United Technologies Seeks Payoff on $16.5B Aerospace Bet

United Technologies CEO Louis Chenevert
United Technologies Corp. Chief Executive Officer Louis Chenevert Photographer: Jonathan Alcorn/Bloomberg

United Technologies Corp. Chief Executive Officer Louis Chenevert, with his $16.5 billion bet on the aerospace industry in place, is now turning his attention to making sure it pays off.

Focusing on integrating the record acquisition of Goodrich Corp. probably means eschewing any takeovers of more than about $1 billion, Chenevert said in an interview. That deal added the world’s largest maker of aircraft landing gear to brands that include Pratt & Whitney jet engines and Sikorsky helicopters.

Aerospace is now poised to surpass more than half of revenue at United Technologies, from 43 percent when Chenevert became CEO in 2008. As the Hartford, Connecticut-based company finishes selling units that include manufacturers of rockets and industrial pumps, the aviation shift will pay off as airlines race to buy fuel-efficient jets, according to Chenevert, 55.

“The next time someone says they want to do a whole new airplane, we have a whole array of opportunities we can offer them,” Chenevert said in the interview at Bloomberg headquarters in New York.

His customers include Airbus SAS and Boeing Co., the biggest commercial-jet makers, enabling United Technologies to benefit from what Boeing predicts will 5 percent annual growth in global airline traffic for the next 20 years. At the same time, United Technologies and Goodrich already share the U.S. government as their largest buyer, according to data compiled by Bloomberg, amid a squeeze in defense spending.

Integration Focus

Chenevert said his Goodrich-integration emphasis may last as long as three years, curbing United Technologies’ appetite for large acquisitions for now.

“When you do a big deal, getting the deal done is hard but doing the integration and bringing it home is even more difficult,” Chenevert said. “The portfolio’s been reshaped, and I don’t see any other big deals.”

Chenevert spoke a day after a Sept. 27 conference for analysts and investors near Montreal, where Chief Financial Officer Greg Hayes said Goodrich was helping United Technologies put more equipment on the newest wide-bodies, such as Boeing’s 787 and Airbus’s A350, than on their predecessors.

United Technologies announced the deal in September 2011 and completed it July 30. It is the largest aerospace industry acquisition on record, according to data compiled by Bloomberg. While the associated costs will damp earnings by 20 cents a share this year, income from Goodrich will boost profit by 50 cents in 2013, United Technologies has said.

Earnings Outlook

Earnings for 2012 will be $5.25 to $5.35 a share on sales of $58 billion to $59 billion, the company said Sept. 7, reaffirming earlier projections. A 2013 profit forecast will be provided later this year, it said.

Goodrich isn’t the only recent aerospace acquisition. United Technologies also is digesting International Aero Engines, maker of V2500 engines for Airbus’s A320 narrow-body jet. Pratt & Whitney took control of the joint venture with MTU Aero Engines AG and Japanese Aero Engines Corp. after buying Rolls-Royce Holdings Plc’s stake for $1.5 billion in July.

Counting Goodrich and IAE, more than half of United Technologies’ 2011 revenue would have come from aerospace, according to a presentation at the Montreal conference that didn’t give a precise figure. John Moran, a spokesman, said the company isn’t disclosing that number.

United Technologies’ 7.1 percent gain in 2012 through Sept. 28 beat the 5.7 percent climb for the Standard & Poor’s Supercomposite Aerospace & Defense Index while trailing broader stock market benchmarks. The S&P 500 Index rose 15 percent.

Shares Slide

The shares slid 0.1 percent to $78.29 at the last close, capping a seven-day decline that’s the longest such streak since August 2011, according to data compiled by Bloomberg.

United Technologies plans to spend as much as $2 billion or more to buy back stock as it resumes repurchases suspended to help pay for Goodrich, Chenevert said at the conference.

On May 24, United Technologies issued $9.8 billion of bonds with maturities from 18 months to 30 years with an average interest rate of about 2.8 percent in the biggest U.S. corporate debt offering in more than three years, according to data compiled by Bloomberg.

United Technologies forecasts $150 million of savings this year in its UTC Aerospace Systems unit, which includes Goodrich and aviation equipment maker Hamilton Sundstrand. It plans steps such as consolidating some facilities, Alain Bellemare, head of the business, told investors and analysts in Montreal.

“Pratt & Whitney, along with Hamilton Sundstrand over the next couple of years, is the business within UTC in our opinion that holds the largest potential source of upside,” Nicholas Heymann, an analyst at William Blair & Co. in New York, wrote in a Sept. 28 note. He has an outperform rating on the shares.

Even with Europe gripped by an economic slump and China’s growth cooling this year, worldwide passenger traffic rose 5.8 percent in the first eight months, the International Air Transport Association trade group said last week.

Chenevert, who led Pratt & Whitney before becoming CEO, said rising demand will validate the aerospace strategy.

“The appetite that people have to fly, especially in emerging markets, is so great,” he said in the interview. “That’s going to help us get tremendous momentum.”

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