Slowing Global Growth Weighs On United Technologies

by Trefis Team
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United Technologies (NYSE:UTX) posted revenues of $13.8 billion in the second quarter down 5% y-o-y on lower sales at Otis division, partially offset by higher sales of residential heating, ventilation and air-conditioning (HVAC) systems in North America. [1] Sales were also negatively impacted by a stronger U.S. dollar. However, operating profit in the second quarter was $2.2 billion, up 1.3% y-o-y, on higher operating margins at Climate, Controls & Security business division.

Also, the company has lowered its earnings per share (EPS) guidance range for full year 2012 to $5.25 – $5.35, from the earlier indicated $5.30 – $5.50, due to slowing global economic growth and higher restructuring costs.

Lower sales at Otis impact revenues

Sales in the Otis division were $3 billion in the second quarter, down 5.2% y-o-y. Sales were impacted most in China where the ongoing efforts of Chinese government to cool real estate prices and tame inflation has had an adverse effect on the high-end construction market, which constitutes more than 50% of Otis’ sales in China. The division designs, manufactures and sells elevator and escalator systems under the brand name Otis and constitutes nearly 30% of the overall company value. The effect of decline in sales was magnified by a stronger U.S. dollar.

Higher sales of HVAC systems in North America aid revenue growth

However, higher sales of residential HVAC systems in North America partially offset the decline in sales at Otis. North America experienced a warmer than usual summer this year, and as a result, new equipment orders for residential HVAC systems, which includes Carrier brand of air-conditioners, increased 4% y-o-y. [2]

Also, operating margins for the Climate, Controls & Security division, which includes the HVAC systems business, increased to 17.3% in the second quarter of 2012, compared to 12.9% in second quarter of 2011. This helped operating profits for the company rise on a year-over-year basis, in the second quarter. Operating margins for the division benefited from the one-time net gain of approximately $142 million, accrued from sale of a controlling interest in the division’s Canadian distribution system.

A lower EPS guidance range for 2012

The company also lowered its earnings per share (EPS) guidance range for 2012 to $5.25 – $5.35, from the earlier indicated $5.30 – $5.50. The downward revision has been driven by three major factors. First, the slowing growth of global economy particularly China, which constitutes a significant portion of the overall sales for the company. Second, a weaker euro that the company anticipates will remain in the range of $1.20 for remainder of 2012, and affect sales from Europe unfavorably. And third, an upward revision in estimated restructuring costs for 2012 to $500 million from the earlier indicated $450 million. The company initiated several restructuring activities, including reduction in workforce and consolidation of field operations to achieve lower cost structures. It has incurred $204 million in restructuring costs by the end of second quarter.

On the whole, the company has to deal with a challenging business environment over remainder of 2012. But, the Goodrich acquisition, which we anticipate will be completed in the third quarter of current year should enable United Technologies to take advantage of the growing aerospace industry to drive growth for the company over the coming years.

We are in the process of incorporating the results of second quarter earnings and shall update our analysis shortly.

We currently have a stock price estimate of $102 for the company, approximately 35% above its current market price.

See our complete analysis of United Technologies here

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Notes:
  1. 2012 Q2 10-Q, July 26 2012, www.utc.com []
  2. UTC Reports Second Quarter EPS Growth From Continuing Operations of 15 Percent; Expects 2012 EPS of $5.25 to $5.35 on Sales of $58 Billion to $59 Billion and Increases Restructuring, July 26 2012, www.utc.com []
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