move on, so does that implications... does that move the needle in terms of earnings for Pratt?

Gregory J. Hayes - Vice President, Accounting and Finance

Well, Heidi, I don't know though that I can speculate in terms of what that impact is. We've got... we have contracts in place with the new service revolving the fleets. It's hard to be specific. All I can tell you is, we are balance towards the UTC and it works in Pratt & Whitney, and they are going to... this is not really a bump in the road for them.

Heidi Wood - Morgan Stanley

Okay. A couple more questions, if you don't mind. Going back to the inventory question, that's been asked a couple of times, can you give us a little more color maybe, flesh out what you expect on quarterly progression or may be talk about what you think is reasonable to expect by year end? What would you define a satisfactory progress on inventory?

James E. Geisler - Vice President, Finance

Heidi, it's Jim. We have talked a lot about inventory today and inventory is important. But... and we must do better full stop [Technology Difficulty] posed on the big picture, and inventory is one on one in the cash flow. And this quarter free cash flow is showed in net income because of Carrier seasonality. We are prudently managing both of that [ph] over the last four quarters, and see the free cash flows has been in excess of net income, when we take out Carrier seasonality. So we'll have more even in the future on inventory, obviously we have to do better. But we also have to remember big cash flow in total.

Heidi Wood - Morgan Stanley

No, I know that. I just wondered if you for the stake in Sundstrand, so where you start to find your self feeling better about it? That's just for context, that's all.

James E. Geisler - Vice President, Finance

I think when we have better churns well in inventories; we will start to feel better.

Heidi Wood - Morgan Stanley

All right. On 787, Boeing finally came out with full way production to tenement [ph] by 2012. Can you talk about what kind of investment might be required to take the rates there on your side, the capacity side now for seven?

Gregory J. Hayes - Vice President, Accounting and Finance

No, that Heidi will [indiscernible] for what we believe is the long-term production rate. But we're actually thinking it could be up to 12 months. So I don't see there is any incremental in this. And I think if you can mind 75% or 80% of this content comes out of our own supply base, so it's not a huge incremental piece to Hamilton. But there is no big news there is in terms of the additional investment.

Heidi Wood - Morgan Stanley

That's great. And just a couple of quick ones. Hamilton Sundstrand did I hear correctly that the industrial orders were solid, was the book-to-bill north of one there?

James E. Geisler - Vice President, Finance

Yes.

Gregory J. Hayes - Vice President, Accounting and Finance

Yes.

Heidi Wood - Morgan Stanley

Okay. And then, the stock buyback I think I missed it. How much did you guys spend and how many shares did you buyback?

Gregory J. Hayes - Vice President, Accounting and Finance

$801million now taking average rates of about $71 or so, be back about 11 million shares Jim tells me.

Heidi Wood - Morgan Stanley

Great. Thanks very much.

James E. Geisler - Vice President, Finance

Thanks Heidi.

Operator

And we will take our next question from Joe Nadol of J.P. Morgan.

Joseph Nadol - J.P. Morgan

Good morning.

Gregory J. Hayes - Vice President, Accounting and Finance

Hi Joe.

James E. Geisler - Vice President, Finance

Hi Joe.

Joseph Nadol - J.P. Morgan

On cash flow and not on inventories.

James E. Geisler - Vice President, Finance

Yes.

Joseph Nadol - J.P. Morgan

On receivables actually, you had an upward tick there that was much more than the usual. I am wondering if you could give any color on that, perhaps Greg like you did on inventories, if you could break it down into may be the bigger chunks?

Gregory J. Hayes - Vice President, Accounting and Finance

In the

James E. Geisler - Vice President, Finance

Yes. Let me tell you that we've got a growth in the quarter that's, each chunk of it is due to the other services billing which is difficult for the first quarter and an even higher number year-over-year because they are north of that business, and that's probably couple of $100 million or so. But next big chunk would be at Carrier which is kind of the seasonality as we go into the selling season for the residential business in the US. And then the rest of it fairly spread evenly.

Gregory J. Hayes - Vice President, Accounting and Finance

Just organic growth.

James E. Geisler - Vice President, Finance

Yes.

Joseph Nadol - J.P. Morgan

Okay. Because it was up more than the usual... sort of last quarter.

James E. Geisler - Vice President, Finance

Most of the up more is due to the progress in sales at August.

Joseph Nadol - J.P. Morgan

Okay. And then if you look at cash flow, just free cash flow by month over the first quarter, I don't know if you have these numbers. But was March weaker than you might have expected or was it sort of a typical pattern.

James E. Geisler - Vice President, Finance

Well. I'm not going to get into I guess monthly forecast to reviews of cash. I would say, there is no surprises in March. Business remained strong. There wasn't any deterioration in receivables or collections or anything like that. It was really just the usual normal our working cash flow every day here obviously. And no surprises, no weakness in the businesses, no underlying trend that I would be concerned about.

Joseph Nadol - J.P. Morgan

Right. Okay. And then on the share repurchase, you bought back a very, very even 500 million a quarter last year. And obviously this was a tick up. You are keeping your guidance for the year. I am just wondering, if you look at your pattern it hadn't really been opportunistic in the past, it's been pretty steady. Your stock was down in the first quarter, you bought back more. Was is the change in your behavior or how do we interpret the higher number in first quarter?

Gregory J. Hayes - Vice President, Accounting and Finance

I don't know it's a change in behavior. Obviously when the stock was in the 60s it was just a hell of an investment in this, so we just piled in. And in fact, we like the stock as an investment. The $2 billion place over is still in place for the year, but we are going to continue to go out. The stock is price of levels that we think shouldn't be, we're going to go out and buy.

Joseph Nadol - J.P. Morgan

Do youthink perhaps there is some possible upside to that that $2 billion number, you are just not ready to move up, up yet.

Gregory J. Hayes - Vice President, Accounting and Finance

These numbers are all place-overs, Joe. We'll see how the year progresses. Right now, we're still sticking by the $2 billion and we will come back again at the end of the second quarter and update on all of this.

Joseph Nadol - J.P. Morgan

Okay. Thank you.

James E. Geisler - Vice President, Finance

Thanks Joe.

Gregory J. Hayes - Vice President, Accounting and Finance

Thanks Joe.

Operator

And we will take our next question from Doug Harned of Sanford Bernstein.

Doug Harned - Sanford Bernstein

Good morning.

Gregory J. Hayes - Vice President, Accounting and Finance

Good morning.

Doug Harned - Sanford Bernstein

On Fire & Security, you have talked about getting margins above 10% or at least to 10% this year. The first quarter was well below that. Could you talk about how you expect this to progress over the year?

James E. Geisler - Vice President, Finance

We have got a couple of things happening in the first quarter that held it down. And before I tell you that I will also remind you that in the February we when bill was in front of me, we said exactly that. We said the margin expansion will be greater and that as we progress with the year. During the first quarter remember that we still do have the land corning [ph] business and our numbers. And the Australia piece will go away in the near term, and the U.K. stays. But that does all the margins down a bit.

Also as we have said we do have the acquisition... investments related to the acquisitions on the integration side that the initial... may be of the other acquisitions we built last year. So, for all those reasons while we would like to see a very non-seasonal margin progression, also not only in Fire & Security, we have said that will take a few years to do and this year would still be more back end more of those, and those couples of reasons and some of the primary factors.

Doug Harned - Sanford Bernstein

But you still expect... if you expect the 10% for the year when you are looking at really getting to a more sustainable run rate above that if you are going to concentrate for the first of all at the beginning?

James E. Geisler - Vice President, Finance

Yes. We are still... we are not coming of about 10% for the year, and we are confident we can get there.

Doug Harned - Sanford Bernstein

And then more broadly when you've talked about conservatism in terms of how you are looking at the back half of the year, are there any specific areas that you are more concerned about than others?

Gregory J. Hayes - Vice President, Accounting and Finance

Yes. I don't know if there is anyone particular business. Obviously, we have talked about a lot of different things in the environment there. The aerospace aftermarket and again RPM growth, we are keeping an eye on that. We are also obviously in the shorter cycle businesses at both Carrier and Fire & Security. We have already seen a downturn or a softening there. Those are the businesses that will move us around in a short term in the second half of the year.

Doug Harned - Sanford Bernstein

So, no real single thing that... more of a general sense that you need to be conservative.

Gregory J. Hayes - Vice President, Accounting and Finance

Yes, I think we read the same papers that everybody else does. And I think that we do believe that there is a softening in the US economy whether or not we are in the recession and leading to the economist to tell us that in about two years. But right now we know there is softening in the US economy. We are going to prepare for it, by taking cross out of out of our businesses.

Doug Harned - Sanford Bernstein

Okay, great. Thank you.

Unidentified Company Representative

Thanks Doug.

Operator

And we will take our next question from Ronald Epstein of Merrill Lynch.

Ronald Epstein - Merrill Lynch

Yes. Good morning guys. A couple of questions. You spoke about the commercial construction in Asia. Can we just talk about some of the other regions of the world? What you're seeing in Europe, in Eastern Europe, Western Europe? And if we can maybe take just a little trip around the world in terms of construction.

Gregory J. Hayes - Vice President, Accounting and Finance

Commercialconstruction in Europe, I would say it was very strong, but regionally strong in Eastern Europe. Russia and Ukraine, Poland I think all of those markets remain very, very robust; Southern Europe, not so good. A little bit of over building as we had expected in Spain, and also I think the UK has been softening now. And so, there is New Europe and Old Europe, I guess, and Old Europe is not moving quarters as quickly as New Europe.

We go around Asia. It looks pretty good there with the exception of Japan. Japan has been slow to declining here in the quarter. Korea looks to be coming back a little bit, not in double digits, but fairly good order growth in Korea. India, I think everything is on track there. It's maybe a little lumpy, but it's I don't think we have any concerns. In South America, not a big piece of our business continues to be a very, very good.

Ronald Epstein - Merrill Lynch

Okay. Also just kind of change gears here to Pratt. You guys mentioned this in one of your charge that 18% organic growth in Pratt. You said aftermarket spares were flat, is that right, and is that what you told Steve [ph]?

James E. Geisler - Vice President, Finance

Yes.

Ronald Epstein - Merrill Lynch

So, what was driving that 18% growth, that's huge?

Gregory J. Hayes - Vice President, Accounting and Finance

It's Pratt Canada. Well, as you say, it's Pratt Canada which was up about 30%, you also had good growth on the military side, you have higher... about nine higher military engines delivered in the quarter

Unidentified Company Representative

And the power system

Gregory J. Hayes - Vice President, Accounting and Finance

And the power systems business was also up very strongly. So, we have kind of a broad based strength in the Pratt.

Ronald Epstein - Merrill Lynch

Okay. Now in power system that you said was up I guess two times, and that you said in your prepared remarks. What was driving that? I mean does that... derivatives or what is that?

James E. Geisler - Vice President, Finance

Yes. And we have seen it for the last I think 18 months or so. That has been a very strong part of... has been in a good place of the market I should say.

Gregory J. Hayes - Vice President, Accounting and Finance

Lots of demand out there for power. And I think this where they are going to great start here with Pratt power systems to deliver on that right now.

Ronald Epstein - Merrill Lynch

Okay, okay. And then just one last question if I may, did your turbofan, you guys brought that up a little bit, what's the next milestone we should be looking for I mean, to your fan?

Gregory J. Hayes - Vice President, Accounting and Finance

Well, we just... I think we have completed about 40,000 take-off and land... equivalent [ph] take-off and landings on it. We're loading the new engine in the new missile. We're going to fly it. I think there is the most public milestone you are going to hear about it is flight estimate in the middle of the year. And then that I think we are pretty confidence going to happen, I don't know if June, July, August timeframe. We will fly when it's ready, but we certainly expecting that by the mid-year.

Ronald Epstein - Merrill Lynch

Okay, great. Thank you.

James E. Geisler - Vice President, Finance

Thanks Ron. Okay. Dena can we take our next caller, please?

Operator

Absolutely sir. We will take our final question today from Myles Walton of

Oppenheimer.

Myles Walton - Oppenheimer & Co., Inc.

Thanks. Good morning.

Gregory J. Hayes - Vice President, Accounting and Finance

Hi Myles.

Myles Walton - Oppenheimer & Co., Inc.

Greg you have taken the conservative stands not raising it to the full year guidance. But I guess maybe the important question is where the contingency stands with respect to the full year guidance. I think you started the year at about $150 million at the top end of the range. So with that that's here it looks like may be that's plus $50 million to $100 million offset a little by Hamilton. So, I guess my question on line, where is the contingency today with respect to the top end of the guidance?

Gregory J. Hayes - Vice President, Accounting and Finance

You ended that pretty well Myles. I don't know if I can add much to it. The fact is that we started the year with a $150 million in contingency. We still feel a very, very good about the year, because we had contingency because of the good news on FX. And again, it's a solid contingency. Right now, as you mentioned Hamilton's got a little bit of potential risk, and it always be a one-to-one [ph] commodities at Carrier whether that's going to continue flow through. But overall, I will tell you, we just feel very good about the year.

James E. Geisler - Vice President, Finance

And again just to fall [ph] into that and earlier comment... may be we do feel very good about the year, and you are right the math is all higher, right. It's an environment that can change and this no benefit with three quarters of the year lap to overreach or go higher and again I don't think we don't want to be in a position or been in the stress like that in possibly declining environment, only you want us to be, releasing our raising doing calls and reduction [ph] either.

Myles Walton - Oppenheimer & Co., Inc.

No, I think that... I think it's good commentary, though I mean essentially that your contingency is flat to up, and you're looking away some of the uncertainties over the back half of the year, and I think that's important takeaway.

Unidentified Company Representative

Thanks Myles.

Gregory J. Hayes - Vice President, Accounting and Finance

Thanks Myles.

James E. Geisler - Vice President, Finance

Okay. Thanks Myles.

Gregory J. Hayes - Vice President, Accounting and Finance

Okay. Let me just may be wrap up with just two last thoughts, if I can. First of all, as you have heard we have got a very, very good quarters, strong backlog. And of course there is a little bit of economic uncertainty on the horizon. But we are confident on our guidance, and we are going to work to continue the each trend with [ph] you guys as we always have. This is a culture of no surprises and we don't endeavor to make sure that there are no surprises as we look forward. And may be conservative but we think it's appropriate in this environment. We have great operating systems here to ACE. We are really focused on the significant guidance for the year [ph]. so we have a good quarter and I think it's going to be a very good year.

Lastly, I just want to say thanks to Ken Parks. Ken Parks is leaving soon, maybe about right after this call, in fact to become CFO at UTC Fire & Security. He has been doing a great job here over the last two years. So we thank him very much, and I know you guys can out him, so you allow [ph] him words of thanks. But he has done just a tremendous job.

At the same time, we are also going to welcome Keo Jordan [ph] back to corporate office as Head of our Investor Relations now. He is leaving Fire & Security for almost five years, five long years. He was in the IR, so he me remember a very short time back in the 2003. We welcome back the Keo; I think he is uniquely positioned with his operating experience at Fire & Security so you can see him these next few years.

So thank you ken and welcome to the Keo. Keo been on the call this afternoon with him so please take your moment and welcome the Keo back as we all do. So we now thank everyone, and we will be talking to you. Bye-bye.

Operator

And that does conclude today conference call. Thank you for your participation. You may disconnect at this time.

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