Highlights From UTX's Q2 Conference Call: Seeing Some Positives, But Expect Weakness Through 2009

FREE Breaking News Alerts from StreetInsider.com!

More News related to UTX

Pratt & Whitney Canada Proudly Welcomes Association Members to CAAA's 26th Annual Conference and Tradeshow in Montreal

More News related to Corporate News

July 21, 2009 12:48 PM EDT

This morning, United Technologies (NYSE: UTX) reported Q2 EPS of $1.05, 1 cent above the consensus of $1.04. Revenues came in at $13.2 billion, versus the consensus of $13.92 billion. Shares opened lower, bounced back slightly, but are now down 2.2%.

Highlights From UTX's Q2 Conference Call:

United Technologies tightened top-end of FY EPS guidance - sees EPS of $4.00-$4.20, versus prior guidane top-end of $4.50 and the consensus of $4.07. Cuts FY revenues forecast by $2 billion to $53 billion, versus the consensus of $54.1 billion.
(CFO) Segment operating margin reached a record high of 14.9% as adjusted for restructuring and one-time gain.
We also saw excellent progress in driving down working capital this quarter. As a result, free cash flow was 140% of net income even with $400 million of contributions to our domestic pension plans.
As far as the order rates, no significant changes in the year-over-year order rates in the quarter. However, order rates do appear to be stabilizing.
The evidence of the cost reduction is in the segment operating margins. All were double-digit and four of six, Otis, Fire & Security, Sikorsky, and Pratt & Whitney saw operating margin gains of 100 basis points or more, again adjusted for restructuring and one-time gain. Otis led the way at 21.9%.
Carrier delivered double-digit margins this quarter as a result of the relentless focus on cost take out despite very difficult end markets. This margin performance was achieved even while UTC's revenues decreased $2.7 billion or 17% to $13.2 billion. Revenues decreased 11% organically and 5% from foreign currency translation.
Absent the impact of these restructuring costs in both quarters and the one-time gain this year, earnings per share was down 12%.
On revenues, only Sikorsky saw growth. Revenues of the other five businesses were down with particular weakness in our short-cycle segments. Carrier revenues declined 29% in the quarter, 21% organically.
Consumer confidence does show some indication of improvement, but the US housing starts outlook is more or less the same as we saw in March and the outlook for commercial construction and aerospace traffic are somewhat worse.
China on the other hand has started to show the positive impact of the government's stimulus program. As we said before, we always expected China to recover first and we did see early signs of that in this quarter.
As a result of the continued weakness in order rates, we are revising our full-year revenue guidance from 55 billion to 53 billion, that's down 11% from last year revenue.
We still expect to spend about $750 million on restructuring this year and we now estimate one-time gains to be only around $200 million.
With the lower revenue outlook and the higher net restructuring, we're tightening our EPS guidance range with the top end at $4.20 compared with 4.50 previously.
Overall head count has now gone down by more than 12,000 since December and that excludes the net impact of acquisitions and divestitures. About 70% of that 12,000 decrease results from the 2008 and 2009 restructuring programs.
Given that first half order rates, Otis now expects full-year revenues to be down near double-digits compared with 2008. We now expect profit for the year to decline by $50 million, a $100 million improvement from the midpoint of our previous guidance range.
Carrier, operating margin exceeded 10% in the quarter, down 210 basis points on 29% lower revenues. Carrier continues on the path of aggressive transformation to a simpler more focused higher returns business.
Carrier's head count had been reduced by 5,200 or 13% of the workforce before the impact of net divestitures. Carrier's organic revenue declined 21% in the quarter.
In light of continued weakness in order rates, Carrier now expects organic revenues in the third quarter to be down in line with first half and expects profit growth to resume in the fourth quarter on the back of easier compares and continued cost reductions.
For the full-year, Carrier expects revenues down in the mid 20s and earnings down in the range of 500 to $550 million with second half earnings down approximately 100 to 150 million versus prior guidance of flat second half earnings.
On slide six, UTC Fire & Security delivered a solid quarter with operating margin expansion of 180 basis points to 10.6% on 23% lower revenues. Organically, revenues contracted 8% with both fire safety and electronic security revenues down high-single digits in the quarter. We remain confident in UTC Fire & Security's 2009 guidance of flat profits on revenues down mid teens.
Revenues at Pratt & Whitney declined 13% in the quarter driven primarily by lower overall aftermarket volume and Pratt Canada engine shipments. Revenues were also adversely impacted by net hedging activities at Pratt Canada. Large commercial engine spare revenues were down in the mid 20s and book-to-bill was slightly below 1. Engine shipments at Pratt Canada were down about 25%. Operating profit declined 7% in the quarter.
Overall, Pratt & Whitney 2009 revenues will likely be down mid to high single digits. Operating profit is now expected to be down $100 million year-over-year as compared with the prior guidance of down 0 to 50 million.
Hamilton Sundstrand's revenues were down 15%. Organic revenues were down 9%, with aerospace aftermarket down double-digits, the industrial business down 25%, and aero OEM flat.
Commercial space revenues were down over 20% again. Lower E&D, discretionary cost curtailment across the business, favorable mix in aero OEM, and productivity improvements in the repair shops partially offset the volume impact.
Sikorsky, operating profit grew 26% on 6% higher revenues. During the quarter, Sikorsky shipped a total of 50 large helicopters, 40 based on military platforms and 10 commercial. Sikorsky continues to target delivery of between 230 to 240 large aircraft in 2009. Operating margin expanded 160 basis points in the quarter to 10.1%.
During the second quarter, it completed an agreement to manufacture S-92 helicopter cabins with the Tata group in India. Sikorsky is also making progress with the international Black Hawk in its facility in Mielec, Poland.
While we see continued weakness in the commercial market, we expect Sikorsky to continue its strong performance for the remainder of the year with revenues still projected to grow in the high teens, and operating profit expected to increase approximately $125 million.
Our 2009 M&A placeholder remains at $2 billion, although our acquisition spend year-to-date is only 153 million net of divestitures. As always, deals happen when they happen. We'll continue to be aggressive in identifying and pursuing acquisition opportunities. We also will remain disciplined in our approach.
Our share repurchase guidance remains at $1 billion.
Also, our ace initiative with suppliers is gaining traction, with 44% of key suppliers now with gold or performing suppliers, well on track to reach this target of 70% by 2011.
(Q&A) You talked about Carrier in the question mark column, yet you called out growth in 4Q EBIT, which implies that you're pretty confident of first half growth at least in 2010. So, I'm just wondering why that would be in the column out in the plus? (A) I think you have Carrier - there is a lot of pieces to Carrier. I think the long cycle part of Carrier which is the HVAC, commercial HVAC, piece is a bit of a question mark for next year. We actually would expect that to be down slightly. I think the real question on Carrier though goes to the nature of the economic recovery, and when we're going to see a rebound in housing, and when we're going to see a rebound in demand for the transport refrigeration products. Again, those are very economically sensitive businesses. They have been referred to as the most -- the quickest and the most I would say. And so, until we see some real signs of an economic recovery, I think Carrier remains kind of a question mark for next year.
In China, that's where you are seeing the best -- best results in the company, and of course that's where the GDP looks like for the best, how sustainable the -- do your people there are particularly notice think that this recovery has? (A) What we've seen in the last quarter Joe is really a recovery at the long-end of the market, in terms of order rates or actually we see business orders I think are actually up about 15% or so. And that low end is where the government stimulus program is helping in most; this is on the residential construction market. I would say, I think that looks to be sustainable, the 7.9 or 8% GDP growth is all very good. We've also seen foreign direct investment start to come back to last year's levels, still down the year-over-year. But again as foreign direct investment picks up
and I think the compound in effect of the stimulus picks up, we've got a lot of confidence. We are going to see a good back half for voters in China as well as carrier in the year strong 2010.
What's your commercial HVAC backlog down year-to-date first of all? And then secondly could you just discuss your Hamilton, E&D spending and where you are running versus where you thought you would be? (A) Hamilton, E&D was a little bit of a reduction Q2, probably on a year-over-year basis. Overall as you know, we had E&D down about 50 million this quarter and Hamilton was roughly 40% of that in terms of year-over-year decline. We do expect continued decline in the second half there primarily as the 787 spend comes down although you can imagine with the delay in the first flight there is some pressure on that. With regard to commercial HVAC I think the orders have been worse than these revenues that we have generated, so backlog is down. The orders have been down roughly 20% plus for the first half while the revenues have been down organically in the low teens, so you can do the math, it's down slightly not huge.
Could you maybe touch on the outlook for Otis new equipment shipments, as you think about 2010. I think you had previously got it originally restarted thinking about flat and I think you talked about down 5 to 10, just given the order you are seeing now, how do you think about Otis new equipment in 2010? (A) I think for this year we expect Otis new equipment to be down kind of in that 10ish percent range, was down 9% in the quarter and certainly with orders down around 40% on the new equipment side that 9 or 10% down we'll play out next year. So I think again another 5% down next year is probably in the realm of reasonable. I think part of the question here is how quickly China recovers. If you remember China accounts for a-third of the new equipment business at Otis, so even if we -- we've got these big order rates coming down, China is recovering as well as there were a lot of deferrals at the end of this year that we'll probably play out next year. So, as we were thinking about it, I think there is obviously pressure on new equipment next year, but I wouldn't think -- I would say 5%, but it's a little early and they will come back obviously at the end of year with some better visibility there.