United Technologies Corporation Integrating Building and Industrial Systems

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United Technologies is focused on integrating Otis with Climate, Control, and Security Systems and successfully ramping up production for its new PurePower GTF narrowbody engines. There is no change to our 2014 sales of $64 billion, but the higher end of 2014 EPS guidance of $6.55-$6.85 seems likely.

Due to several unusual factors, first-quarter sales guidance of approximately $14.5 billion and EPS of about $1.25 were below our $14.7 billion and $1.40 EPS estimates, respectively, and consensus expectations of $14.9 billion and EPS of $1.38. While weather was not cited, lower revenues made this seem likely.

Hurdles to achieving UTC’s 2020 revenue target of $100 billion included returning to sustainable, midsingle-digit, average annual organic sales growth, which is likely to be supplemented by some larger acquisitions but probably not for at least another 18 months (late 2015 or 2016).

Key operating business assumptions for UTC’s 2020 goals included a significant expansion in Otis’s Chinese aftermarket service and modest growth Otis’s European aftermarket business, flat margins for P&W on twice the engine production, and a seamless handoff from legacy to GTF engine spares sales.

UTC is cumulative free cash flow from 2014-2020 of $50 billion. Margin expansion will remain an integral part of UTC’s future earnings growth but not for Pratt & Whitney (P&W), where sales could double by 2020, but margins remain essentially flat due to a rapid rise in non-profitable new aircraft engine sales. Principal sources of upside to UTC’s unchanged 2014 EPS guidance of $6.55-$6.85 could include renewal of tax extenders, with continued favorable foreign exchange and lower-than-expected international pension expense. UTC is comfortable with consensus 2014 EPS of $6.82.

Principal uses of cash in 2014 include higher capital spending of about $2 billion, $1 billion for share repurchase, a $1 billion placeholder for acquisitions, and $1 billion of additional debt reduction; significant reacceleration of repurchase currently appears more likely in starting in 2015.

The building and industrial systems division is well positioned for a continued moderate construction upturn globally; divestitures of businesses with $1.2 billion of sales are more likely prior to any additional selective acquisitions to leverage midsingle-digit revenue growth and midteens operating margins.

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