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UK: Chief of United Technologies Talks About Truth and Accounting

by Oliver MorganObserver (London)
July 28th, 2002

'I'll say something on public accounting: it is an art, not a science. That is a rather bold statement. It may cause some people some concern or unrest.'  It certainly does, not least the pop-eyed director of worldwide public relations perched on a chair in London's Connaught Hotel to monitor the words of his chairman and chief executive.
 
George David, the quintessentially American chairman and CEO in question - at the head of US industrial combine United Technologies Corporation - expands the point. 'Accounting summarises the judgements of hundreds, if not thousands of people. UTC has activities at 500 locations in the world. People make judgements in all these locations.' He adds: 'I am choosing my words very carefully.' 
 
He certainly is. David speaks only after considering for at least five seconds - a long pause in what is supposed to be a conversation - while he taps his fingers on the upholstery of London's finest hotel. 
 
This is daring, in this post-Enron and Andersen world, to go where few businessmen would go, let alone American businessmen, for fear of wiping millions off their market value by the merest hint that their numbers do not represent the unalloyed truth. 

But the chief of number 59 on the Fortune 500 list of US companies - the maker of Pratt & Whitney aero engines, Sikorsky Helicopters, Otis Lifts, Carrier air conditioning and Hamilton Sundstrand flight systems - has as his catchphrase: 'What you see is what you get.' He is keen to live up to it. Hell, in a Jack Welch kind of a way, it seems a challenge. 
 
David does not have the outwardly explosive demeanour of 'neutron Jack', the former head of the other giant US aero/industrial combine, General Electric (sixth in the Fortune list), who last year gazumped UTC to Honeywell and then failed to conclude the deal. 
 
But where Welch was brash, he is conservative - a word he likes to use. Where Welch had a tendency to meltdown, he has his own brand of menace.
 
Like Welch, however, David exudes self-belief. He's happy to explore the reasons for the current lack of faith in business: stating baldly that the truth investors want is in reality subjective and the numbers do not always add up. 'People think it is two plus two is four, white is white and black is black. Then they think that anything that is not in that category is incorrect.' 
 
There is a cough from David's left. The PR man has gone crimson. He adds: 'Accountancy reflects judgements. There are rules for how you make them. It is essential you stay inside the rules when you make the judgements.'
 
David reacts robustly to the suggestion that the complex financing behind aero engines, which often involves losing money on sales and recouping it through servicing and spares, or using 'risk/revenue sharing arrangements', could mask accounting creativity. 

He admits plainly: 'There may be a loss on a new aero engine sale. We record the loss. Without qualification. When there is an after-market sale [51 per cent of UTC revenues come here] at some later point we record the financial elements of the transaction at the moment it occurs. We have not ever combined the two.'
 
He says UTC has not entered the kind of risk-sharing deals that caused concern at Rolls-Royce. He adds: 'One of the reasons I feel freer to talk about this than others is that any good observer of this company will tell you that we are seen by everybody to be highly conservative.' 
 
Despite his conversational risk-taking, and the hint of a racier side (he is about to remarry at the age of 60), David radiates conservatism. He is solidly wealthy - he earns $3.1m - and enjoys the pastimes of the solidly wealthy, such as yachting. He runs an old-fashioned company in a sober suit and tie and sprinkles his conversation with conservative, reassuring observations. 
 
What is it like running a major American business just now? 'If earnings go up,' he says, 'the share price goes up. We can't do much about the market.' Simple.
 
Two weeks ago UTC unveiled second-quarter profits up 6.1 per cent, with projected full-year earnings per share running at a better than expected $4.40 - putting it back on track for its target 15 per cent increase after a disappointing last year. The shares rose 5 per cent. 
 
David delivered the results by old-fashioned cost-cutting - slashing jobs at Pratt, affected by the downturn after September 11, and closing plants at Carrier air conditioning - combined with acquisitions via the Otis elevator business. It is the classic conglomerate tactic - focusing on earnings from one part of the group (Otis profits rose 14 per cent) as others hit turbulence (Pratt's profits fell 7 per cent on lower shipments of small engines, spares and power systems). 
 
Running such a company is about managing different business cycles to smooth market volatility. So how does David deal with 'choppy' conditions?
 
Again, he talks conservative. 'What we care about is fundamentals. Long experience is: what goes down goes up and what goes up goes down. But the trend is up over time.'
 
The key longer-term issue is investing the $1bn to $2bn cash generated each year by UTC's traditional businesses. Research and development costs soak up a lot. 'We spend about half of company-funded R&D on commercial engines - and that is $600m a year. It is very research-intensive, and new engine pro duction sometimes results in losses.' 
 
To combat this, UTC has focused on generating as much revenue as possible on after-sales, along with entering a cost-sharing partnership with GE.
 
But short-term volatility presents difficulties, particularly for acquisitions. 'We can fund between $1bn and $2bn of cash transactions [a year],' he says. 'It has been a little harder in the last eight months.' UTC has spent only $350m in the first half. David says: 'We invest for market leadership,' and acquisitions are important to this. But while Otis and Carrier deliver, Pratt does not. 
 
So, while most purchases are small bolt-ons, David was anxious to do the transforming Honeywell deal, which would have won it strength in engines for smaller planes and avionics. 
While Pratt has had recent successes in airline deals - for example, elbowing Rolls-Royce out of its favoured status with Emirates to get a $1.5bn order for its Airbus A380 engines - it has watched Rolls secure second spot to GE with a 25 per cent market share through its new family of Trent engines. 
 
'I think we have a difficult environment for another year. It is well known the aerospace business has a 10-year cycle, with the down in the first two to three years of the decade. September 11 was coincidental with that.' 
 
Rolls-Royce has pointed to a 30 per cent fall in engine deliveries this year. UTC refuses to publish its own estimates. Against this background, the Farnborough Air Show has been downbeat. 'There will not be a big announcement by us or anybody,' says David. 

Despite the Honeywell disappointment and difficult markets, David remains upbeat, in solid, American style. He was quick to support President Bush's recent interventions to steady markets. 
 
Bush has faced problems of his own. In supporting him, tackling the accountancy controversy and just being optimistic, David shows that you can be conservative and controversial. His PR man would surely agree. 




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