2012 was a happening year for United Technologies Corporation (UTX). The Company went for both acquisition as well as disinvestment to reduce its concentration in the non-core markets like the Fire, Security and Power businesses and to capitalize more on the Aerospace and Building segments. United Tech's acquisition of Goodrich was a landmark deal. Goodrich's landing gears gave United's aviation division a competitive edge in commercial aviation. The company is currently working on the post-restructuring integration of Hamilton Sundstrand and Goodrich into United Technologies Aerospace System (UTAS). It is expected that UTAS will achieve a total synergy of ~$400 million, out of which the company has attained ~$50 million in FY12 and the remaining should be achieved by FY 2013.
Key Acquisition and Divestment for United Technologies:
1. Pratt & Whitney, a subsidiary of United took controlling interest in International Aero Engines (IAE) venture from Rolls-Royce's. Pratt is realigning its manufacturing lineups for the integration and it is expected that it will generate total revenue of ~$15 billion in the year 2013.
2. United Technologies has divested 50% of its under-performing assets in the Fire & Security Segment and is continuously working to improve margins by simplifying and unifying the product lines, reporting structure and eliminating low-performing businesses. An additional operational integration synergy of ~$100 million is expected in 2013 with the integration of the Carrier and Fire & Security businesses, as the new Climate, Control & Security (CC&S) segment.
3. The company also divested some of its non-core businesses in the Fire & Security and Power segments. It has sold the Hamilton Sundstrand Industrials businesses, Rocketdyne, Clipper Windpower, Pratt & Whitney Power Systems in 2012. Also, the company recently announced sell-off of UTC Power to ClearEdge Power. This money will be utilized to pay-off the debts taken up for acquiring Goodrich and the controlling interest in IAE thereby reducing the interest burden on United. The Company took ~$17 billion in form of debts for the acquisitions and it is expected that it will repay ~$6 billion before the end of 1Q13.
Talking about competitors, industry giant General Electric Company (GE) is also betting big on aerospace segment which indicate positive prospects for the industry in long term. GE recently went in for a backward vertical integration by purchasing Italian supplier Avio's Aviation business for ~$4.3 billion. It is expected that the acquisition will generate ~$200 million in cost synergies, primarily due to the enhanced sourcing and overheads consolidation. Around 50% revenue of Avio's Aviation business comes from its sale to G.E. I think this acquisition will bring more positives for GE as it strengthens the company's after-market position in aviation and well as improve its availability of components.
What Investors can expect?
I feel that United's shifting focus to Aviation and Building segments and restructuring the Power and Fire & Security segments is a good move. With these, it has also finished most of its transactions for portfolio restructuring.
Going forward, the company is poised to benefit from demand for commercial aircraft as well as construction recovery in the medium to long term. One of the key clients, Boeing (BA) is also seeing good growth trends which in turn should benefit United Technologies. Boeing's future growth is evident from its 787 Dreamliner stabilization. The 787 was responsible for ~40% of Boeing's topline growth in 2012 and it is expected to be ~80% this year. Although the stock is trading at a premium to its industrial peers, I believe it is warranted given the late cycle nature of Aerospace industry. I would suggest buying this stock for a long haul.