- Quick Take
- In the fourth quarter, United Technologies (UTC) will likely post strong growth in its revenues and earnings driven by incorporation of full year results from Goodrich, which it acquired in mid-2012.
- Excluding the impact from this acquisition, UTC’s organic sales will likely post more moderate growth due to mixed macro environment in the global aviation and building markets.
- Also in focus in the fourth quarter results will be the decline that UTC posts in its debt load.
United Technologies (UTX) will announce its fourth quarter earnings Wednesday, January 22. The industrial conglomerate will likely post strong growth in its revenues and profits driven by acquisitions and cost cutbacks. In the first three quarters of 2013, United Technologies’ (UTC) revenues rose by 11% annually to nearly $46 billion, and its earnings rose by 8% annually to $4.64 per share, largely due to incorporation of full year sales from Goodrich, which it acquired in July 2012.  Excluding the impact from acquisitions, we figure that growth in UTC’s fourth quarter organic sales will be moderate, as it faced mixed macro environment across its businesses during the quarter. In particular, we anticipate growth in UTC’s organic sales from commercial aviation to be offset in part by weak construction markets in Europe and lower defense spending in the U.S.
For full year 2013, driven by acquisitions and supported by moderate organic growth, UTC forecasts its revenues to be around $63 billion, up from $58 billion last year, and its earnings to be around $6.15 per share, up from $5.35 per share in 2012.  We currently have a stock price estimate of $119 for UTC, around 5% ahead of its current market price.
Mixed Aviation Markets – Commercial Up, Military Down
UTC’s aviation related segments – Pratt & Whitney, Aerospace Systems and Sikorsky – are witnessing mixed demand, with growth from commercial aviation being offset in part by weakness from military aviation.
In the military space, demand is hit due to reduced defense spending from the U.S. government, which constitutes a significant share of UTC’s total revenues. In 2012, the government constituted around $11 billion of the company’s $57.7 billion revenues.  In the first nine months of 2013, due to government austerity, military engine shipments from UTC’s Pratt & Whitney segment fell to 78 from 119 in the same period last year.  Sales of Sikorsky and UTC Aerospace Systems, which manufactures aviation components, also faced headwinds in this period from government’s defense budget cuts. We expect these trends continued to weigh on UTC’s results in the fourth quarter.
On the bright side, sales of UTC’s Pratt & Whitney, Aerospace Systems, and Sikorsky segments are expected to continue to grow in the fourth quarter, driven by demand from global commercial markets. Airplane replacement demand from developed markets like the U.S., and fresh capacity addition demand from developing regions like Asia-Pacific and Latin America, are driving new orders at aircraft manufacturers like Boeing (BA) and Airbus. In turn, these aircraft manufacturers are hiking their production rates, which is increasing shipment volumes of engines and aircraft parts manufactured by Pratt & Whitney and UTC Aerospace Systems segments.
Mixed Building Markets – China Up, Europe Down
A similar mixed demand environment affects UTC’s building market related segments. This includes the Otis elevators and escalators business, as well as the and Climate, Controls & Security (CCS) business, which makes air conditioners (under the Carrier brand), and fire and security systems (from brands that include Kidde and Chubb). During the fourth quarter, weak building markets of Europe likely continued to impact results at Otis and CCS, offset to a degree by higher demand from China.
Progress Made In Debt Reduction Also In Focus
Also in focus in the fourth quarter results will be the progress that UTC has made in lowering its debt load. The company’s debt to total capitalization rose from 31% at the beginning of 2012 to 53% at the end of the third quarter of 2012, driven by the Goodrich acquisition, which was closed during the quarter.   Even though the company has steadily paid down its debt since, its debt to total capitalization ratio at the end of the previous quarter stood at 41% – much higher than the levels seen prior to the Goodrich acquisition last year.  We figure that UTC needs to continue to pay its debt to reduce the risk to its business, and it will be important to note the progress that it posts on this front in the fourth quarter results.
- UTC’s 2013 Q3 earnings form 8-K, October 22 2013, www.utc.com
- UTC Chairman & CEO Expects 2013 Earnings Per Share of Approximately $6.15; Expects 2014 EPS of $6.55 to $6.85 on Organic Sales Growth of 3 to 4 Percent, December 12 2013, www.utc.com
- UTC Overview presentation – investor and analyst meeting, March 14 2013, www.utc.com
- UTC’s 2013 Q3 earnings presentation, October 22 2013, www.utc.com
- 2012 Q4 earnings form 8-K, January 23 2013, www.utc.com
- UTC’s financial tables at the end of 2012 Q3, October 23 2012, www.utc.com
Disclosure: No positions