While Digesting Deals United Technologies Positions For Growth

by Trefis Team
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United Technologies
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    Quick Take
  • Organic sales for the company declined across three out of five of its segments which include Climate, Controls & Security, Pratt & Whitney and Sikorsky due to weak demand from Europe and budget cuts in the U.S.
  • In the remaining two segments, organic sales were flat in UTC Aerospace Systems and they increased marginally at Otis, driven by higher sales from China.
  • Going forward, UTC anticipates its organic sales to recover during the year on strength of its current order rates. Accordingly, it reaffirmed its growth outlook for 2013.
  • UTC will also pay off $2 billion of its debt in 2013. The company’s debt had increased significantly last year following the acquisition of Goodrich.

United Technologies‘ (NYSE:UTX) revenues increased by 16% year-over-year to $14.4 billion in the first quarter due to the Goodrich and International Aero Engine (IAE) acquisitions of last year. Excluding these acquisitions, organic sales of the company declined by 2% y-o-y, on a slowdown in Europe, weakness in the commercial aerospace aftermarket and a decline in U.S. defense spending. [1]

On the bright side, orders at the company’s building market related/commercial businesses – Otis and Carrier heating, ventilation and air-conditioning (HVAC) systems increased significantly driven by the rising construction spending from China and consistent growth in U.S. housing starts.

Looking ahead, based on macroeconomic trends and continued growth in new orders at its commercial businesses, United Technologies (UTC) anticipates its organic growth to recover during the year. Accordingly, it reaffirmed its outlook for 2013. The company anticipates its revenues to grow by 11%-13% annually, to $64-$65 billion and its earnings to grow to $5.85-$6.15 per share in 2013, from $5.35 per share in 2012. [2] UTC’s earnings in the first quarter were $1.39 per share up 6% from the prior year period. [1]

We currently have a stock price estimate of $109 for UTC, around 15% above its current market price.

See our complete analysis of UTC here

Lower U.S. Defense Spending And Slowdown In Europe Weigh On UTC’s Results

In 2012, the U.S. government accounted for around $11 billion of the $57.7 billion revenues of UTC. [3] Thus, the decline in spending from the government, especially the significant reduction in its defense budgets is impacting sales of UTC’s military products, which include offerings from Sikorsky, Pratt & Whitney and UTC Aerospace Systems.

In the first quarter, Sikorsky’s military aircraft shipments declined due to headwinds from lower defense spending and lowered the segment’s overall sales by 7% y-o-y to $1.2 billion. Pratt & Whitney’s military engine shipments also declined to 25 in the first quarter from 37 in the year ago period, and UTC Aerospace Systems’ sales from the military aftermarket also declined, due to the lower U.S. defense spending. [1]

This impact from government austerity was enhanced by the economic slowdown in Europe, which impacted sales across all segments of UTC. In particular, the lower construction spending from the region impacted sales at Otis and UTC Climate, Controls and Security. The latter includes the business of Carrier HVAC systems.

Higher Construction Spending From China Drives Order Growth At Otis

On the bright side, higher construction spending from China increased new equipment installation orders at Otis by 24% y-o-y in the first quarter. Orders at UTC Climate, Controls and Security also increased by 5%, driven by a stable demand environment for residential HVAC systems from the Americas. [1]

UTC Will Pay Down Debt And Repurchase Stock

In addition, UTC plans to pay down $2 billion of its debt in 2013, up from its prior estimate of $1 billion, due to its strong cash flow from operations. [1] The company had amassed a large debt load in July last year to fund the $18.3 billion acquisition of Goodrich, but it has been paying off this debt steadily. At the end of the first quarter, UTC lowered its debt to $23.8 billion, from $28.7 billion at the end of the third quarter of 2012. As a result, its debt to total capitalization ratio improved to 45% from 52% over the same period. [1] [4] However, this is still well above its debt to total capitalization ratio of 31% at the beginning of 2012. [5]

UTC also expects to repurchase stock worth $1 billion in 2013. Of this, it repurchased stock worth $335 million in the first quarter. [1]

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Notes:
  1. UTC’s Form 8-K filing for 2013 first quarter earnings, April 23 2013, www.utc.com [] [] [] [] [] [] []
  2. UTC’s 2012 10-K, February 7 2013, www.utc.com []
  3. UTC Overview presentation – investor and analyst meeting, March 14 2013, www.utc.com []
  4. UTC’s financial tables at the end of third quarter, October 23 2012, www.utc.com []
  5. Earning Results of Q4 – Form 8-K, January 23 2013, www.utc.com []
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