United Technologies Merging With Raytheon, Will Spin Off Otis Worldwide And Carrier Global

Under The Spotlight: United Technologies (UTX-$130.59)
In November 2018, United Technologies (UTX) announced plans to separate United Technologies Corporation into three independent, publicly traded companies:
 

(1) UTC, a preeminent aerospace company comprised of the Collins Aerospace and Pratt & Whitney businesses;
(2) Otis Worldwide Corporation , the world’s largest elevator and escalator manufacturing, installation and service company; and
(3) Carrier Global Corporation, a leading global provider of heating, ventilating and air conditioning (HVAC); refrigeration; and fire and security solutions. 

The separation of Otis and Carrier from United Technologies is intended, among other things, to better position the management of each company to the management of each company to pursue opportunities for long-term growth and profitability unique to each company’s business and to allow each to more effectively implement its own distinct capital structure and capital allocation strategies. The separation will occur through two tax-free spinoffs, expected tooccur early in the second quarter of 2020.

For each share of United Technologies a shareholder holds, they will receive 0.5 shares of Otis (OTIS) and 1.0 share of Carrier (CARR).

The number of United Technologies shares an investor owns will not change due to the spinoff transaction. To better understand each separate company as they become public entities, we are providing highlights from the prospectus and management presentations.

OTIS WORLDWIDE 
Otis Worldwide is celebrating 167 years of industry leading innovation. Elisha Graves Otis invented the safety brake that made elevators safe for passengers, enabling modern cities to rise to previously unthinkable heights. The Otis brand is recognized across the globe and its products are installed in some of the world’s most recognizable buildings. 

Otis elevators and escalators move more than two billion people every day. The company serves customers in over 200 countries and territories and supports over two million maintenance units under contract. Otis is a leader in the approximately $75 billion global elevator and escalator industry. The industry is supported by attractive macro growth trends, including urbanization, a growing middle class and digitalization. We like the recurring
business model of new installations and maintenance plus repair of the global installed base.

For the year ended December 31, 2019, the company’s net sales and operating profit were approximately $13.1 billion and $1.8 billion, respectively. International operations represented approximately 73% of net sales for the year.

Otis is well positioned for solid 2020 performance with organic sales growth of 2% to 3%, operating profit margin expansion of 20 basis points, and robust free cash flow of $1.0 billion to $1.1 billion. The company’s disciplined capital allocation policy is to pay out about 40% of earnings in dividends, repay $250 million a year in debt and invest in bolt-on mergers and acquisitions. 

CARRIER GLOBAL 
Carrier is a leading global provider of heating, ventilating and air conditioning (HVAC); refrigeration; and fire and security solutions. The company’s 100-year heritage is built on a legacy of innovation, beginning with its founders—Willis Carrier, who designed the world’s first modern air conditioning system; Robert Edwards, who patented the first electric alarm bell; and Walter Kidde, who produced the first integrated smoke detection and carbon dioxide extinguishing system for use on board ships.

Carrier’s pro-forma sales in 2019 were $18.6 billion with adjusted operating profits of $2.6 billion. HVAC sales represented $9.7 billion of sales with profits of $1.6 billion; Fire and Security sales were $5.5 billion with profits of $700 million; and Refrigeration sales were $3.8 billion with profits of $500 million. 

For fiscal 2020, Carrier revenues are expected to rise slightly thanks to new revenue sources. Adjusted operating profit is expected to increase $25 million to $75 million thanks to improved pricing and cost reductions. Free cash flow is expected in the $1.3 billion to $1.4 billion range.

Carrier’s growth model is to grow sales faster than the industry; grow adjusted operating profit faster than sales; grow adjusted EPS faster than adjusted
operating profit; and grow free cash flow faster than earnings.Over the medium term, revenues are expected to increase in the mid-single digit range with adjusted EPS increasing in the high-single digit range with free cash flow conversion of 90% to 100%.

Carrier plans a balanced capital allocation policy with a healthy and competitive dividend at an initial planned rate of $550 million per quarter, share repurchase programs as appropriate and a disciplined approach to mergers and acquisitions. 

MERGER WITH RAYTHEON
Following the spinoffs of Otis Worldwide and Carrier Group, United Technologies will merge with Raytheon (RTN). The merger will create Raytheon Technologies, a premier systems provider with advanced technologies to address rapidly growing segments within aerospace and defense. United Technologies will change its symbol from UTX to RTX and will continue to trade on the NYSE. 

For each share held, Raytheon shareholders will receive 2.3348 shares of the merged company, which will represent 43% of the combined company, while United Technologies’ investors will own 57% of the combined firm.