United Technologies Corporation (NYSE:UTX) released its fourth quarter earnings, and the report was less than stellar. Stock price per diluted share dropped 27% year-over-year to $1.04, but that will not stop United Technologies from a strong performance going forward. In this article, I will explain why investors should go long on United Technologies.
While the fourth quarter earnings report was somewhat lackluster, United Technologies is a global market provider. Recent slowdowns in Europe, lower military engine shipments and the negative impacts from an extensive restructuring all led to the dismal earnings. However, the largest impact to earnings was due, specifically, to restructuring and a one-time charge that led to a loss of $0.25 per diluted share on earnings.
Restructuring Activities
2012 was a year of big moves for United Technologies:
· In July of 2012, United Technologies acquired the Goodrich Corporation.
· In August of 2012 it disposed of its Clipper Windpower section in a sale to Platinum Equity. LLC.
· In December of 2012 it disposed of its Milton Roy Company entity.
· In December of 2012 it disposed of its Sullair Corporation entity.
· In December of 2012 it disposed of its Sundyne Corporation entity.
Furthermore, in the first quarter of 2012, United Technologies also restructured its workforce and it consolidated many field operations in response to the weak global economic environment. However, as a direct result, United Technologies incurred a cost of $268 million in Q4 and an overall cost of $600 million for the year.
United Technologies paid off a very large portion of its outstanding debt, and it now forecasts a year-over-year growth of between 9% and 15% for 2013.
Global Marketplace
While the global recession influenced reduction of revenue for several of United Technologies divisions, the Otis division experienced a “double digit” increase in its orders due in large part to the reduction of key interest rates by the Chinese government in mid-2012. China is now the largest market for Otis Elevators.
Additionally, we are seeing a revival of both the residential and commercial construction industry in the United States. As a direct result of this revival, United Technologies is seeing a “double digit” increase in orders for its residential HVAC systems.
Debt Load Reduction
United Technologies went a long way in paying down a significant portion of its debt burden. According to the report, in Q4, United Technology reduced its debt burden from $28.7 billion to $23.2 billion. As a direct result, the company’s debt to total capitalization ratio improved from 52% to 46%.
It is important to remember that a large portion of this debt was incurred from acquisitions and not mismanagement or lackluster sales; specifically the acquisition of the Goodrich Company.
2012 Transformation
The key here is to look at the “big picture” and realize that much of the losses incurred by United Technologies were due to restructuring and the acquisition of both the Goodrich Company and all of the outstanding shares of International Aero Engines that was held by Rolls Royce Holdings.
This is key, as United Technologies removed itself from several non-core businesses and increased its holdings in the global aviation industry. This is critical if you take the time to realize that the demand for flights from developed countries to emerging markets will only continue to grow.
