UTC Annual Meeting, New York Public Library, New York, NY

UTC Chairman and CEO
George David

Let’s turn now to the business report section of our agenda and I’d like to differ from past practice and ask Louis Chênevert, UTC’s President and Chief Operating Officer, to provide most of these. In introducing Louis, I should note his election as COO effective at last year’s Annual Meeting and that he has spent the intervening year involved primarily with UTC’s operations worldwide and especially the commercial and aerospace companies other than Pratt & Whitney where he had been President for the prior seven years. It’s been an intense year for our President including 6 international trips and more than 50 plant visits. Louis…….

Thank you, George. I’ll start this afternoon with a quick review of UTC’s financial performance in 2006 and then spend a few minutes discussing some key aspects of our business operations.

2006 was another strong year for UTC. Last year our revenues grew to $48 Billion, a 12 percent increase from 2005. Once again, we saw strong Organic Growth at 9 percent, which follows similar growth in 2005 and 2004. This growth is a reflection of the strength of UTC’s products and services, as well as, the strength of our balanced portfolio - balanced not only by business segment, but by geography including a strong presence in fast growing emerging markets.

A continued focus on process improvement and cost containment, trademarks of UTC, lead to solid growth in net income and earnings per share in 2006. Net income and earnings per share were up 18 and 19 percent respectively, and - as usual - cash flow from operations less capital expenditures exceeded net income.

The dividend rate on common shares increased 20 percent in 2006, more than doubling the rate since 2002. Share repurchase in 2006 was $2.1 Billion, a record for UTC. Total shareholder return for the year was 14 percent.

UTC’s cumulative shareholder return over the last decade is 338 percent, more than two and a half times either the Dow Industrials or the S&P 500. This ranks UTC second among the 30 Dow Industrials companies on total shareholder return over the past decade.

Turning now to the business operations, in my first year as President and COO I’ve visited over 50 UTC facilities around the world. Based on my observations during these visits, I’m confident in the opportunities UTC has to increase productivity and drive margin improvement based on further deployment of our already proven ACE operating system. I’ve also been impressed with the talent and skill level of our global workforce, and in particular with the very strong and deep leadership team across UTC.

Along with many achievements in 2006, UTC faced two production issues. Carrier struggled with a tough ramp-up at Collierville where it manufactures its new high-efficiency 13 SEER product line for the North America residential market. Sikorsky also struggled last year in executing its volume ramp-up.

With respect to Carrier, we are confident that the ramp-up issue is behind us. Carrier has achieved and sustained full production rates ahead of schedule this year. Carrier’s 13 SEER product line has also been very well received by customers. It is an industry leading product -it’s smaller, lighter, and more energy efficient than competitors’ products. Moreover, our 13 SEER product line is already compliant with regulatory changes that take effect in 2010, banning the use of the ozone depleting R22 refrigerant. While the strength of the North American residential market remains a question, I feel comfortable in Carrier’s ability to gain share with its superior product line and the lowest cost structure in the industry.

Sikorsky’s challenges last year came in the midst of a three-year period where it is more than doubling its helicopter production. This volume ramp-up, combined with a 6-week strike and a major reconfiguration in how Sikorsky aircraft builds its helicopters resulted in disappointing operating profit and delayed military helicopter deliveries. I have personally spent a great deal of time at Sikorsky this year, and can tell you that Sikorsky is making good progress in optimizing its operations – transitioning away from a highly vertically integrated company to better meet the demands of its ramp-up and its current $9B backlog.

Despite these operational challenges at Carrier and Sikorsky, UTC achieved 19 percent growth in earnings per share. Again, this proves the strength and value of UTC’s balanced portfolio, which allows UTC to overcome adversity in certain business segments or markets. It is also evidence of our presence in strong global markets, focus on cost improvement, and the ability to develop superior products.

Over the past year, product development progressed very well across the entire company. Accomplishments in 2006 include the first flight of the Pratt & Whitney powered Joint Strike Fighter. The Joint Strike Fighter has the potential to be the largest fighter engine program in history, and the Pratt & Whitney engine continues to perform flawlessly during flight testing. The Joint Strike Fighter engine has the same core as the engine that powers the F-22 Raptor. In recognition of the remarkable capabilities of this aircraft, the F-22 Raptor team - including Pratt & Whitney - was awarded the 2006 Collier Trophy, the most prestigious award in aviation. This is the 10th time a UTC division has won or shared in winning the Collier Trophy.

In 2006, we also saw the first delivery of Cessna’s Citation’s Mustang and the first Eclipse 500. Both aircraft are powered by Pratt & Whitney Canada’s PW600 family of engines. The success of these programs confirms our leadership in the emerging Very Light Jet market.

Last year, Hamilton Sundstrand opened its Boeing 787 systems integration laboratory in Rockford, Illinois and increased its already high content on the Boeing 787 with an additional system win. Hamilton Sundstrand will provide 9 systems for the 787, which is scheduled to fly for the first time later this year. Hamilton also saw strong growth in its industrial business, growing 21% in 2006 with solid margin expansion. The Industrial business is now a billion dollar business and all of its units, Sullair, Sundyne and Milton Roy are industry leaders.

On the commercial side, Otis’ Gen2 elevator product line continues to be a great success, allowing Otis to gain share both in the US and in markets around the world. Taking all markets and products combined, Otis has gained more than five percentage points of market share since 2000, due in large part to the Gen2 product launch.

UTC Fire & Security also had a good year, making further progress integrating Kidde and improving margins while investing in new product development. We continue to look for opportunities to grow and strengthen our portfolio across the fire safety and electronic security business as we have done with the recently announced acquisition of the electronic security division of Rentokil and the planned divesture of the low-technology manned guarding business.

At Carrier, the combination of energy efficient products and environmentally friendly technology allowed it to win a remarkable 69 percent of the air conditioning contracts awarded to date for the 2008 Beijing Olympics. This success reinforces Carrier as a leader in commercial air conditioning in the fast growing China market.

Of course, none of UTC’s success would be possible without the contributions of our 215,000 employees around the world who continue to make UTC a truly amazing company. On behalf of all shareholders, I want to end my remarks by thanking our employees for their hard work and many contributions to UTC.

I’d like to close this business report section with some top level comments on aspects of corporate citizenship important to UTC. We closed at the end of 2006 our prior decade’s goals on environment, health and safety and generally with remarkable success. Lost workday incidence internationally and U.S. recordable incidence were down 80 and 78 percent, respectively. Worldwide energy use measured in Btu’s was down 19 percent and water use in gallons was down 49 percent, both on a company twice the size. Two week ago UTC was also recognized yet again by the EPA’s Climate Leaders program for having met and surpassed the commitments we set with them five years ago.

Looking ahead, we set early this year our goals for the four years through 2010. Notable among these is a further halving of the lost workday incidence rate internationally, to a world class level. Second is our commitment to reducing carbon dioxide equivalents (which means basically greenhouse gasses) by three percent annually or a total of 12% over the four years. The latter goal is independent of UTC’s internal growth rates which means not only are reducing emissions but on significantly higher volumes. Both are tough targets as are all the other 2010 metrics.

We closed out two months ago UTC’s first material compliance blemish in 15 years, a European Commission investigation into cartel behavior in the elevator industry in four countries in Europe We had previously completed our own internal investigation, terminated 9 employees, cooperated aggressively with the Commission, and re-launched and re-emphasized our already important Code of Ethics and compliance program worldwide. Although the fine was large, it was notable for having been reduced by 49% reflecting Otis’ and UTC’s aggressive support for the Commission’s investigation and the strength of our then existing compliance program.

A year ago also marked the first decade of UTC’s Employee Scholar Program. 21,000 degrees have been earned by our employees worldwide, and additionally 13,000 employees are current participants (8500 domestically and 4500 internationally). Advanced degrees are forty percent of the total, and degrees earned by hourly paid employees 25%. UTC’s investment is $600 million over the decade and we regard it as some of the best money we’ve ever spent.

We’ve had some nice recognition in the last six months. Fortune magazine ranked us in February again number one in the aerospace and defense category in its annual Most Admired companies survey. In March, BusinessWeek recognized us in its list of the 50 “best in class” companies in the S&P 500. And last September, Barron’s ranked UTC number 11 on its list of the world’s 100 Most Respected Companies.

Altogether, we’ve fared well in the last year and look forward to another solid year ahead and beyond.