United Technologies Corp. (
Q3 2010 Earnings Call Transcript
October 20, 2010 9:00 am ET
Greg Hayes – SVP and CFO
Akhil Johri – VP, Financial Planning and IR
Nigel Coe – Deutsche Bank
Howard Rubel – Jefferies
David Strauss – UBS
Robert Stallard – RBC
Deane Dray – Citi Investment Research
Ron Epstein – Bank of America
Jeff Sprague – Vertical Research Partners
Joseph Nadol – JPMorgan
Terry Darling – Goldman Sachs
Cai von Rumohr – Cowen and Company
Sam Pearlstein – Wells Fargo
Shannon O’Callaghan – Nomura
George Shapiro – Access 342
Doug Harned – Sanford Bernstein
Julian Mitchell – Credit Suisse
Previous Statements by UTX
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» United Technologies Corporation Q3 2009 (Qtr End 9/30/09) Earnings Call Transcript
Good morning and welcome to the United Technologies third quarter conference call. On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer; and Akhil Johri, Vice President, Financial Planning and Investor Relations.
This call is being carried live on the Internet and there is a presentation available for download from UTC’s home page at www.utc.com.
The company reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. UTC’s SEC filings, including its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.
Once the call becomes open for questions, we ask that you limit your first round of questions to two per caller to give everyone the opportunity to ask questions. You may ask further questions by reinserting yourself into the queue, and then we will answer those questions as additional time permits. Please go ahead, Mr. Hayes.
Thank you, Katie, and good morning, everyone. As you saw on the press release this morning, solid results in end market environment that continues to improve.
Some key takeaways for the quarter, organic revenues grew 3% and segment operating profits grew 9% adjusted for restructuring and one-time items, demonstrates the benefit of our structural cost reduction and the resulting strong operating leverage. Segment operating margin set another record and free cash flow was very strong at 125% of net income.
As you all know, the global economic recovery remains uneven. The global airline industry continues to gain traction as airlines have kept capacity additions well below air traffic growth, within the higher yields and capacity utilization, on the other hand, commercial construction markets remain weak with the exception of emerging markets.
In the face of this economic picture, UTC will continue to focus on cost containment and a rigorous process improvement at our factories, our back offices and our supply chain.
Based on this strong year-to-date performance, we are confident in raising our EPS guidance to $4.70, at the high end of the prior range of $4.60 to $4.70.
While firming up our outlook of $4.70 or 14% EPS growth, we’re also increasing our estimate of restructuring costs and excess of one-time times by $100 million. That’s now $0.28 per share for the full year versus our prior guidance of $0.20.
Given the unevenness of the global economic recovery, we’re going to continue to aggressively take out structural cost to position UTC to grow earnings consistently in the years ahead.
Turning to third quarter result, as I mentioned, revenues grew organically at 3%. Carrier had another very solid quarter with 7% organic growth driven primarily by continuing strength in the Transicold business.
Pratt & Whitney saw the expected recovery in the commercial aftermarket and Hamilton Sundstrand returned to organic growth for the first time since the first quarter of 2009. On the other hand, Sikorsky’s revenues declined 6%, but they remain on track to deliver on the revenue guidance for the full year of up high single digits.
Earnings per share in the third quarter were $1.30. That’s up 14%.Net restructuring and one-time items were a charge of $0.09. Excluding restructuring and one-time items in the third quarter of both 2009 and 2010, earnings per share increased 9%.
Restructuring charges in the quarter were $58 million and significant one-time items included an impairment charge of $159 million or $0.17 per share, to bring our Clipper Windpower investment to market value as of September 30.
This week as you no doubt have heard we’ve announced our agreement to acquire the remaining 50.1% of Clipper at $0.65 per share. We continue to see wind power as an attractive, high growth market, and Clipper Windpower will benefit greatly from the operational and financial strength at UTC.
Partially offsetting the Clipper charge was a net tax benefit of $102 million related to our decision to repay additional high tax foreign dividends as a result of recent U.S. tax law changes. The accelerated dividend plan provides a benefit this year, but the tax law change is a negative going forward as it will limit our ability to utilize foreign tax credits.
Cost execution continues to be exceptional across our businesses, resulting in segment margin expansion of 90 basis points to another record of 16.3%. Year-to-date segment margin expansion is 110 basis points, strong evidence of the operating leverage from our relentless focus on cost control.
Five of the six business units improved margins on an adjusted basis with Carrier, Fire & Security and Sikorsky increasing by 100 basis points. Once again, Carrier led the way with 200 basis points of margin expansion to 12.1%.
E&D was up by $89 million over last year’s third quarter and is now up $152 million year-to-date. We now expect engineering and development to be up around $225 million for the year.
Hamilton continues to support the 787 flight test program, but the program delays continue to put pressure on their E&D spends. Pratt & Whitney and Sikorsky also continued to ramp up new product development programs.
On to Slide #2, order rates. Order rates remain robust across the business with a few exceptions. Importantly, commercial aerospace aftermarket orders improved in line with our expectations with double digit growth in the second half.
Pratt, Whitney and Hamilton Sundstrand and Commercial spares orders increased by 35% and 13%, respectively. Carrier’s U.S. residential HVAC shipments actually declined in the quarter due to consumer-related weakness, while Hamilton’s short cycle industrial businesses continued to grow strongly.