United Technologies (NYSE:UTX) posted revenue of $15 billion in the third quarter, up 6% y-o-y. The acquisitions of Goodrich and Rolls-Royce’s share of International Aero Engines (IAE) added 11% to its top-line growth. However, organic sales fell 2% y-o-y and foreign currency translation had an adverse impact of 3% y-o-y in the three months ended September 30, 2012. Earnings declined 4% y-o-y to $1.37 per share.  Earnings from Goodrich were offset by its transaction and financial costs incurred during the period, and earnings from other divisions declined due to a fall in demand due to a weak global economy. Restructuring costs too continued to weigh on the company’s earnings.
All in all, United Technologies’s (UTC) Q3 results were weighed down by slow global economic growth. The company currently forecasts the full year 2012 sales of $58 billion, marginally lower than its 2011 sales, and 2012 earnings in the range of $5.25-$5.35 per share compared to $5.58 per share for 2011. 
Weak global economic environment and a stronger dollar weigh on UTC’s sales
China’s recent monetary easing failed to offset the impact of the slowdown in Europe and and the weak global economic growth environment. Excluding the impact of acquisitions, sales declines in each of UTC’s business divisions. The decline was most severe (down 13.5% y-o-y) at UTC climate, controls and security division which sells heating, ventilation and air-conditioning (HVAC) solutions under the Carrier brand. This was followed by 12.1% and 6.3% y-o-y declines at Sikorsky and Otis divisions, respectively. Sales increased by 16% y-o-y at Pratt & Whitney due to the acquisition of IAE and by 125% at UTC Aerospace Systems due to the acquisition of Goodrich.  Overall, UTC sales declined 6% y-o-y to $15 billion.
In addition, a stronger dollar unfavorably impacted sales from outside of the U.S., in particular from Europe. UTC receives approximately 25% of its sales from Europe, and the dollar traded in the range of $1.20–$1.30 to the euro in the third quarter compared to the range of $1.35–$1.45 the same period last year.   This strengthening in the dollar value translated into fewer dollars for foreign currency sales.
Acquisitions add to top-line but fail to lift earnings substantially
The IAE and Goodrich acquisitions added to top-line growth but failed to lift earnings growth. IAE, which was acquired in June-end, added earnings of $0.03 per share in Q3.  But, Goodrich did not have an impact on EPS as its sales were offset by transaction and financing costs.
These acquisitions, particularly Goodrich, has substantially raised UTC’s debt levels. Goodrich was acquired for $18.4 billion, including $1.9 billion of debt and was financed through a combination of debt and equity.  At the end of the third quarter, UTC’s total debt increased nearly 180% y-o-y to $28.7 billion. Its debt to total capitalization ratio increased from 31% to 52% over the same period. 
Restructuring costs continue to pull down margins
UTC also incurred $128 million in restructuring costs in the third quarter. The company had initiated several restructuring activities, including a reduction in workforce and consolidation of field operations to achieve lower cost structures in light of the weak global economic environment. It incurred $332 million in these costs by the end of Q3 and expects to incur $600 million for the full year 2012. 
In the near term, the sluggish economic environment will continue to weigh on UTC’s earnings, and this is reflected in the company’s forecast of lower revenue and earnings for 2012 compared to 2011.
We currently have a stock price estimate of $83.51 for UTC, approximately 5% above its current market price. The has restructured its business divisions to incorporate Goodrich and IAE acquisitions and to achieve higher synergies. We will update our model of UTC soon to reflect the new divisional structure.Notes:
- UTC Reports Third Quarter EPS From Continuing Operations of $1.37, October 23 2012, www.utc.com [↩] [↩] [↩]
- UTC’s financial tables at the end of third quarter, October 23 2012, www.utc.com [↩] [↩] [↩]
- 2011 10-K, www.utc.com [↩]
- EUR/USD, finance.yahoo.com [↩]
- United Technologies To Acquire Goodrich Corporation – Complements And Strengthens Position In Aerospace And Defense Industry, September 21 2011, www.utc.com [↩]