Morningstar | Following Rockwell Close, United Technologies Is Spinning Off Its Non-Aerospace Businesses
After its lackluster performance over the past few years, we believe United Technologies is poised for growth as secular tailwinds in aerospace drive the industrial conglomerate's top line. The challenge will be translating this into margins, particularly in Pratt & Whitney, which faces a steep ramp on its geared turbofan engines, and in aerospace systems, which will need to integrate the Rockwell Collins acquisition.Pratt & Whitney is ramping up the GTF to roughly 740 deliveries in 2018 from 374 in 2017. The company has faced teething problems on in-service engines and through 2019, Pratt's earnings will remain pressured as its mix shifts from legacy engines and services toward the GTF, which record a negative margin at delivery. However, GTF margins will improve as Pratt moves down the learning curve (management is anticipating about 2,500 GTF deliveries over the next three years) and the new installed base of GTF engines will secure aftermarket services that should generate cash flows for decades.The other businesses in the portfolio--Otis and climate, controls, and security--are lower-growth. Urbanization and economic growth in emerging markets spur building construction, which will benefit Otis and CCS. However, both Europe and China have pressured Otis' top line and margins have also suffered from pricing in China. That said, we do think that innovation around services will protect Otis’ installed base. In CCS, United Technologies runs some solid brands, and its flagship business, Carrier, enjoys advantages due to its reputation for quality. United Technologies announced the separation of CCS and Otis from its aerospace businesses on Nov. 27, 2018. The aerospace units, Pratt & Whitney and UTAS, will remain together and also retain the United Technologies brand. CCS will take the Carrier brand name for both its HVAC and fire and security businesses. The new Carrier and Otis companies will be separated as tax-free spin-offs and will be publicly traded entities.United Technologies provides technology products and services to the building systems and aerospace industries. The company has four segments: Otis, which designs, manufactures, sells and installs passenger and freight elevators; Carrier, which provides heating, ventilating, air conditioning refrigeration, fire, security and building automation products; Pratt & Whitney, which supplies aircraft engines for the commercial, military, business jet and general aviation market; and Collins Aerospace Systems, which provides aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military, space and undersea operations.
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