United Technologies enters 2013 with strong additions, lingering issues

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United Technologies enters 2013 a transformed company with the acquisitions of Goodrich and International Aero Engines making an immediate impact to its bottom line, but still saddled over lingering concerns about its commercial aftermarket engine business and the status of a highly disputed Sikorsky contract with the Canadian government.

Net income for the full year rose 3% to $5.13 billion, a marginal improvement. But UTC's positive bottom line was possible only because of a fourth quarter surge in profits, which reached $2.06 billion or 55% higher than the same period a year ago.

Meanwhile, operating profit margins fell by 1.1 percentage points for the full year and 3.1% percentage points in the fourth quarter. The steepest yearly decline came at the re-organised UTC Aerospace Systems. The combined unit of Hamilton Sundstrand and Goodrich posted an 11.3% positive margin, but that was 4.6% percentage points off the market set in 2011.

For analysts, UTC's overall growth was balanced with the future of certain key businesses. Pratt & Whitney has recently secured Embraer as the fifth airframer to select the geared turbofan (GTF) engine, but it is struggling to keep its aftermarket business growing as PW4000-powered platforms are retired or are subject to deferred maintenance.

"We continue to see weakness of the widebody, which is the PW4000," says Greg Hayes, chief financial officer and senior vice president.

But there are also positive trends in aftermarket business, particularly in the narrowbody segment where P&W consolidated its grip on the IAE V2500 engine and continued supporting the PW2000-powered Boeing 757.

"We thought that [757s] were going to start to see some acceleration of retirements," Hayes says. "We haven't really seen that. In fact, they are flying more now. So, spares actually look pretty good on 75s and on the Vs and all of the weakness we are seeing, all the year-over-year decline is really in the 4000 family."

UTC officials were unable to offer much reason for optimism on the pace of talks with the Canadian government over the long-delayed contract for Sikorsky CH-148s, a maritime patrol version of the S-92 helicopter.

Sikorsky planned to deliver eight CH-148s in an interim configuration to Ottawa, but preliminary discussions with the Canadian government bogged down.

"We have not entered into a renegotiation of the contract yet," says Jay Malave, UTC's director of investor relations. "We are in discussions to get to that point where we can restructure the deliveries of the IMH, which is the interim configuration of the helicopter. We started those discussions last year. I think they are going very well, but we are not at the point yet where we're ready to pencil to paper."