United Technology’s Outlook Improves Despite Lower Earnings

by Trefis Team
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United Technologies‘ (NYSE:UTX) fourth quarter earnings declined 27% year-over-year to $1.04 per diluted share due to the slowdown in Europe, lower military engine shipments and negative impacts from restructuring and one-time charges. The largest impact was from restructuring and one-time charges that led to a loss of $0.25 per diluted share on earnings. [1]

On the bright side, earnings were helped by monetary easing in China that promoted growth in new equipment orders for Otis. The recovering housing market in the U.S. drove growth in the residential heating, ventilation and air-conditioning (HVAC) business. The company also paid off a significant portion of its debt in the fourth quarter and, looking at 2013, it forecasts 9% to 15% y-o-y growth in earnings. [1]

Restructuring activities

UTC had initiated several restructuring activities in the first quarter of 2012, including a reduction in workforce and consolidation of field operations to achieve lower cost structures in light of the weak global economic environment. UTC incurred $268 million in these costs in Q4 and $600 million in full year 2012. [2] To provide context, the company’s operating profit in Q4 was $1.75 billion. [1]

Mixed economic environment

The recession in several parts of Europe due to the sovereign debt crisis in European Union impacted sales volume of Otis elevators and escalators. The decline in the region also offset growth in China and Americas where new equipment orders for Otis increased in double-digits. However, looking forward, growth in China is a good sign as the country is the largest market for elevators.

In the first half of 2012, the sales of Otis elevators in the country had declined significantly due to monetary tightening by the Chinese government to control inflation. However, around mid-2012, the reduction in key interest rates revived construction spending in the country and improved sales of elevators and escalators.

Additionally, along with rising construction spending in China, the recovering residential and commercial building industry in the U.S. saw a double-digit improvement in sales of UTC’s residential HVAC systems in Americas. UTC sells HVAC systems under the Carrier brand.

Earnings in the fourth quarter were also impacted by lower military and large commercial engine shipments. In the fourth quarter of 2012, Pratt & Whitney, a unit of UTC, delivered 174 military and large commercial engines, down from 203 in the year-ago period. [3]

Lower debt

UTC also paid down a significant portion of its debt in Q4. Total debt for the company declined to $23.2 billion at the end of Q4, down from $28.7 billion at the end of Q3. [2] As a result, the company’s debt to total capitalization ratio improved from 52% to 46% over the same period. However, this is still very high compared to 31% at the beginning of 2012. [1] Debt increased in 2012 due to multiple acquisitions including the $18.4 billion acquisition of Goodrich.

Portfolio transformation in 2012 and outlook for 2013

Looking back at 2012, the key highlight for UTC was its portfolio transformation with the acquisition of Goodrich and Rolls Royce’s share of International Aero Engines (IAE) and divestiture of several non-core businesses like the industrial business of Hamilton Sundstrand. As a result, the company increased its stake in the global aviation industry, which is poised for growth in the long term driven by increasing demand for flights from emerging economies.

For 2013, UTC forecasts revenues in the range of $64-$65 billion, up from $58 billion in 2012, and earnings in the range of $5.85-$6.15 per diluted share, up from $5.35 per diluted share in 2012. [1]

We currently have a stock price estimate of $86 for UTC, approximately in-line with its current market price. We are in the process of incorporating Q4 earnings and will update our analysis shortly.

See our complete analysis of UTC here

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Notes:
  1. Earning Results of Q4 – Form 8-K, January 23 2013, www.utc.com [] [] [] [] []
  2. UTC’s financial tables at the end of third quarter, October 23 2012, www.utc.com [] []
  3. Q4 2012 earnings conference call presentation slides, January 23 2013, www.utc.com []
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