United Technologies (click ticker for report: ) posted mixed fourth-quarter results as it ended what we’d describe as a transformational year. The company scooped up aerospace supplier Goodrich and a larger stake in International Aero Engines (IAE) during 2012, two moves we applaud as both increase the firm’s exposure to a burgeoning commercial aerospace delivery advance in coming years.
Sales during the quarter jumped 14% from the prior-year period, though organic expansion was flat. The company’s adjusted segment operating margin came in at 13.3%, roughly 200 basis points lower than last year’s quarterly mark. Earnings per share in the quarter dropped 27% from the same period a year ago, but after adjusting for restructuring items, profits fell just 9%. Free cash flow, however, remained strong at $1.3 billion in the quarter, or about 7.9% of sales.
Importantly, order trends were solid. New equipment orders at Otis advanced 12%, while North American HVAC new equipment orders jumped 20%. Though large commercial engine spares increased 46% thanks to the addition of IAE, organically they fell 8% at Pratt & Whitney and 4% at UTC Aerospace Systems. But given the order books at the commercial airframe makers, we’re not sweating the declines, and we fully expect expansion to resume.
On the conference call, management talked very highly about the benefits of the geared turbofan (GTF) and the progress it is making with that engine–a key benefit for Best Ideas portfolio holding, EDAC Tech (click ticker for report: ):
Pratt & Whitney made great progress in developing the GTF and bringing this disruptive technology to market. We have now completed nearly 4,200 hours and more than 12,400 cycles of full engine testing. We recently completed the final significant tests on the C-Series engine, including the FAA mandate of 150 hour endurance test and we expect to certify this engine shortly.
As you saw, the GTF has also been selected to power Embraer’s second generation E-Jet family, the fifth airframe manufacture to use our technology. This is a big win for Pratt & Whitney, and solidifies our position in the regional jet market well into the future. And with nearly 3,000 firm and option engines in backlog airline customers have embraced the lower fuel burn, emissions, noise and operating cost of the GTF technology (Image Source: EDAC Investor Presentation, January 2013).
Looking ahead, United Technologies expects 2013 earnings per share to be in the range of $5.85-$6.15 and revenue to come in between $64-$65 billion (additional granularity provided in the image below). We think both goals are achievable, and we wouldn’t be surprised if there were upside to these numbers if either the industrial recovery or the commercial aerospace upswing is better than expected (Image Source: UTX 3Q Earnings Presentation).