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United Technologies (UTX) |
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WIKI ANALYSIS
United Technologies (NYSE: UTX) is a conglomerate that makes products for a number of different industries. It makes most of its money, however, by selling helicopters, aircraft parts, elevators and escalators, and heating and air conditioning systems for buildings. The company earned $53 billion in revenue and $4.2 billion in net income in 2009.[1]
With around two-thirds of its revenues coming from abroad, UTX is a truly international company. UTX is especially focused on emerging markets. It the dominant player in the Chinese elevator market with an impressive three-quarters share of the market. China has about one third of the world's elevators, a number that is increasing and will help UTX's revenue grow.
About the remaining third off UTX's revenues come from the sale of aircraft, aircraft parts, and aircraft maintenance. As a result, the company is subject to the cyclical trends of the aerospace market. In general, increased military aircraft demand by the US government since 2001, as well as increased demand for commercial aircraft, has pushed revenues higher. Specifically, the company has benefited from the ongoing war in Iraq. The company signed a contract in 2007 to deliver 537 helicopters over the next five years.[2]
Although trends in recent years have been mostly positive, the company faces headwinds in the form of rising commodity prices. Its products use large amounts of metals such as titanium, steel and copper. Time table for the war in Iraq is also uncertain, and an early withdrawal would also adversely affect the company's prospects.
Company Overview
The company has 6 business segments:[3][4]
- Carrier (21% of net sales) - heating and air conditioning systems
- Pratt & Whitney (24% of net sales) - aircraft engines and space propulsion
- Otis (22% of net sales) - elevators and escalators
- UTC Fire & Security (10% of net sales) - fire and security systems for buildings
- Hamilton Sundstrand (11% of net sales) - aerospace and industrial systems
- Sikorsky (12% of net sales) - helicopters
Business Growth
FY 2009 (ended December 31, 2009)[1]
- Net revenue decreased 11% to $53 billion.
- Net income decreased 17% to $4.2 billion.
Trends and Forces
Increasing demand due to surge in offshore drilling
As oil prices have risen during the last decade, offshore drilling has become more popular. This trend has led to greater demand for helicopters, particularly the The Sikorsky S92 and S76 , to transport personnel to and from oil rigs.
Changes in Military Conflicts Abroad Affect Military Contracts for Sikorsky, Pratt & Whitney, and Hamilton Sundstrand
The war in Iraq and continued engagement in Afghanistan have created an increased demand for military aviation. Products such as the UH-60 Black Hawk have seen heavy use, and the US government contracts with United Technologies directly for its military products. The company's sales of military equipment have helped revenues since 2001 due to increased US military activity. However, if the war in Iraq changes course or ends, it might lead to a loss of revenue for United Technologies. As a military contractor, United Technologies also runs the risk of losing large contracts to competitors as the military upgrades and changes equipment. Sikorsky signed a contract with the US military in December 2007 for 537 helicopters to be delivered over the next five years.[5]
Large Amounts of International Business Expose the Company to Political and Currency Risks
Approximately two-thirds of United Technologies' revenue was from international sources, with about 30% of those coming from Europe and another 20% from the Asia Pacific region. Furthermore, business is conducted in a variety of global currencies, and changes in currency values are a risk to revenue. The devaluation of the US dollar versus other currencies makes doing business in other countries more expensive in US dollars, but also made revenue abroad worth more in US dollars. Because UTX makes the majority of its revenues outside the US, a decrease in the value of the dollar raises revenues.
Fluctuations in Housing and Commercial Real Estate Markets Affect New Construction Revenues for Otis, Carrier, and UTC Fire & Security
With business units Otis, Carrier, and UTC Fire & Security relying on construction of new buildings for revenues, changes in the commerical and residential real estate markets can have a significant impact on revenues. The downturn in the real estate market has presented a risk for United Technologies, but the company has continued to increase revenues through first quarter 2008 despite the unfavorable market.[6]. About 25% of the company's revenue comes from residential housing.
2010 Layoff Announcements
In July 2010, UTX announced it would be cutting 2,100 employees by the end of 2011. The announcement was made in concert with an increase in the firm’s profit projections, and is interpreted by many as an effort to control inefficiencies, rather than a move of financial necessity.
Commodity Price Fluctuations drive down Profit Margins
As a manufacturing company, raw materials are a primary expense in creating salable products. Increasing commodity prices, especially for steel, copper, aluminum, titanium and nickel have limited profit margins. The company deals with this issue through conservation, scrap reclamation, consolidating purchases, and limiting the number of different suppliers.
Exposure to Emerging Markets Drives UTX's Growth
United Technologies is invested in emerging markets, such as China and India, which are growing much faster than U.S. domestic markets. The Chinese elevator market, which Otis controls a 75% of, is growing at a rate of 15-20% per year. In addition to new construction, emerging markets have had increased demand for commercial aircraft.
Competition
With business units in a number of different fields, United Technologies has numerous competitors, though most competitors are specialized to only one business field. Notable competitors include Rolls-Royce and GE Aviation, which compete with Pratt & Whitney in producing airplane engines; SPX Corporation, which competes with UTX in the HVAC market; and Honeywell, a large conglomerate that competes with United Technologies in both the aerospace and building supply markets.
References
- ↑ 1.0 1.1 UTX 2009 10-K Exhibit 13 pg. 1
- ↑ United Technologies gets $1.5 B US Army contract, Reuters
- ↑ UTX 2009 10-K Exhibit 13 "Segment Review" pg. 8
- ↑ UTX 2009 10-K "Description of Business Segments" pg. 3-7
- ↑ United Technologies gets $1.5B US Army contract, Reuters
- ↑ United Technologies Posts Solid Quarter Despite Housing Weakness, Seeking Alpha
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