Can UTC Get Back on Its Flight Path?

The conglomerate has made big changes--but still feels it gets no respect

For seven years, George A. David, chairman and chief executive of United Technologies Corp. (UTX ), has quietly built his $27 billion conglomerate into an earnings powerhouse. With such marquee names as Otis elevators, Pratt & Whitney engines, Carrier air conditioners, and Sikorsky helicopters, the Hartford company efficiently churned out the profits. Despite its stellar performance, however, UTC never generated much buzz. Not only was the Old Economy conglomerate overshadowed in the '90s by a sexier crop of hi-tech stars, but David--an unflappable executive who rarely raises his voice--bristled at the sloganeering, spotlight-grabbing style of some execs. He was never a high-profile exec like General Electric Co.'s (GE ) John F. Welch, for instance. As A.G. Edwards & Sons Inc. analyst Kent Newcomb puts it: "This is a fairly conservative, New England-type company that doesn't blow its own horn."

But after the bizarre events of the past year, it's clear David, 59, has some explaining to do. Suddenly, his growth strategy has been sent back to the repair shop. First, his plan to transform UTC into a bigger and bolder beast took a hit when former GE chief Welch stole away Honeywell International Inc. mere minutes before David could seal a union. Then, after UTC deployed a successful legal effort in Europe to help derail GE's $45-billion deal in July, the terrorist attacks of September 11 sent some key units into a tailspin. While David wants to prove that years of prudent management and dealmaking will continue to pay off, the attacks ended a remarkable record of 28 straight quarters in which UTC beat Wall Street's expectations. And skittish investors initially fled, driving the stock price down 26% in the first day that trading resumed, on Sept. 17, compared with an 11% slide for GE.

On Oct. 16, David said that UTC could only meet expectations this time around. Still, that translates into a 14% jump in third-quarter earnings to $565 million, on revenue of $6.9 billion, up 7%. David also confirmed his earlier warning that the downturn could slice up to $250 million from fourth-quarter profits. Now David, a man who shies away from both confrontation and glad-handing, must convince investors that UTC can bounce back. He even seems a little bitter about those who bailed out on his shares: "I thought they might have cut us some slack."

BIG STEP. David points out that he has long been prepping UTC for this kind of crisis by working to improve its global reach and overall business mix. Says Partha Ghosh of Adventis, a Boston consulting firm: "He's made it lean and focused on what it does well." The challenge now is to keep that steady double-digit growth despite a volatile stock price and business downturn. That means more emphasis on the cost-cutting and productivity initiatives that have expanded margins in recent years, as well as more service business and strategic acquisitions to make up for lagging sales.

Indeed, UTC has already become a much different animal. Its CEO took a big step to improve the company's business mix in 1999 when he sold auto-parts maker UT Automotive for $2.3 billion while paying $4.3 billion for leading industrial and aerospace manufacturer Sundstrand Corp. That unit, which became Hamilton Sundstrand, will be hurt by lower commercial aircraft sales, but the one-two punch of dumping a sagging unit for one that's dominant pleases David: "The [September 11] shock would have been twice as significant to us in 1990 as it is today."

Still, he seems piqued that investors have apparently failed to credit UTC for ongoing changes at its troubled Pratt & Whitney engine unit, which accounts for 36% of operating income. Once the standard for large aircraft, Pratt & Whitney now garners only 5.4% of new big-engine orders, excluding joint-venture projects, and is a distant No. 3 behind GE and Britain's Rolls-Royce (RYCEY ). Pratt made the dubious decision two decades ago to not make an engine for the Boeing 737, the world's most popular plane. Pratt has also been unable or unwilling to compete on price in the cutthroat battles in the large-jet-engine business over the past decade. With its big engine deals withering, UTC increasingly has focused on more lucrative service contracts, small-engine sales, and even power generation. So while revenues have declined in recent years, margins have expanded. More military sales, such as the engine contract for Lockheed's (LMT ) new F-22 fighter, should also help offset falling commercial orders.

Now service business is falling off, as airlines ground their older jets first. But David's obsession with quality and cost-cutting--as well as 5,000 recently announced layoffs at Pratt and Hamilton Sundstrand--are helping to keep those units profitable. Pratt President Louis Chenevert feels like he "talks to the Street all the time," and investors still don't get that Pratt is half as reliant on big commercial engines as it once was. Yet some critics insist that investors know exactly what they're doing. Says Paul Nisbet, an aerospace analyst with JSA Research Inc., "They've been losing market share in a critical area, and now they face a sudden drop in their aftermarket business."

Even so, David's challenges with Pratt can't compete with his frustration over Carrier Corp. On Oct. 11, he replaced Jonathan W. Ayers, president of the air-conditioning unit, with Geraud Darnis, previously president of UTC's power group. The move was officially dubbed a resignation, but it's no secret that David was unhappy with Carrier. Although its operating margins in the past five years rose to 9.4% from 7.1%, those at the rest of UTC showed far better improvement, climbing to 15.6% from 9.5%. "Carrier is a drag, and we don't like drags," snaps David. The refrigeration business in particular has been hurt as it has tried to integrate a spate of small acquisitions during the economic downturn. Sure, it's cyclical, but that's no excuse, says David: "Our instinct is fix it or drop dead." That means squeezing out more productivity gains and developing new markets.

That strategy has worked for UTC's other main businesses. Take Otis Elevator Co.: Its prospects are linked to construction markets, but 72% of its revenue flows from service contracts and upgrades. It also benefits from a diverse geographic base, operating in more than 200 countries. And Sikorsky, which makes the Black Hawk and Sea Hawk helicopters, should get more business during the war. Sikorsky has already joined with Boeing (BA ) to create the Army's RAH-66 Comanche helicopter.

David already knew before September 11 that UTC needed more heft to really thrive. He's still almost wistful at the failure of his biggest attempt at a makeover, the merger with Honeywell (HON ). That would have doubled UTC's revenues and added a slew of new aerospace businesses. "We would have more financial muscle and reach at twice our size," says David. Although European regulators nixed GE's merger as well, Honeywell's management now says it isn't interested in partnering with anyone. While David wants to make more deals, he says that now is not the time to use volatile stock or deplete cash. He wants cash on hand in case his troubled airline customers need more flexible financing.

STOCK SPLIT? Changing UTC's image--or lack of one--will also be an important part of convincing investors that UTC's prospects are sound, say insiders. It doesn't help that UTC'S name doesn't appear on any of its products, unlike rival GE. As Otis President Steve Page says, "when I travel the world and say I work with UTC, people ask, `What does it do?"' So when London ad agency Euro RSCG Wnek Gosper began to develop new ads for UTC two years ago, it found it had to compensate for a corporate culture awash in modesty. To jazz things up, one ad shows UTC scientists in dark suits and sunglasses with the slogan "The Punks Who Killed Heavy Metal." In other words, UTC is on the cutting edge of technology.

Now if David can just convince Wall Street. Already the stock has rebounded to around $53 from its post-attack low of $41.64 on Sept. 20. David could even push for a stock split, says UTC director Sanford I. Weill, CEO of Citigroup (C ). Weill calls David one of the best managers he's ever met, and one of the most private: "Even his hobbies aren't the kinds of things where there are a lot of people." That includes sailing world-class yachts and collecting rare books. When it comes to UTC, though, David is determined to start drawing a crowd.

By Diane Brady in Hartford

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