United Technologies Corp. (UTX) reported third-quarter earnings per share from continuing operations of $1.43, above the Zacks Consensus Estimate of $1.28. The year-over-year increase in the company’s earnings, along with improved margin, was led by the sustained cost reduction efforts of the company.
Revenue
Total revenue in the quarter increased by 1% year over year to $13.5 billion, including organic growth of 3% and a negative impact from foreign currency translation of 1%. Revenue was below the Zacks Consensus Estimate of $13.9 billion.
Segment wise, the revenue increased in UTC Fire & Security, Pratt & Whitney and Hamilton Sundstrand by 19.8%, 7.2% and 1.4%, respectively. However, revenue in Otis, Carrier and Sikorsky declined by 1.6%, 1.3% and 6.1%, respectively. The company’s highest revenue generating segment, Pratt & Whitney, contributed about 24% to the total revenue.
Though revenues in Carrier declined during the quarter, commercial HVAC new equipment orders in the segments increased by 3% year over year (including unfavorable foreign exchange of 1%). At Otis, orders for new equipment declined by 1%. Orders for commercial spares were up by 35% at Pratt & Whitney’s large engine and 13% at Hamilton Sundstrand.
Margin
Segment operating margin increased by 160 basis points to 16.1%, compared with the prior-year period. Adjusted segment operating margin, excluding restructuring and one time items, increased 90 basis points to 16.3%.
Balance Sheet and Cash Flow
The company continues to maintain a strong cash flow position. Cash and cash equivalents was $5.7 billion with long-term debt of $10 billion and shareowners equity of $21.3 billion. During the quarter, the company made additional contributions of $350 million to its domestic pension plans.
United Technologies generated cash flow from operations of $1.7 billion and capital expenditures were $177 million during the quarter.
The company repurchased shares worth $494 billion, with total repurchase under its plan reaching $1.6 billion. The company expects to repurchase approximately $2.0 billion shares during the year. Total spending for acquisitions is expected to be about $3 billion for the year, with $2.6 billion already made.
Outlook
A solid performance delivered in the first three quarters of 2010 led the company to increase its EPS guidance to $4.70, the high end of the prior guidance of $4.60 to $4.70. United Technologies plans to incur additional restructuring, net of one-time items, of $100 million, which is expected to further solidify its future earnings. Revenues for the year are expected to be $54 billion, up 2%.
The company has strong market positions in aerospace/defense and has a global infrastructure with a portfolio that includes Carrier, Otis, Hamilton Sundstrand, Pratt & Whitney, Sikorsky and Fire & Security. The company noted that while the commercial aerospace aftermarket orders have recovered, the commercial construction markets remain weak.
The financial performance of the company depends on the conditions of the construction and aerospace industries. The company is highly dependent on the US government’s budgetary allocation for defense. Its business may also be impacted by government contracting risks.
The major competitors of United Technologies are The Boeing Co. (BA), BorgWarner Inc. (BWA), General Electric Co. (GE) and Honeywell International Inc. (HON). Recently, General Electric also declared its third quarter of 2010 results, reporting earnings per share from continuing operations of 29 cents, exceeding the Zacks Consensus Estimate of 27 cents. Total revenue for GE declined by 5% to $35.9 billion, below the Zacks Consensus Estimate of $37.7 billion.
United Technologies is a global provider of high technology products and services to the building systems and aerospace industries. The company’s growth has been attributed to acquisitions and internal development of its existing businesses.
We currently maintain our Neutral rating on United Technologies, with a Zacks #4 Rank (short-term Sell recommendation) over the next one-to-three months.
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