Acquisitions Lift United Technologies’ Results Amid A Mixed Macro Environment

United Technologies (NYSE:UTX) posted strong growth in its second quarter sales and profits on gains from Goodrich and International Aero Engines (IAE) acquisitions of last year. Sales of the industrial conglomerate grew by 16% annually to $16 billion, and earnings by 5% annually to $1.70 per share in the second quarter. ^[1]

Excluding acquisitions, organic sales of United Technologies (UTC) were flat on a year-over-year basis. However, when measured sequentially, organic sales of the company improved in the second quarter with positive growth at three out of its five segments namely Otis, Climate, Controls & Security (CCS) and UTC Aerospace Systems. In comparison, in the first quarter, organic sales of UTC had declined by 2% annually. ^[2]

In addition, the company saw strong growth in orders across its segments, including 23% growth in new equipment orders at Otis, 6% growth in equipment orders at CCS, 65% growth in large commercial engine spare orders at Pratt & Whitney driven by incremental IAE share and 4% growth in commercial spare orders at UTC Aerospace Systems. ^[1] Buoyed by such strong order trends, the company forecast its organic growth to turn positive in the second half of the year.

At the same time, citing additional restructure savings, UTC raised the lower end of its full year earnings guidance. The company now expects 2013 earnings per share of $6-$6.15, up from $5.85-$6.15 per share announced earlier. The latest earnings guidance translates to an annual growth of 12-15%. ^[1]

We currently have a stock price estimate of $116 for UTC, around 10% above its current market price.

See our complete analysis of UTC here

Mixed Building Markets – China Up, Europe Down

In the second quarter, UTC faced a mixed macro environment at its two building market related segments – Otis and Climate, Controls & Security (CCS). The latter segment manufactures Carrier brand heating and air-conditioning (HVAC) systems, and building safety and security systems.

Sales across both these segments were impacted by the ongoing slowdown in Europe. However, weakness from Europe was more than offset by growth from China and North American residential HVAC markets. In the second quarter, Otis’ orders from China for new elevator/escalator installations grew by 35% annually, while UTC’s North American residential HVAC system sales increased by 13% annually. ^[3]

Mixed Aerospace Markets – Commercial Up, Military Down

At its aerospace segments, UTC again faced a mixed environment with higher demand from commercial aviation impacted by weakness in defense markets.

In the military space, Pratt & Whitney’s military engine shipments declined to 28 in the second quarter from 41 last year due to budget cuts in the U.S. UTC Aerospace Systems segment, which manufactures aviation components and Sikorsky, also saw their sales from the military aftermarket decline. ^[3]

On the bright side, in the commercial aviation space, sales of Pratt & Whitney, UTC Aerospace Systems and Sikorsky increased in the second quarter driven by higher demand from aircraft manufacturers like Boeing (NYSE:BA), Airbus, Bombardier and Embraer. These original equipment manufacturers are hiking their production rates in order to make timely deliveries against their growing order books, which are being driven by replacement (of older aircraft) demand from developed markets and fresh capacity demand from developing markets.

Pratt & Whitney shipped 185 large commercial jet engines in the second quarter driven by this growing commercial aviation demand, up from 142 in the prior year quarter, and Sikorsky shipped 15 commercial aircraft during the quarter, up from seven in the year ago period. ^[3] UTC Aerospace Systems also saw its sales rise from both commercial original equipment and commercial aftermarket in the quarter.

UTC Lowers Risk With Debt Repayment

Separately, UTC paid down $1.1 billion of its debt during the quarter, improving its debt to total capitalization ratio to 43% at the end of the second quarter, from 52% at the end of the third quarter of 2012. ^{[1] [4]} In July last year, the company had amassed huge debt load following the $18.3 billion acquisition of Goodrich, but since it has been paying down this debt steadily. Nonetheless, the 43% ratio at the end of last quarter is still well above the 31% debt to total capitalization ratio of the company at the beginning of 2012, prior to the acquisition of Goodrich. ^[5]

Understand How a Company’s Products Impact its Stock Price at Trefis

1. UTC’s Q2 2013 earnings form 8-K, July 23 2013, www.utc.com [↩] [↩] [↩] [↩]
2. UTC’s Form 8-K filing for 2013 first quarter earnings, April 23 2013, www.utc.com [↩]
3. UTC’s Q2 2013 earnings presentation, July 23 2013, www.utc.com [↩] [↩] [↩]
4. UTC’s financial tables at the end of third quarter 2012, October 23 2012, www.utc.com [↩]
5. Earning Results of Q4 – Form 8-K, January 23 2013, www.utc.com [↩]