United Technologies’ Organic Sales A Concern Amid An Uneven Recovery

by Trefis Team
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    Quick Take 

  • In the second quarter, United Technologies (UTC) will post strong year-over-year growth in its sales and profits driven by the Goodrich and International Aero Engines (IAE) acquisitions last year.
  • Excluding these, organic sales of the company will likely be lower due to the negative impact from lower government spending in the U.S. and the economic slowdown in Europe.
  • On the bright side, high construction spending from China will aid results in the building market related commercial business of UTC – Otis and Climate, Controls & Security (CCS).
  • Also, in focus this earnings will be the decline in UTC’s debt load, which has increased significantly following the acquisition of Goodrich.

United Technologies (NYSE:UTX) will announce its second quarter earnings Tuesday, July 23. Organic sales will be in focus this quarter following a decline across three out of its five segments in the previous quarter after taking out the effects of the Goodrich and IAE acquisitions in 2012. Weak demand from Europe and budget cuts in the U.S. were the primary sources cited for the weakness.

In the second quarter, it will be interesting to see if the negative impact on United Technologies’ (UTC) organic sales from lower U.S. defense spending and construction spending from Europe will again offset the growth from commercial aviation and higher construction spending from China. However, including the impact from Goodrich and International Aero Engines (IAE) acquisitions completed in the third and second quarter of last year, respectively, sales and profits of UTC will likely post strong growth in the second quarter.

For full year 2013, driven by benefits from acquisitions UTC anticipates its revenues to grow 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. [1] In the first quarter, UTC’s earnings were $1.39 per share, up 6% from the prior year period. [2]

Also, in focus in the second quarter earnings will be the decline in UTC’s debt load. The company amassed a huge debt last year following the Goodrich acquisition, but it has been paying off this debt steadily since. We currently have a stock price estimate of $110 for UTC, around 10% ahead of its current market price.

See our complete analysis of UTC here

Lower U.S. Defense Spending And Slowdown In Europe Will Weigh On Results

In 2012, the U.S. government accounted for $11 billion of the $57.7 billion revenues of UTC, [3] and so the decline especially in defense spending is impacting sales of UTC’s military products, which include offerings from Sikorsky, Pratt & Whitney and UTC Aerospace Systems. In particular, Sikorsky’s military aircraft shipments, Pratt & Whitney’s military engine shipments and UTC Aerospace Systems’ military aftermarket sales are suffering from lower U.S. defense spending.

The impact from government austerity is being enhanced by the economic slowdown in Europe which is impacting results across all segments of UTC. In particular, the lower construction spending from the region is impacting sales at Otis and Climate, Controls & Security (CCS). The latter includes the business of Carrier heating, ventilation and air-conditioning (HVAC) systems.

High Construction Spending From China Will Lift Results

On the bright side, higher construction spending from China is aiding growth in new equipment installations at Otis. In the previous quarter, orders for new elevator and escalator installations increased by 24% year-over-year driven by the growth from China. [2] In addition, we anticipate the ongoing recovery in US housing starts to also aid results at CCS by maintaining a stable demand environment for residential Carrier HVAC systems from the U.S.

Decline In Debt In Focus

Also, in focus in the second quarter earnings will be the progress that UTC has made in achieving its 2013 target of lowering debt load by $2 billion. In the first quarter, UTC  lowered its debt by $372 million, improving its debt to total capitalization ratio to 45% at the end of the quarter, from 46% at the end of 2012. [2] However, this is well above its debt to total capitalization ratio of 31% at the beginning of 2012, prior to the acquisition of Goodrich. [1]

Separately, UTC is also expected to announce significant stock repurchases undertaken in the second quarter. In the first quarter, the company repurchased common stock worth $335 million, and for full year 2013, UTC anticipates to repurchase stock worth around $1 billion. [2]

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Notes:
  1. UTC’s 2012 10-K, February 7 2013, www.utc.com [] []
  2. UTC’s Form 8-K filing for 2013 first quarter earnings, April 23 2013, www.utc.com [] [] [] []
  3. UTC Overview presentation – investor and analyst meeting, March 14 2013, www.utc.com []
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