The Daily Magic Formula Stock for 09/12/2008 is United Technologies Corp. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is 50-75 %.
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United Technologies Corporation was incorporated in Delaware in 1934. UTC provides high technology products and services to the building systems and aerospace industries worldwide. Growth is attributable to acquisitions and the internal development of our existing businesses. The following description of our business should be read in conjunction with â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť in our 2007 Annual Report, especially the information contained therein under the heading â€śBusiness Overview.â€ť
Our operating units include businesses with operations throughout the world. Otis, Carrier and UTC Fire & Security (collectively referred to as the commercial businesses) serve customers in the commercial and residential property industries worldwide. Carrier also serves commercial, industrial, transport refrigeration and food service equipment customers. Pratt & Whitney, Hamilton Sundstrand and Sikorsky (collectively referred to as the aerospace businesses) primarily serve commercial and government customers in the aerospace industry. Hamilton Sundstrand and Pratt & Whitney also serve customers in industrial markets. For 2007, our commercial and industrial revenues (generated principally by our commercial businesses) were approximately 63 percent of our consolidated revenues, and commercial aerospace and military aerospace revenues were approximately 21 percent and 16 percent, respectively, of our consolidated revenues. Revenues for 2007 from outside the United States, including U.S. export sales, were 62 percent of our total segment revenues.
This Form 10-K and our quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Investor Relations section of our Internet website (www.utc.com) under the headings â€śFinancialsâ€ť and/or â€śSEC Filingsâ€ť as soon as practicable after these reports are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). Our SEC filings are also available for reading and copying at the SECâ€™s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) containing reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Description of Business by Segment
We conduct our business through six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Each segment groups similar operating companies and the management organization of each segment has general operating autonomy over a range of products and services. The principal products and services of each segment are as follows:
â€”elevators, escalators, moving walkways and service.
â€”residential, commercial and industrial heating, ventilating, air conditioning (HVAC) and refrigeration systems and equipment, food service equipment, building automation and controls, HVAC and refrigeration components and installation, retrofit and aftermarket services.
UTC Fire & Security
â€”fire and special hazard detection and suppression systems and fire fighting equipment, electronic security, monitoring and rapid response systems and service and security personnel services.
Pratt & Whitney
â€”commercial, general aviation and military aircraft engines, parts and services, industrial gas turbines and space propulsion.
â€”aerospace products and aftermarket services, including power generation, management and distribution systems, flight systems, engine control systems, environmental control systems, fire protection and detection systems, auxiliary power units and propeller systems, and industrial products, including air compressors, metering pumps and fluid handling equipment.
â€”military and commercial helicopters, aftermarket helicopter and aircraft parts and services.
Segment financial data for the years 2005 through 2007, including financial information about foreign and domestic operations and export sales, appears in Note 15 to the Consolidated Financial Statements in our 2007 Annual Report.
Otis is the worldâ€™s largest elevator and escalator manufacturing, installation and service company. Otis designs, manufactures, sells and installs a wide range of passenger and freight elevators for low-, medium- and high-speed applications, as well as a broad line of escalators and moving walkways. In addition to new equipment, Otis provides modernization products to upgrade elevators and escalators as well as maintenance services for both its products and those of other manufacturers. Otis serves customers in the commercial and residential property industries around the world. Otis sells directly to the end customer and, to a limited extent, through sales representatives and distributors.
Revenues generated by Otisâ€™ international operations were 81 percent and 80 percent of total Otis segment revenues in 2007 and 2006, respectively. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006, Otis undertook a re-evaluation of the factors used to calculate service contract backlog in light of an industry-wide progression to longer term maintenance contracts. The adjustment to these factors resulted in an increase to backlogs reported for both 2006 and 2005. During 2007, Otis made system enhancements at several locations enabling the backlog calculations at those locations to be made on a contract-by-contract basis to provide a more precise calculation of the Otis backlog. These enhancements resulted in further adjustments to the backlog. As currently calculated, Otisâ€™ backlog at December 31, 2007 is $14,146 million as compared to $12,549 million at December 31, 2006. Calculated as previously reported, Otisâ€™ backlog at December 31, 2006 was $11,583 million. Of the total Otis backlog at December 31, 2007, approximately $8,167 million is expected to be realized as sales in 2008.
Carrier is the worldâ€™s largest manufacturer and distributor of HVAC and refrigeration systems. It also produces food service equipment and HVAC and refrigeration-related controls for residential, commercial, industrial and transportation applications. Carrier also provides installation, retrofit and aftermarket services and components for the products it sells and those of other manufacturers in the HVAC and refrigeration industries. Carrierâ€™s products and services are sold under Carrier and other brand names to building contractors and owners, homeowners, transportation companies, retail stores and food service companies. Carrier sells directly to the end customer and through manufacturersâ€™ representatives, distributors, wholesalers, dealers and retail outlets. Certain of Carrierâ€™s HVAC businesses are seasonal and can be impacted by weather.
Revenues generated by Carrierâ€™s international operations, including U.S. export sales, were 59 percent and 54 percent of total Carrier segment revenues in 2007 and 2006, respectively. At December 31, 2007, Carrierâ€™s business backlog was $2,097 million as compared to $1,852 million at December 31, 2006. Substantially all the business backlog at December 31, 2007 is expected to be realized as sales in 2008.
UTC Fire & Security
UTC Fire & Security (UTC F&S) is a global provider of security and fire safety products and services. We created the UTC F&S segment in the second quarter of 2005 upon acquiring Kidde, adding the Kidde industrial, retail and commercial fire safety businesses to the former Chubb segment. In the electronic security industry, UTC F&S provides system integration, installation and service of intruder alarms, access control systems and video surveillance systems under several brand names including Chubb. In the fire safety industry, UTC F&S designs, manufactures, integrates, installs, sells and services a wide range of specialty hazard detection and fixed suppression products and systems and manufactures, sells and services portable fire extinguishers and other fire fighting equipment under several brand names including Kidde. UTC F&S also provides monitoring, response and security personnel services, including cash-in-transit security, to complement its electronic security and fire safety businesses. Its products and services are used by governments, financial institutions, architects, building owners and developers, security and fire consultants and other end-users requiring a high level of security and fire protection for their businesses and residences.
In the third quarter of 2007, we completed the acquisition of Initial Electronic Security Group (IESG), a division of Rentokil Initial, plc, with the exception of the French operations, the acquisition of which we completed during the fourth quarter of 2007. IESG is being integrated into the UTC F&S segment and is expected to enhance UTC F&Sâ€™s scale and capability in the electronic security business in key markets where UTC F&S has a significant presence. In the third quarter of 2007, we also completed the acquisition of Marioff Corporation Oy, a global provider of water mist suppression systems for land and marine applications.
UTC F&S provides its products and services under Chubb, Kidde, Lenel and other brand names and sells directly to the customer as well as through manufacturer representatives, distributors and dealers. Revenues generated by UTC F&Sâ€™s international operations were 82 percent and 84 percent of total UTC F&S segment revenues in 2007 and 2006, respectively. At December 31, 2007, UTC F&Sâ€™s business backlog was $1,084 million as compared to $692 million at December 31, 2006. Substantially all the business backlog at December 31, 2007 is expected to be realized as sales in 2008.
Pratt & Whitney
Pratt & Whitney is among the worldâ€™s leading suppliers of commercial, general aviation and military aircraft engines. Pratt & Whitneyâ€™s Global Service Partners provides maintenance, repair and overhaul services, including the sale of spare parts, as well as fleet management services for large commercial engines. Pratt & Whitney produces families of engines for wide, narrow body and military aircraft. Pratt & Whitney also sells engines for auxiliary power units, industrial applications and space propulsion systems. Pratt & Whitney Canada (P&WC) is a world leader for engines powering business, regional, light jet, utility and military aircraft and helicopters. Pratt & Whitney Rocketdyne (PWR) is a leader in the design, development and manufacture of sophisticated aerospace propulsion systems for military and commercial applications, including the space shuttle.
In view of the risk and cost associated with developing new engines, Pratt & Whitney has entered into collaboration arrangements in which revenues, costs and risks are shared. At December 31, 2007, the interests of participants in current Pratt & Whitney-directed commercial jet engine production programs ranged from 14 percent to 29 percent. In addition, Pratt & Whitney has interests in other engine programs, including a 33 percent interest in the International Aero Engines (IAE) collaboration that sells and supports V2500 engines for the Airbus A320 family of aircraft. At December 31, 2007, Pratt & Whitney sub-partners held interests equivalent to 4 percent of the overall IAE collaboration. Pratt & Whitney also has a 50 percent interest in the Engine Alliance (EA) (a joint venture with GE Aviation) to develop, market and manufacture the GP7000 engine for the Airbus A380 aircraft. At December 31, 2007, other participants held interests totaling 40 percent of Pratt & Whitneyâ€™s 50 percent share of the EA. Flight testing of the GP7000 commenced in 2006. European Aviation Safety Agency and Federal Aviation Authority type certification of the Airbus A380 aircraft with the GP7000 engines occurred in December 2007, with entry into service expected in 2008.
In terms of engine development programs, Pratt & Whitney is under contract with the U.S. Air Force to develop the F135 engine, a derivative of Pratt & Whitneyâ€™s F119 engine, to power the single-engine F-35 Lightning II aircraft being developed by Lockheed Martin. In addition, Pratt & Whitney is currently developing technology, including testing of a geared turbofan engine, which is intended to enable it to power proposed and future aircraft. Pratt & Whitney has also initiated the Advantage 70 program, which is intended to enhance its PW4000 engine for the Airbus A330 aircraft by reducing maintenance and fuel costs and increasing thrust. PWR is developing a liquid fuel J-2x engine to support NASAâ€™s vision for space exploration. P&WC is developing the PW600 engine series for the very light jet market. Three of these P&WC PW600 engine models have been selected to power Cessna Aircraftâ€™s Citation Mustang, Eclipse Aviationâ€™s Eclipse 500 and Embraerâ€™s Phenom 100. P&WC is also developing the PW210 engine for Sikorskyâ€™s S-76D helicopter. IAE is developing the V2500Select Â® program as an enhancement to its V2500 engine. Pratt & Whitney continues to enhance its programs through performance improvement measures and product base expansion. During 2006, Pratt & Whitney launched Global Material Solutions (GMS), a new business that is in the process of engineering, certifying, manufacturing and selling new parts, including life limited parts, for CFM56 Â® -3 engines.
Pratt & Whitneyâ€™s products are sold principally to aircraft manufacturers, airlines and other aircraft operators, aircraft leasing companies, space launch vehicle providers and the U.S. and foreign governments. Pratt & Whitneyâ€™s products and services must adhere to strict regulatory and market driven safety and performance standards. The frequently changing nature of these standards, along with the long duration of aircraft engine programs, create uncertainty regarding engine program profitability. The vast majority of sales are made directly to the end customer and, to a limited extent, using independent distributors and service providers. Sales to Airbus and Boeing were 9.5 and 6.4 percent, respectively, of total Pratt & Whitney revenues in 2007, before taking into account discounts or financial incentives offered to customers. Sales to the U.S. government were 29.5 percent of total Pratt & Whitney segment revenues in 2007.
Revenues from Pratt & Whitneyâ€™s international operations, including U.S. exports, were 56 percent and 53 percent of total Pratt & Whitney segment revenues in 2007 and 2006, respectively. At December 31, 2007, Pratt & Whitneyâ€™s business backlog was $23,607 million, including $5,334 million of U.S. government-funded contracts and subcontracts, as compared to $16,893 million and $2,895 million, respectively, at December 31, 2006. Of the total Pratt & Whitney backlog at December 31, 2007, approximately $6,882 million is expected to be realized as sales in 2008. Pratt & Whitneyâ€™s backlog includes certain contracts for which actual costs may ultimately exceed total revenues from these contracts. See Note 1 to the Consolidated Financial Statements in our 2007 Annual Report for a description of our accounting for long-term contracts.
Hamilton Sundstrand is among the worldâ€™s leading suppliers of technologically advanced aerospace and industrial products and aftermarket services for diversified industries worldwide. Hamilton Sundstrandâ€™s aerospace products, such as power generation management and distribution systems, flight systems, engine control systems, environmental control systems, fire protection and detection systems, auxiliary power units and propeller systems, serve commercial, military, regional, business and general aviation, as well as space and undersea applications. Aftermarket services include spare parts, overhaul and repair, engineering and technical support and fleet maintenance programs. Hamilton Sundstrand sells aerospace products to airframe manufacturers, the U.S. and foreign governments, aircraft operators and independent distributors. Hamilton Sundstrand sales of aerospace products to Boeing, Airbus and Pratt & Whitney, collectively, including sales where the U.S. government was the ultimate customer, were 16.6 percent of Hamilton Sundstrand segment sales in 2007.
Hamilton Sundstrand is engaged in development programs for the Boeing 787 aircraft, the Lockheed Martin F-35 Lightning II military aircraft and the Airbus A400M military aircraft, and has developed and delivered systems for the Airbus A380 aircraft. Hamilton Sundstrand is also the prime contractor for NASAâ€™s space suit/life support system and produces environmental monitoring and control, life support, mechanical systems and thermal control systems for the space shuttle, international space station and the Orion crew exploration vehicle.
Hamilton Sundstrandâ€™s principal industrial products, such as air compressors, metering pumps and fluid handling equipment, serve industries involved with raw material processing, bulk material handling, construction, hydrocarbon and chemical processing, and water and wastewater treatment. Hamilton Sundstrand sells these products under the Sullair, Sundyne, Milton Roy and other brand names directly to end-users, and through manufacturer representatives and distributors.
Revenues generated by Hamilton Sundstrandâ€™s international operations, including U.S. export sales, were 50 percent and 47 percent of total Hamilton Sundstrand segment revenues in 2007 and 2006, respectively. At December 31, 2007, Hamilton Sundstrandâ€™s business backlog was $5,152 million, including $823 million under U.S. government-funded contracts and subcontracts, as compared to $4,527 million and $725 million, respectively, at December 31, 2006. Of the total Hamilton Sundstrand backlog at December 31, 2007, approximately $2,761 million is expected to be realized as sales in 2008.
Sikorsky is one of the worldâ€™s largest manufacturers of military and commercial helicopters and also provides aftermarket helicopter and aircraft parts and services.
Current major production programs at Sikorsky include the UH-60L and UH-60M Black Hawk medium-transport helicopters for the U.S. and foreign governments, the MH-60S and MH-60R helicopters for the U.S. Navy, the International Naval Hawk for multiple naval missions, and the S-76 and S-92 helicopters for commercial operations. In December 2007, the U.S. government and Sikorsky signed a five-year multi-service contract for 537 H-60 helicopters to be delivered to the U.S. Army and U.S. Navy. Actual production quantities will be determined year-by-year over the life of the program based on funding allocations set by Congress and Pentagon acquisition priorities. In April 2006, Sikorsky was awarded a System Development and Demonstration contract for the U.S. Marine Corps CH-53K next generation heavy lift helicopter. Development of the H-92 helicopter for military markets and the S-76D helicopter, which is expected to be the next generation of the S-76 helicopter, is in process.
In March 2007, UTC acquired the Polish aircraft manufacturer, PZL Mielec, which is intended to form the foundation for Sikorskyâ€™s European operations. Sikorskyâ€™s aftermarket business includes spare parts sales, overhaul and repair services, maintenance contracts, and logistics support programs for helicopters and other aircraft. Sales are made directly by Sikorsky and by its subsidiaries and joint ventures. Sikorsky is increasingly engaging in logistics support programs and partnering with its government and commercial customers to manage and provide maintenance and repair services.
Revenues generated by Sikorskyâ€™s international operations, including U.S. export sales, were 34 percent of total Sikorsky revenues in 2007 and in 2006. At December 31, 2007, Sikorskyâ€™s business backlog was $11,445 million, including $5,180 million under U.S. government-funded contracts and subcontracts, as compared to $8,789 million and $3,257 million, respectively, at December 31, 2006. Of the total Sikorsky backlog at December 31, 2007, approximately $5,116 million is expected to be realized as sales in 2008.
UTC Power develops and markets distributed generation power systems and fuel cell power plants for stationary, transportation, space and defense applications. UTC Powerâ€™s three primary distributed generation product lines, PureCell 200 fuel cell power plants, PureComfort combined cooling, heat and power systems and PureCycle geothermal organic Rankine cycle power systems, are designed to provide reliable, efficient and environmentally responsible energy solutions for customers.
UTC Powerâ€™s automotive and bus transportation fuel cell power plants are based on proton exchange membrane (PEM) technology, including its PureMotion 120 power plant, which is currently used in revenue service in transit bus applications. UTC Power is currently developing PEM fuel cells for submarine applications. UTC Powerâ€™s alkaline-based fuel cells are used on NASAâ€™s space shuttle program.
Although fuel cells are believed to be superior to conventional power generation technologies in terms of efficiency and environmental characteristics, the technology is still in development and continued technology advancement and cost reduction of key fuel cell components are required to achieve wide-scale market acceptance. Government support is needed to advance fuel cell technology to a truly commercial stage. There is still significant uncertainty as to whether and when commercially viable PEM fuel cells will be produced.
UTC Power merged with UTC Fuel Cells, effective January 1, 2007, with UTC Power continuing as the surviving entity. The results of UTC Power and UTC Fuel Cells are included in the â€śEliminations and Otherâ€ť category in the segment financial data in Note 15 to the Consolidated Financial Statements in our 2007 Annual Report.
Other Matters Relating to Our Business as a Whole
Competition and Other Factors Affecting Our Businesses
As worldwide businesses, our operations can be affected by a variety of economic and other factors, including those described in this section, in â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť included in our 2007 Annual Report, in Item I, â€śCautionary Note Concerning Factors That May Affect Future Results,â€ť and in Item 1A, â€śRisk Factorsâ€ť in this Form 10-K. Each business unit is subject to significant competition from a large number of companies in the United States and other countries, and each competes on the basis of price, delivery schedule, product performance and service.
Our aerospace businesses are subject to substantial competition from domestic manufacturers, foreign manufacturers (whose governments sometimes provide research and development assistance, marketing subsidies and other assistance for their national commercial products) and companies that obtain regulatory agency approval to manufacture spare parts. In particular, Pratt & Whitney experiences intense competition for new commercial airframe/engine combinations. Engine suppliers may offer substantial discounts and other financial incentives, performance and operating cost guarantees, participation in financing arrangements and maintenance agreements. Customer selections of engines and components can also have a significant impact on later sales of parts and services. In addition, the U.S. governmentâ€™s and other governmentsâ€™ policies of purchasing parts from suppliers other than the original equipment manufacturer affect military spare parts sales. Significant elements of our aerospace businesses, such as spare parts sales for engines and aircraft in service, have short lead times. Therefore, backlog information may not be indicative of future demand. Pratt & Whitneyâ€™s major competitors in the sale of engines are GE Aviation and Rolls-Royce. For information regarding customer financing commitments, participation in guarantees of customer financing arrangements and performance and operating cost guarantees, see Notes 4 and 13 to the Consolidated Financial Statements in our 2007 Annual Report.
Research and Development
Since changes in technology can have a significant impact on our operations and competitive position, we spend substantial amounts of our own funds on research and development. These expenditures, which are charged to expense as incurred, were $1,678 million, or 3.1 percent of total sales in 2007, as compared with $1,529 million or 3.2 percent of total sales in 2006 and $1,367 million or 3.2 percent of total sales in 2005. We also perform research and development work under contracts funded by the U.S. government and other customers. This contract research and development, which is performed principally in the Pratt & Whitney segment and to a lesser extent in the Hamilton Sundstrand and Sikorsky segments, amounted to $2,123 million in 2007, as compared to $1,952 million in 2006 and $1,650 million in 2005. These contract research and development costs include amounts that are expensed as incurred, through cost of products sold, and amounts that are capitalized into inventory to be subsequently recovered through production aircraft shipments. Of the totals, $1,872 million, $1,621 million and $1,478 million were expensed in 2007, 2006 and 2005, respectively. The remaining costs have been capitalized.
U.S. Government Contracts
U.S. government contracts are subject to termination by the government, either for the convenience of the government or for default as a result of our failure to perform under the applicable contract. In the case of a termination for convenience, we would normally be entitled to reimbursement for our allowable costs incurred, plus termination costs and a reasonable profit. If terminated by the government as a result of our default, we could be liable for additional costs the government incurs in acquiring undelivered goods or services from another source and any other damages it suffers. Most of our U.S. government sales are made under fixed-price type contracts, while approximately $2,221 million or 4.1 percent of our total sales for 2007 were made under cost-reimbursement type contracts.
Our contracts with the U.S. government are also subject to audits. Like many defense contractors, we have received audit reports from the U.S. government which recommend that we reduce certain contract prices because cost or pricing data we submitted in negotiation of the contract prices or cost accounting practices may not have conformed to government regulations. Some of these audit reports have involved substantial reductions. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain cases. For further discussion of risks related to government contracting, see the discussion in Item 1A, â€śRisk Factorsâ€ť and Item 3, â€śLegal Proceedings,â€ť in this Form 10-K and Note 14 to the Consolidated Financial Statements in our 2007 Annual Report for further discussion.
Compliance with Environmental and Other Government Regulations
Our operations are subject to and affected by environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. We have incurred and will likely continue to incur liabilities under various government statutes for the cleanup of pollutants previously released into the environment. We do not anticipate that compliance with current provisions relating to the protection of the environment or that any payments we may be required to make for cleanup liabilities will have a material adverse effect upon our cash flows, competitive position, financial condition or results of operations. Environmental matters are further addressed in â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť and Notes 1 and 14 to the Consolidated Financial Statements in our 2007 Annual Report.
Most of the U.S. laws governing environmental matters include criminal provisions. If we were convicted of a violation of the federal Clean Air Act or Clean Water Act, the facility or facilities involved in the violation would be ineligible to be used in performing any U.S. government contract we are awarded until the Environmental Protection Agency certified that the condition giving rise to the violation had been corrected.
We conduct our businesses through subsidiaries and affiliates worldwide. Changes in legislation or government policies can affect our worldwide operations. For example, governmental regulation of refrigerants and energy efficiency standards, elevator safety codes and fire safety regulations are important to the businesses of Carrier, Otis and UTC F&S respectively, while government safety and performance regulations, restrictions on aircraft engine noise and emissions and government procurement practices can impact our aerospace businesses.
Intellectual Property and Raw Materials
We maintain a portfolio of patents, trademarks, licenses and franchises related to our businesses. While this portfolio is cumulatively important to our business, we do not believe that the loss of any one or group of related patents, trademarks, licenses or franchises would have a material adverse effect on our overall business or on any of our operating segments.
We believe we have adequate sources for our purchases of materials, components, services and supplies used in our manufacturing. We work continuously with our supply base to ensure an adequate source of supply and to reduce costs. We pursue cost reductions through a number of mechanisms, including consolidating our purchases, reducing the number of suppliers, strategic global sourcing and using online bidding competitions among potential suppliers. In some instances, we depend upon a single source of supply or participate in commodity markets that may be subject to allocations of limited supplies by suppliers. Like other users in the United States, we are largely dependent upon foreign sources for certain raw materials requirements such as cobalt (Finland, Norway, Russia and Canada), tantalum (Australia and Canada), chromium (South Africa, Kazakhstan, Zimbabwe and Russia) and rhenium (Chile, Kazakhstan and Germany). We have a number of ongoing programs to manage this dependence and the accompanying risk, including long-term agreements and the conservation of materials through scrap reclamation and new manufacturing processes. We believe that our supply management practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Although recent high prices for some raw materials important to some of our businesses (steel, copper, aluminum, titanium and nickel) have caused margin and cost pressures, we do not foresee any near term unavailability of materials, components or supplies that would have an adverse effect on our overall business or on any of our business segments. For further discussion of the possible effects of the cost and availability of raw materials on our business, see Item 1A, â€śRisk Factorsâ€ť in this Form 10-K.
Employees and Employee Relations
At December 31, 2007, our total employment was approximately 225,600, approximately 66 percent of which represents employees based outside the United States. During 2007, we renegotiated twenty-two multi-year collective bargaining agreements, the largest of which covered certain workers at Otis and Pratt & Whitney. In 2008, numerous collective bargaining agreements are subject to renegotiation, the largest of which cover certain workers at Carrier and Hamilton Sundstrand. We do not anticipate any problems in renegotiating these contracts that would either individually or in the aggregate have a material adverse effect on our financial condition or results of operations. For discussion of the effects of our restructuring actions on employment, see â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť and Note 11 to the Consolidated Financial Statements in our 2007 Annual Report.
For a discussion of other matters which may affect our financial condition, results of operations or cash flows, including the risks of our international operations, see the further discussion under the headings â€śGeneralâ€ť and â€śDescription of Business by Segmentâ€ť in this section, Item 1A, â€śRisk Factorsâ€ť in this Form 10-K, and under â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť in our 2007 Annual Report.
Cautionary Note Concerning Factors That May Affect Future Results
This Form 10-K contains statements which, to the extent they are not statements of historical or present fact, constitute â€śforward-looking statementsâ€ť under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These forward-looking statements are intended to provide managementâ€™s current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as â€śbelieve,â€ť â€śexpect,â€ť â€śplans,â€ť â€śstrategy,â€ť â€śprospects,â€ť â€śestimate,â€ť â€śproject,â€ť â€śtarget,â€ť â€śanticipate,â€ť â€śguidanceâ€ť and other words of similar meaning in connection with a discussion of future operating or financial performance. These include, among others, statements relating to:
future earnings and other measures of financial performance;
future cash flow and uses of cash;
the effect of economic downturns or growth in particular regions;
the effect of changes in the level of activity in particular industries or markets;
the availability and cost of materials, components, services and supplies;
the scope, nature or impact of acquisition activity and integration into our businesses;
the development, production and support of advanced technologies and new products and services;
new business opportunities;
restructuring costs and savings;
the impact of tax laws and regulatory changes;
the effective negotiation of collective bargaining agreements;
the outcome of contingencies;
future repurchases of common stock;
future levels of indebtedness and capital spending; and
pension plan assumptions and future contributions.
All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For additional information identifying factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Forms 10-K, 10-Q and 8-K filed with the SEC from time to time. This Annual Report on Form 10-K for 2007 includes important information as to these factors in the â€śBusinessâ€ť section under the headings â€śGeneral,â€ť â€śDescription of Business by Segmentâ€ť and â€śOther Matters Relating to Our Business as a Wholeâ€ť and in the â€śRisk Factorsâ€ť and â€śLegal Proceedingsâ€ť sections. Additional important information as to these factors is included in our 2007 Annual Report in the section titled â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations.â€ť
LOUIS R. CHĂŠNEVERT, President and Chief Operating Officer, United Technologies Corporation. Mr. ChĂŞnevert was elected President and Chief Operating Officer on March 8, 2006. He previously served as President of the Pratt & Whitney division of UTC from April 1999 through March 2006. In 2005, he was inducted as a Fellow of the American Institute of Aeronautics and Astronautics (AIAA). Mr. ChĂŞnevert serves on the Board of Directors of the Friends of HEC Montreal, the Board of Overseers for the Bushnell Center for the Performing Arts in Hartford, Connecticut and the Directorâ€™s Advisory Board for the Yale Cancer Center. Mr. ChĂŞnevert is 50 and has been a UTC director since 2006.
GEORGE DAVID, Chairman and Chief Executive Officer, United Technologies Corporation. Mr. David was elected Chief Executive Officer in 1994 and Chairman in 1997. He also served as UTCâ€™s President from 2002 to 2006 and from 1992 to 1999. Mr. David is a board member of BP and Citigroup. He is also a member of The Business Council and The Business Roundtable, and Vice Chairman of the Peterson Institute for International Economics. Mr. David was awarded the Order of Friendship from the Russian Federation in 1999 and in May 2002 France named him to its Legion of Honor. Mr. David is 65 and has been a UTC director since 1992.
JOHN V. FARACI has been Chairman and Chief Executive Officer of International Paper (paper, packaging and wood products) since 2003. Earlier in 2003 he was elected President and a director of International Paper, and previously served as Executive Vice President and Chief Financial Officer, with additional corporate responsibility for the companyâ€™s former majority-owned New Zealand subsidiary, Carter Holt Harvey. He joined International Paper in 1974. He serves on the boards of the American Forest & Paper Association, the Grand Teton National Park Foundation and the National Park Foundation. He is a member of The Business Roundtable, Citigroup International Advisory Board, the American Enterprise Institute and the Denison University Board of Trustees. Mr. Faraci is 58 and has been a UTC director since 2005.
JEAN-PIERRE GARNIER, Ph.D., has served as Chief Executive Officer and Executive Member of the Board of Directors of GlaxoSmithKline plc (pharmaceuticals) since 2000. Dr. Garnier served as Chief Executive Officer of SmithKline Beecham plc in 2000 and as Chief Operating Officer and Executive Member of the Board of Directors of SmithKline Beecham plc from 1996 to 2000. He served as Chairman, Pharmaceuticals, SmithKline Beecham from 1994 to 1995. Dr. Garnier is a director of the Committee to Encourage Corporate Philanthropy and the Eisenhower Exchange Fellowships. In 2007, he was promoted from Chevalier to Officier de la LĂ©gion dâ€™Honneur of France. In 2006, he was named to the global list of top 20 CEOs by the Best Practice Institute. He is currently a board member of the Stanford Advisory Council on Interdisciplinary Biosciences and the Weill Cornell Medical College, serves on UK Prime Minister Gordon Brownâ€™s International Business Advisory Council and is a member of the advisory board of Dubai International Capitalâ€™s Global Strategic Equities Fund. Dr. Garnier is 60 and has been a UTC director since 1997.
JAMIE S. GORELICK is a partner at the international law firm, WilmerHale, having joined the firm in 2003. Ms. Gorelick represents companies on regulatory, compliance, governance and enforcement issues. She has held numerous positions in the U.S. Government, serving as Deputy Attorney General of the United States, as General Counsel of the Department of Defense, as Assistant to the Secretary of Energy, and most recently as a member of the bipartisan National Commission on Terrorist Threats Upon the United States. She also served as Vice Chair of Fannie Mae from 1997 to 2003. She is currently a member of the boards of Schlumberger, Ltd., the John D. and Catherine T. MacArthur Foundation, the Carnegie Endowment for International Peace, the Washington Legal Clinic for the Homeless, and The Urban Institute. She is a member of the Council on Foreign Relations. Ms. Gorelick is 57 and has been a UTC director since 2000.
CHARLES R. LEE served as the Non-Executive Chairman of the Board of Directors of Verizon Communications (telecommunications) from April 2002 until his retirement in December 2003. He was Chairman and Co-Chief Executive Officer of Verizon Communications from June 2000 to March 2002. Prior to the merger of GTE Corporation and Bell Atlantic Corporation to form Verizon Communications, Mr. Lee served as Chairman and Chief Executive Officer of GTE Corporation from 1992 to 2000. He is a director of United States Steel Corporation, Marathon Oil Corporation, The Procter & Gamble Company and The DIRECTV Group, Inc. Mr. Lee is also a member of the Board of the American Institute for Research (AIR), Project GRAD and the Stamford Hospital Foundation. He is also a Trustee Emeritus and Presidential Councilor of Cornell University. In addition, he serves on the Board of Overseers for the Weill Cornell Medical College and is a member of The Business Council. Mr. Lee is 68 and has been a UTC director since 1994.
RICHARD D. MCCORMICK served as Chairman of the Board of U S WEST, Inc. (telecommunications) from June 1998 until his retirement in May 1999. He was Chairman, President and Chief Executive Officer of U S WEST, Inc. from May 1992 until June 1998. He is also a director of Wells Fargo and Company, Nortel Networks Corporation and Nortel Networks Limited. In addition, he is a former Chairman and Honorary Chairman of the International Chamber of Commerce, Vice Chairman of the United States Council for International Business, a trustee of the Denver Art Museum, Vice President of the Denver Art Museum Foundation and Director Emeritus of Creighton University. Mr. McCormick is 67 and has been a UTC director since 1999.
HAROLD MCGRAW III has been Chairman of the Board of The McGraw-Hill Companies (global information services) since 1999 and President and Chief Executive Officer of McGraw-Hill since 1998. Mr. McGraw was President and Chief Operating Officer of McGraw-Hill from 1993 to 1998. He is also a director of ConocoPhillips, Chairman of the Emergency Committee for American Trade, The Business Roundtable and the Committee Encouraging Corporate Philanthropy, and a member of The Business Council, the State Departmentâ€™s Advisory Committee in Transformational Diplomacy and the U.S. Trade Representativeâ€™s Advisory Committee for Trade, Policy and Negotiations (ACTPN). He also serves on the boards of Carnegie Hall, the National Council on Economic Education, The New York Public Library, National Organization on Disability, National Academy Foundation, Partnership for New York City, the Council for Industry and Higher Education in London and Prep for Prep. Mr. McGraw is 59 and has been a UTC director since 2003.
RICHARD B. MYERS, Ret. U.S. Air Force General, served as Chairman of the U.S. Joint Chiefs of Staff from 2001 to 2005. He was the principal military adviser to President George W. Bush, Secretary of Defense Donald Rumsfeld, and the National Security Council. Gen. Myers previously served as Vice Chairman, which included acting as Chairman of the Joint Requirements Oversight Council, Vice Chairman of the Defense Acquisition Board, and member of the National Security Council Deputies Committee and the Nuclear Weapons Council. He also serves on the boards of Aon Corporation, Deere & Company, and Northrop Grumman. Gen. Myers is the Foundation Professor of Military History at Kansas State University and holds the Colin Powell Chair for Leadership, Ethics and Character at the National Defense University. He is a member of the Defense Policy Board and the Department of Stateâ€™s Transformation Diplomacy Advisory Board. Gen. Myers is 65 and has been a UTC director since 2006.
H. PATRICK SWYGERT has served as President of Howard University since 1995. Mr. Swygert served as President of the University at Albany, State University of New York from 1990 to 1995, and as Executive Vice President of Temple University from 1987 to 1990. He also serves on the boards of Fannie Mae and The Hartford Financial Services Group Inc. Mr. Swygert is a member of the Central Intelligence Agencyâ€™s External Advisory Board, the Advisory Council for the Smithsonian Institutionâ€™s National Museum of African American History and Culture, the D.C. Emancipation Commemoration Commission, the U.S. National Commission for the United Nations Educational, Scientific and Cultural Organization (UNESCO) and the Commission on Presidential Debates. Mr. Swygert is 64 and has been a UTC director since 2001.
ANDRĂ‰ VILLENEUVE has been the Non-Executive Chairman of LIFFE (now part of NYSE Euronext group), the London futures and derivatives exchange, since 2003. He was an executive director of Reuters from 1989 to 2000. He was Chairman of Instinet Corp., an electronic brokerage subsidiary of Reuters, from 1990 to 1999, and Executive Chairman from 1999 to 2002. He is Chairman, City of London EU Advisory Group and a member of the UK Chancellorâ€™s High Level Financial Services Group. Mr. Villeneuve was Chairman of Promethee, the French think tank, from 1998 to 2002 and non-executive director of Aviva PLC from 1996 to 2006. He is currently a non-executive director of IFRI (Institut Francais des Relations Internationales), International Financial Services London and EuroArbitrage. Mr. Villeneuve is 63 and has been a UTC director since 1997.
CHRISTINE TODD WHITMAN served as Administrator of the U.S. Environmental Protection Agency from January 2001 through June 2003. She was Governor of the State of New Jersey from 1994 through 2001. She has served as President of The Whitman Strategy Group (environment and public policy consulting) since December 2004. She is a director of Texas Instruments Incorporated, S.C. Johnson & Son, Inc. and the Council on Foreign Relations. In addition, she serves on the Steering Committee of The Cancer Institute of New Jersey, the board of trustees of the Eisenhower Fellowships, the Governing Board of the Park City Institute, and is a member of the National Council of the National Parks Conservation Association and the BP America Inc. External Advisory Board. She is also a member of the Center for Civic Engagement and Volunteerism Advisory Board at Raritan Valley Community College. Gov. Whitman is 61 and has been a UTC director since 2003.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF CONTINUING OPERATIONS
Revenue growth in the second quarter of 2008 includes organic growth of 6%, revenue contributed by acquired companies of 2%, and the favorable impact from foreign currency translation of 5% resulting from the weakness of the U.S. dollar relative to currencies such as the Euro. The growth in organic revenue reflects the strength in the commercial aerospace OEM and commercial HVAC markets, the strong opening new equipment backlog at Otis and the demand for military helicopters as discussed previously in the â€śBusiness Overviewâ€ť section.
The six month revenue increase of 12% consists of organic growth of 7%, the favorable impact of foreign currency translation of 4%, and revenue contributed by acquired companies of 2% partially offset by a decrease in other income of 1%. As with the second quarter growth, the six month revenue growth is due largely to strong new equipment backlog entering the year at Otis, the strength in the commercial aerospace OEM markets and the demand for military helicopters. The decrease in other income in the first six months of 2008, as compared with 2007, is largely related to the absence of gains reflected in the first quarter of 2007, which included approximately $150 million related to the sale of certain marketable securities and an $84 million gain recognized on the sale of land by Otis.
Gross margin increases for the second quarter of 2008, as compared to the same period of 2007, resulted from higher volumes, savings from previously initiated restructuring actions, net operational efficiencies and the favorability of foreign exchange translation. Gross margin as a percentage of sales improved 50 basis points as compared with the second quarter of 2007 as the factors noted above more than offset the adverse impact of higher commodity and restructuring costs. After a partial recovery through pricing, the net adverse impact to earnings of higher commodity costs was approximately $50 million in the second quarter and for the six months ended June 30, 2008.
For the first six months of 2008, gross margin as a percentage of sales increased by 110 basis points, as compared to the same period of 2007. This improvement is primarily due to the absence of the first quarter 2007 EU Fine, net of reserves (approximately $216 million). The adverse impact of foreign exchange at Pratt & Whitney Canada was largely offset by savings from previously initiated restructuring actions and net operational efficiencies.
The increase in company-funded research and development in the second quarter and first six months of 2008, compared to the same periods in 2007, was driven largely by continued efforts on Pratt & Whitneyâ€™s next generation product family, which includes the Geared Turbofan TM (GTF) engine. Company-funded research and development spending for the full year 2008 is expected to increase by approximately $200 million from 2007 levels, led by Pratt & Whitneyâ€™s engineering investments on aerospace programs such as the GTF. Company funded research and development spending is subject to the variable nature of program development schedules. The increase in customer-funded research and development spending in the second quarter of 2008, compared to the same period in 2007, relates largely to increased engineering effort in space programs at Pratt & Whitney and space and military programs at Hamilton Sundstrand. The increase in customer-funded research and development spending for the first six months of 2008, as compared to the same period of 2007, relates largely to increased engineering effort in space programs at Pratt & Whitney and space and military programs at Hamilton Sundstrand and military programs at Sikorsky.
The increase in selling, general and administrative expenses for the quarter and six months ended June 30, 2008, compared to the same periods of 2007, is due primarily to general increases across the businesses in support of volume, higher restructuring charges, and the adverse impact of foreign currency translation. Selling, general and administrative expenses as a percentage of sales in the second quarter of 2008 as compared to the same period in the prior year increased primarily due to higher year over year restructuring charges (approximately 40 basis points) and the impact of recent acquisitions at UTC Fire & Security. For the first six months of 2008, selling, general and administrative expenses increased as a percentage of sales primarily due to the impact of recent acquisitions at UTC Fire & Security and higher year over year restructuring charges (approximately 20 basis points).
Interest expense for the quarter and six months ended June 30, 2008, as compared to the same periods in 2007, has increased primarily as a result of the issuances of $1.0 billion of long-term debt in December 2007 bearing interest at 5.375% and $1.0 billion of long-term debt in May 2008 bearing interest at 6.125%. The overall average interest rate declined as these debt issuances were at interest rates lower than the existing debt levels.
The effective tax rate for the six months ended June 30, 2008 decreased as compared to the same period of 2007 due to the absence of certain discrete events that impacted 2007. The 2007 period was adversely impacted by the previously disclosed EU Fine, and the sale of land and marketable securities. The effective tax rate for the second quarter of 2008 is consistent with the anticipated effective rate for the full year absent any discrete activity.
Foreign currency translation had a positive impact on earnings per share in the second quarter of 2008 of $.04 per share compared to $.03 per share in the same period of 2007, while incremental restructuring charges resulted in an adverse impact of $.06 per share and $.02 per share in the second quarter 2008 and 2007, respectively. As previously disclosed, the diluted earnings per share for the first six months of 2007 included the EU Fine, net of previously established reserves against the fine, and incremental restructuring charges, partially offset by gains on the sale of land and marketable securities, and the favorable impact of a contract termination at Pratt & Whitney, resulting in a $.07 per share adverse impact on diluted earnings per share in the first quarter of 2007 and an additional $.02 per share adverse impact in the second quarter of 2007. In the first six months of 2007, net income was further reduced by an increase in minority interest which included $27 million for the minority partnerâ€™s share of the gain from the previously noted sale of land.
Gregory J. Hayes - Vice President, Accounting and Finance
Thanks you, Nicky and good morning everyone. You saw in the press release this morning, we had anther very strong quarter driven by solid performance across the business.
Revenues were up 13%, with six points of organic revenue growth. Earnings per share in the quarter were $1.32, and that's up 14% over last year, and includes $0.06 per share of uncovered restructuring charge. Absent the impact of restructuring, and the results for both second quarter of '07 and '08, earnings per share was up 17%. Foreign exchange generated a net $0.04 benefit in the quarter, positive impact from the euro and other currencies, partially offset once again by the FX headwind that's present [ph] with these Canadian operations.
Most importantly, we remain confident about the year. Accordingly, we're taken our earnings guidance for the full year up to a range of $4.80 to $4.95 a share, and that's up 12% to 16%, $0.15 on the bottom, $0.10 on the top of the prior range. These increases are on the back of better earnings of Otis and UTC Fire & Security. Both units are now expected to the deliver operating profit guidance... or operating profits higher than the guidance already inbuilt in firm just this past February.
All the other businesses are on track with the prior profit guidance. You should note that the revised guidance does assume the year with a current spot rate of about $1.58, and you'll recall that our plan assumed the euro rate at about $1.44, a little bit of tailwind there.
We're also updating our guidance on full year revenues. We now expect it to be over $60 billion. And on restructuring spending as well, year-to-date we've incurred about $130 million in restructuring costs, all of this uncovered by gains. We do expect some gains in the second half for the year, and we are also increasing today our outlook for restructuring spending for the year to about $300 million. That's double the $150 million we forecasted at the beginning.
Now as you know, it's not unusual for us to see some lumpiness in the timings of gains and restructuring on a quarter-to-quarter basis. But, we do expect that restructuring will be significantly in excess of gains for the full year.
And free cash flow, it came in at 87% of net income, quarter-to-quarter. It's primarily due to Carrier seasonality, as you would expect, as well as slightly lower advances at Sikorsky.
We are encouraged however by inventory performance in the quarter. And the overall level of inventory remains high, especially, at the aero businesses. Although inventory was essentially flat for the quarter, improving inventory performance remains a focus; there is still a lot of work to do.
And full year cash flow, we expect the usual UTC standard of free cash flow greater than or equal to net income. Also in the quarter, we repurchased $719 million of UTC shares bringing the year-to-date total to over $1.5 billion.
In this full year, we may continue to be optimistic in our repurchases. The share repurchases will likely exceed the $2 billion guidance that we have for the year, especially, if the stock continues to trade at decade low P/E multiple.
Another key, I will take you through the business in details in just a minute, but let me talk about some of the concerns here as we have been hearing from investors over the last few months. And those concerns are of course, commercial aerospace markets, commercial construction order trends and commodity inflation. Now, with oil around $135 a barrel, we are all concerned about the impact for our airline customer's profitability, and the associated capacity reductions they'll have forecasted.
In the second quarter, large commercial engine spare parts sales at Pratt & Whitney were about flat with last year, generally in line with Pratt's expectations going into the year. And book-to-bill was marginally below one. And with concerns around its commercial spare parts and the sale... parts sales in the quarter, we were in the mid single-digit range. For the year, our outlook for spares at both of these divisions remained generally in line with where they were at the start of the year. But, we'll be watching these trends closely.
As for commercial construction activity, we continue to see very strong orders that brought us decent growth in Carrier's commercial business. In the quarter, in North America, new equipment orders were at double-digits, worldwide orders were up 23%. Carrier's commercial HVAC business, new equipment orders in North America were essentially flat in the quarter. But commercial HVAC orders worldwide were up double-digits.
In Europe, new equipment orders at both companies were strong in the quarter, with Otis up nearly 40%. Well, about half of that was from the benefit of the euro. Otis saw particularly good growth in France, Germany, Eastern Europe.
Carrier's commercial HVAC business grew about 12% in Europe in the quarter at a constant currency rate. Asian orders for both companies continued to grow at double-digit rates.
Our refrigeration orders at Carrier both in North America and Europe continued weaker in quarter as we had previously discussed. We're also mindful of the construction industry forecast for the U.S. are generally down, although our order book doesn't indicate this yet.
Given this overall environment, all of our commercial businesses are continuing to focus on cost reduction and restructuring actions.
Last issue I want to touch upon is commodity cost increases. Recall, going into the year we expect a gross commodity cost impact including energy, to be about $200 million, with about half of that offset by pricing. We now see these gross commodity costs increases of over $300 million. Pricing is still expected to offset a little more than half of the impact.
As you all know, steel prices are roughly double than past year along with the cost of oil. Some of the metals used in the aero businesses as well as copper are also up, although to a much lesser extends.
On the other hand, we are getting better pricing than anticipated. In some, higher commodity cost than anticipated at the beginning of the year, but also a better pricing environment.
UTC's response to all of these challenges of course to continue to work on cost and productivity, while we bump the year's restructuring to about $300 million, also why we continue to focus on the implementation of basic cost in all of our businesses. As a result to tight cost control, restructuring and process improvement, we saw 40 basis points of margin expansion in the quarter, adjusting for restructure.
Our portfolio of companies has allowed us to outperform in the past, we expect to continue to outperform even in the current market environment. Our target of 10% and more earnings growth annually remains unchanged. Our executive compensation incentives are all tied to this target.
I will turn over to Akhil and have you walk through the business.
Akhil Johri - Vice President, Investor Relations
Thanks, Greg. Before I begin on page four, let me mention that I will talk to segment results with restructuring added back as we usually do.
Otis delivered another very good quarter. Revenues increased 19%, the growth in all geographic region led by double-digit growth in North America and Russia and China. This reflects the strong new equipment backlog entering the year, as well as higher modernization and the fair sales in Europe, which benefited from changes to elevator safety laws in France and Spain.
Operating profit grew 25%, as higher volume, product cost reductions and other cost containment initiatives more than offset headwinds on input cost increases. Feasible foreign exchange contributed approximately half of the improvement in revenues and profit. As a result of all of the above, operating margin expanded by 90 basis points to 19.8%.
Otis new equipment orders were up 23% in the quarter as Greg mentioned 14% at constant currency, reflecting double-digit increases in all geographic areas. In light of very strong first half performance and Otis current expectations, we are now increasing profit growth guidance for Otis from 10% plus to nearly 20% for the full year. Also we are increasing revenue growth guidance from high single-digit to low teens.
At Carrier, operating profit increased 9% on 7% higher revenue. Foreign exchange contributed about five points of revenue growth and six points of the profit growth. Operating margin expanded 10 basis points to 12.2%. Benefits from product cost reduction and prior restructuring action in the commercial HVAC and North American residential businesses more than offset $30 million of net commodity headwind in the quarter, an adverse shift towards lower margin segment in the refrigeration and international residential businesses.
The commercial HVAC business remains solid with mid single-digit revenue growth. On the negative side however, we still have the U.S. housing recession. Cooling season started poorly in Europe and commercial refrigeration markets are down both in Europe and North America.
In the face of market softness, Carrier has launched significant restructuring and other cost reduction initiatives. As a result, we remain comfortable with Carrier's full year earnings growth guidance of 10% plus on mid single-digit increase in revenue.
UTC Fire & Security performance was also strong. Revenue grew 29% with acquisitions contributing 18 points and foreign exchange seven points of this growth. Organic growth was 4% with the fire safety businesses in Europe and the Americas up mid single-digits. The security business in Europe up low single-digit and the man guarding business is down moderately in the quarter.
Operating profit increased 46% with foreign exchange contributing eight points of the growth. Benefits of restructuring actions and continuing productivity initiatives along with the profit contribution from acquisitions were partially offset by the impact of lower U.S. residential volume. Operating margin expanded 100 basis points to 8.8%.
Based on performance to date, we are increasing UTC Fire & Security full year operating profit growth guidance from 25% to 30%. We are also increasing the revenue growth guidance from high single-digit to mid teens.
Now, turning to the Aerospace businesses on slide seven, Pratt & Whitney revenues increased 6% in the quarter, led by continued engine volume growth at Pratt & Whitney Canada.
Revenues improved over 20% at Pratt Canada, revenues at Pratt & Whitney Rocketdyne and Power Systems also grew over 10%, while military revenues are essentially flat. Large commercial engine aftermarket grew low single-digit with spares [ph] about flat.
Operating profit also improved 6% in the quarter led by the military business on favorable aftermarket performance and improved engine mix. This was partially offset by adverse top visit mix in the large commercial engine aftermarket business. Profit contribution from high revenues at Pratt Canada was largely offset by the unfavorable foreign currency impact from the weaker U.S. dollar. E&D [ph] for Pratt was essentially flat in the quarter.
We continue to expect Pratt & Whitney revenues to be up mid single-digit and operating profit to be up approximately 10% for the year.
Hamilton Sundstrand revenues were up 18%, with aerospace OEM and industrial businesses up nearly 20% each.
Commercial aftermarket revenues were up double-digit, operating profit grew 11% and margin contracted in the quarter, primarily from adverse mix. Lower margin development revenues grew by about 20%, while higher margin commercial spares revenues grew only mid single-digits. Hamilton also faced pressure from commodity and input cost increases during the quarter.
For 2008, we now expect revenues at Hamilton to the higher up low teens. We continue to see operating profit up 10%, or $100 million as indicated last December.
At Sikorsky, operating profit grew 28% on 9% higher revenues. Operating margin expanded 120 basis points in the quarter to 8.5% from higher military volume and favorable mix.
During the quarter, Sikorsky shipped a total of 53 large helicopters; 37 military and 16 commercial. Sikorsky remains committed to its guidance of more than 200 large aircraft deliveries for the year. Sikorsky continues to expect mid-teens revenue growth, with operating profit up approximately 25% in 2008.
Now, let me turn it back to Greg, to wrap up.
Gregory J. Hayes - Vice President, Accounting and Finance
Okay. Thanks, Akhil. While we open the call up to questions, let me just hit on a couple of the significant new product milestones that we've achieved just this past quarter.
First on the 787 program, Boeing, as you no doubt heard, has successfully completed 787's power-on testing with the support of Hamilton Sundstrand. Next big milestone on 787 of course is its first flight which is scheduled for later this year.
Second big milestone for UTC of course is the GTF or fuel-powered W1000 as we now call it, which flew successfully for over six hours 747 tested this past week. Most importantly, engine met or exceeded all of its pre-test performance criteria [ph]. This will of course power the new Bombardier CSeries aircraft, which was formally launched earlier this week, and a letter of interest for up to 60 aircrafts from Lufthansa.
Finally, in the commercial space, UTC Powers had [ph] an order to supply 12 of our brand new 400 kilowatt fuel cells, with the Freedom Tower and three other towers at the World Trade Center site in New York.
All right, summing it all up, it's been a very good quarter, more noteworthy given the economic uncertainties that we're all dealing with. Revenues up 13%, EPS 14%, net of restructuring 17%. Increased guidance 15% on the... $0.15 rather on the bottom of the range and a dime at the top, now expect 12% to 16% EPS growth for the year. Not an unusual performance for UTC is more the same type of performance you have come to expect. Balance across geographies and product, up restructuring fast productivity mentality, especially in more challenging times.
In an unusual strong string of product launches which looked to be highly successful in the markets. Of course, cash content and net income supported increased cash returns to shareholders. It's too soon to talk about 2009 specifically. You should know that we're all focused on double-digit earnings cash flow growth.
With that, let's open up the call for questions. Nicky?