So United Technologies (RTX 1.86%) has decided to sell Sikorsky to Lockheed Martin (LMT 2.11%), and will collect $9 billion in exchange for its marquee helicopter business. That sounds like a big deal, but one number will show you how truly insignificant this supposedly transformative restructuring is for United Technologies.
And we'll get to that number in a moment.
But first, the earnings.
United Technologies (UTC) reported Q2 earnings on Tuesday. The results were mixed, showing the company exceeding expectations in at least one respect, but falling short on others. To wit:
- Analysts following UTC had expected Q2 sales to slip 4%. They fell more than 5% instead, to $16.3 billion.
- Q2 earnings, which were expected to fall 7% year over year, instead declined just 6% to $1.73 per share -- beating estimates.
- Meanwhile, free cash flow for Q2 (cash from operations minus capital expenditures) came in at just under $1.2 billion -- and 27.5% below UTC's $1.65 billion in reported net income for the quarter.
That last number is an improvement over the 32% rate of free cash flow lag, relative to reported income, that UTC has reported so far this year. Management expects the gap to close further as the year progresses, such that by year-end, UTC CEO Gregory Hayes is promising that free cash flow will range from "90 to 100 percent of net income."
Bad isn't good, but it could have been worse
That's certainly not a good ratio, but it will be an improvement. And in an economy that Hayes characterizes as plagued by "continued strength in the U.S. dollar" (which hurts sales and depresses the value of income earned in foreign currency), "softness" in Europe, and "slowing" in China, free cash flow approximating 95% of net income isn't as bad a result as it might have been.
Meanwhile, UTC predicts that as business begins to stabilize in the year's second half, the company can still earn somewhere between $6.45 and $6.60 from its business counting Sikorsky's profits by year-end 2015, or $6.15 to $6.30 not counting Sikorsky. These are weaker profit numbers than management had previously promised. They suggest a current-year P/E ratio of perhaps 16.5 on the stock -- hardly unreasonable in an aerospace and defense products and services industry where the average P/E hovers around 20.
And now for the number you've been waiting for...
"Thirty cents." This, it would appear, is how much Sikorsky is really worth to United Technologies shareholders.
While Lockheed Martin is paying $9 billion for the Sikorsky business as a whole, UTC's estimate of how much it's going to earn this year without counting Sikorsky, versus how much it would earn if it kept Sikorsky hovering around, is just $0.30 per share. So wait -- a division that accounts for 10% of UTC's market capitalization ($9 billion of a $91 billion market cap) only produces less than 5% of UTC's profits?
When you look at Sikorsky that way, UTC might not be giving up very much at all by selling Sikorsky to Lockheed Martin. For that matter, Lockheed Martin may not be gaining all that much from winning Sikorsky, either.