United Technologies (UTX – Free United Technologies Stock Report), an industrial conglomerate heading for a planned breakup and a member of the Dow 30, has reported financials for the fourth quarter of 2019. Revenues and earnings both outdistanced expectations, and management announced that the spinoff and merger plans that have been in the works for some time now are set to occur in the second quarter of this year. Overall, the report was an upbeat one, but the reaction by Wall Street was muted (up less than 1%), likely due to the planned changes to the company's structure that are forthcoming. Still, UTX shares are up more than 30% in price over the last 12 months, or double the increase of the Dow Jones Industrial Average over that span.
Revenues for the three-month window clocked in at $19.6 billion, ahead of our $19.3 billion call, and up handsomely from the $18.0 billion posted in the year-earlier period. Commercial aftermarket sales rose 42% at Collins Aerospace, while Pratt & Whitney receipts were flat. Equipment orders at Carrier were down 4%, in contrast to a 3% increase of new equipment purchases at the Otis elevator/escalator arm. Moreover, the future looks bright across the board. Pratt & Whitney's GTF engine has reduced fuel burn, emissions, and noise. Collins Aerospace achieved $300 million in cost synergies, putting it well on track to reach the $600 million goal by year four of the marriage. Otis completed a high-profile modernization project at the Empire State Building, and Carrier launched more than 100 new products for the fifth-consecutive year.
As far as earnings go, share net came in at $1.94 on an adjusted basis for the fourth quarter. That figure beat our expectation by about a dime, although it is a penny below the fourth-quarter 2018 showing. Net income for the full year registered $5.5 billion, up 5% year over year. Cash flow from operations was $8.9 billion and capital expenditures were $2.3 billion, resulting in free cash flow of $6.6 billion, which includes approximately $400 million of one-time portfolio separation costs.
Management also provided some color on the upcoming portfolio moves. CEO Gregory Hayes stated that operational separation activities for Otis and Carrier are substantially complete. The final steps are now being executed to spin off both businesses as independent companies early in the second quarter. Also, it was noted that it is leadership's goal to have the merger with Raytheon (RTN) ready to close concurrent with the portfolio separation. Therefore, we now expect all this flux to be finalized in a window from April to mid-May. That said, management further intimated that the outlook for sales, adjusted EPS and free cash flow for the soon-to-be formed Raytheon Technologies will be provided after the merger closes. Additionally, the outlooks for Carrier and Otis will be provided in conjunction with pre-spin investor meetings scheduled for February 10th and 11th.
This morning's small uptick in the quotation has pushed the share price even closer to the $155 all-time high. With that in mind, we think investors have missed the boat with regard to the UTX situation. Capital appreciation potential out to 2022-2024 is now subpar and the dividend yield has dipped below the Value Line median, given the now higher share price. A strategy of waiting until after the breakup to see which piece of the puzzle offers the best investment opportunity is likely prudent at this juncture.
About The Company: United Technologies operates in four business segments: Pratt & Whitney makes and services aircraft engines; Otis manufactures and services elevators; UTC Climate, Controls & Security makes heating, ventilating, and air-conditioning equipment; and UTC Aerospace Systems produces aerospace and industrial products.
– Erik M. Manning
