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 With 62% of its revenues coming from abroad,[1] 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 75% share of the market. [2] In 2007, China had one third of the world's elevators, and UTX revenues in this market grew 15 to 20%.[3] Furthermore, UTX won 69% of the air conditioning contracts for the 2008 Olympic Games in Beijing, China. [4] About 37% of 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, pushed the revenues higher from 2003 through 2007. Specifically, the company has benefited from the ongoing war in Iraq. The company signed a contract in December 2007 to deliver 537 helicopters over the next five years.[5] 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. [edit] Business and FinancesThe company has 8 business segments: [6]
63% of the company's 2007 revenue ($54.8B) came from commercial real estate and industrial businesses, 16% from military aerospace business, and the remaining 21% from commercial aerospace business.[7] While R&D spending increased steadily between 2003 and 2007, it did not increase as rapidly as revenues, rising 12.2% annually, compared with annual revenue growth of 15.2%.[8]During 2007, United Technologies acquired several businesses, including Marioff Corporation and Initial Electronic Security Group (IESG). These acquisitions added to the company's growth in revenue, but the organic growth (without acquisitions) of 10% in Q2 2007 demonstrates that the company's existing business is growing. [10] Otis is the worlds largest manufacturer of elevators and escalators, while Carrier is the world's largest HVAC manufacturer.[11] While Pratt & Whitney is still one of the world's major airplane engine producers, it has seen a long-term decline of market share, and held about a fifth of the market share in 2008.[12] [edit] Trends and Forces[edit] Increasing demand due to surge in offshore drillingAs 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. [edit] Changes in Military Conflicts Abroad Affect Military Contracts for Sikorsky, Pratt & Whitney, and Hamilton SundstrandThe 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, either under the Bush presidency or with new leadership in January 2009, 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. In 2007, $7.3 billion of the company's $54.8 billion in revenues came from the US government. [13] Sikorsky signed a contract with the US military in December 2007 for 537 helicopters to be delivered over the next five years.[14] [edit] Large Amounts of International Business Expose the Company to Political and Currency RisksApproximately 62% of United Technologies' revenue was from international sources in 2007,[15] with 29% of those coming from Europe and another 19% from the Asia Pacific region.[16] Furthermore, business is conducted in a variety of global currencies, and changes in currency values are a risk to revenue. This was particularly important during the end of 2007 and beginning of 2008, when the devaluation of the US dollar versus other currencies made 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.[17] In April 2008, United Technologies revised its 2008 estimated earnings per share up to $4.99 from $4.94 to reflect the increased value of revenue from its operations abroad due to changes in exchange rates.[18] [edit] Fluctuations in Housing and Commercial Real Estate Markets Affect New Construction Revenues for Otis, Carrier, and UTC Fire & SecurityWith 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. Since mid-2007, 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.[19]. About 25% of the company's revenue comes from residential housing.[20] [edit] New CEO, Louis Chevenert, Has Yet to Prove HimselfAfter 14 years of management under CEO George David, new CEO Louis Chenevert took over on April 9th, 2008, after being selected by David two years ago. While it seems likely that Chevenert understands the business well and is ready for the transition, this change in leadership is a risk to the structure and effectiveness of the company as a whole.[21] [edit] Commodity Price Fluctuations drive down Profit MarginsAs a manufacturing company, raw materials are a primary expense in creating salable products. Increasing commodity prices, especially for steel, copper, aluminum, titanium and nickel[22] have limited profit margins. The company deals with this issue through conservation, scrap reclamation, consolidating purchases, and limiting the number of different suppliers. [23] The company spent $16 billion on materials in 2007, and is working to find lower-cost sources for its materials.[24] In 2007, the company reported an earnings impact of approximately $290 million, and spent another $166 million in 2007 on reducing future costs by restructuring.[25] [edit] Exposure to Emerging Markets Drives UTX's GrowthUnited Technologies is invested in emerging markets, such as China and India, which are growing much faster than U.S. domestic markets.[26] The Chinese elevator market, which Otis controls a 75% of, is growing at a rate of 15-20% per year[27] In addition to new construction, emerging markets have had increased demand for commercial aircraft.[28] [edit] CompetitionWith 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;[29] 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. United Technologies invests in research and development in order to stay competitive, and designed a new quieter and more efficient jet engine in 2007,[30] as well as a method for geothermal power production in 2007 that lets lower temperatures be used for generation.[31] United Technologies spends a larger percentage of its revenue on research and development than most of its competitors.[32]These investments in research and resulting new products need to become profitable in order for United Technologies to maintain its long-term competitiveness. The company also touts its efficiency-boosting program, ACE (Achieving Competitive Excellence)[33], as a means to create and maintain better profit margins on operations. It has been using this program since the 1990's, under CEO George David, improves it continually, and claims to have made significant strides in efficiency as a result.[34] Boeing competes with United Technologies in the helicopter market, but UTX does not produce large commercial airliners and does not compete with Boeing in the passenger plane market. UTX's 2007 operating margin was 11.66%,[35] compared with competitors Honeywell International at 9.60%,[36]Boeing Company (BA) at 8.78%,[37] and General Electric Company (GE) at 15.40%[38]. Otis has the highest operating margins of the UTX business units, with margins three times higher than its peers.[39]
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