United Technologies Corporation (UTX - Free Report) has completed the acquisition of Rockwell Collins, Inc. , after having received China’s regulatory body’s approval a day before. Further, this conglomerate took the market by surprise as it communicated about its intention to separate into three independent companies.
Concurrently, with the aforementioned news, the company provided an update on its projections for 2018 — having included the impact of the Rockwell Collins buyout. Moreover, it provided some insight about a few projections for 2019.
Yesterday, the company’s share price has lost nearly 0.8%, closing the trading session at $127.98 per share. However, it’s worth mentioning here that the day’s high was at $132.40.
Here, we discussed the Rockwell Collins buyout and briefed on the intended separation.
Collins Aerospace Systems — Born Out of Rockwell Collins Buyout
A green signal from the State Administration for Market Regulation of China was the final step for United Technologies toward the acquisition of Rockwell Collins — a specialist in providing solutions to military and commercial aviation customers. The September 2017 buyout deal was finally completed on Nov 26, 2018.
The acquisition value was approximately $30 billion for United Technologies. The company paid $140 for each share of Rockwell Collins — with roughly $93.33 per share payment made in cash (funded through available cash and debt borrowings) and $46.67 per share disbursement made through exchanging issuances of shares of United Technologies to Rockwell Collins’ shareholders.
The Rockwell Collins buyout will be advantageous to United Technologies, further strengthening the mechanical, electrical and software capabilities of UTC Aerospace Systems. The combined businesses of UTC Aerospace Systems and Rockwell Collins formed a new unit for United Technologies — Collins Aerospace Systems. On a pro forma basis, Collins Aerospace Systems generated revenues of $23 billion in 2017, had employee strength of 70,000 people and worked in 300 sites worldwide.
Putting the benefits of the Rockwell Collins buyout in numbers, accretion to adjusted earnings per share in 2019 is estimated to be 15-20 cents. Impact from incremental intangible amortization related to the buyout, amounting to $650 million, was included in the projection.
The buyout is likely to add roughly $500-$750 million to United Technologies’ free cash flow in 2019. The company’s shares outstanding at the end of 2019 will be roughly 872 million. It’s worth noting here that United Technologies’ shares at the end of the third quarter of 2018 were approximately 802 million shares. Further, cost synergies before tax (run-rate) of over $500 million is predicted by the fourth year.
For 2018, United Technologies revised its financial projections after including the impact of Rockwell Collins buyout. Dilution of 10 cents per share led to lowering of adjusted earnings per share guidance from $7.20-$7.30 to $7.10-$7.20. Likewise, free cash flow projection was revised down from $4.5-$5 billion to $4.25-$4.5 billion. On the other hand, revenues are now predicted to be $64.5-$65 billion, reflecting growth from the earlier $64-$64.5 billion. Organic sales are still anticipated to be roughly 6%.
United Technologies now intends to separate its businesses into three independent companies — United Technologies, Otis and Carrier.
United Technologies will comprise of the businesses of Collins Aerospace Systems and Pratt & Whitney. The company will serve customers in the defense and aerospace end markets. On the other hand, Otis Elevator Company (Otis) will continue manufacturing escalators, moving walkways and elevators while Carries will keep on making building automation; heating, ventilation, and air conditioning; security and refrigeration; and fire safety products.
These separate companies, with solid innovative capabilities, will be leaders in their respective fields and will bring in more customized solutions for their customers as well as create greater value for shareholders. The whole separation plan will be executed if necessary approvals are received through spin-offs of existing Carrier and Otis businesses. The separation procedure will be tax-free in nature.
At first, quarterly dividends to shareholders will not fall below 73.5 cents per share in any case. Initially, this disbursement will be jointly funded by the three separated companies. The separation procedures will likely be completed in 2020.
Zacks Rank and Price Performance of United Technologies
United Technologies, with approximately $102.5-billion market capitalization, currently carries a Zacks Rank #3 (Hold).
In the past month, the company’s share price has increased 5.7% against 2.4% decline recorded by the industry.
In the past 60 days, the Zacks Consensus Estimate for earnings on the stock has increased 0.7% to $7.27 for 2018 and decreased 1.4% to $7.76 for 2019. Further, these estimates represent year-over-year growth of 9.3% for 2018 and 6.8% for 2019.
United Technologies Corporation Price and Consensus