United Technologies Corp. (NYSE:UTX) organic growth drivers remain intact in the form of the Climate, Controls, & Security (CCS) unit despite the temporary roadblocks due to the ongoing government shutdown.
The company warned that its aerospace businesses could be forced to furlough thousands of workers due to the absence of Defense Contract Management Agency (DCMA) inspectors who audit and approve operations throughout the manufacturing process for military products.
Without the required DCMA inspectors, who were deemed non-essential federal employees, certain defense manufacturing work must be halted, which will result in employee furloughs. United Technologies gets about 18 percent of its revenue from the government as it makes Black Hawk helicopters and engines for the F-35 Joint Strike Fighter.
If the shutdown continues through next week, company-wide furloughs are expected to double to include 4,000 workers. This number could exceed 5,000 employees if the government shutdown continues into next month.
However, the company's orders have picked up momentum and organic growth across the company seems to be on the right path as Climate, Controls, & Security (CCS) looks as if it will come in at the high end of the segment range (along with Pratt and UTAS).
The company's CCS segment provides heating, ventilating, air conditioning, and refrigeration solutions, such as controls for residential, commercial, industrial, and transportation applications. It also offers electronic security products, including intruder alarms, access control systems, and video surveillance systems; and monitoring, response, and security personnel services, as well as designs and manufactures a range of fire safety products.
For the second quarter, CCS equipment orders increased 6 percent organically and accounted for 28 percent of total revenue.
"We estimate CCS sales of $16.7B in 2013 which on a reported basis is down slightly from 2012," Deutsche bank analyst Myles Walton ! wrote in a note to clients.
Organic growth should still be positive for the year, but it'll be just 1 percent versus the 4-5 percent targeted at the start of the year as European markets in particular showed worse than expected; in addition to slower commercial market sales.
Management has aspirations for organic growth to trend in the 5 percent range with a potential sales target for CCS of $25 billion in 2020.
"While we aren't ready to sign up to a 5% CAGR through 2020, we do see the potential for the 3% y/y growth in 2H13 to trend modestly higher in 2014, and beyond (depending on a European recovery)," Walton said.
Meanwhile, CCS margins continue to show strength. Margins have been a success story over the last several years as consolidation, portfolio transformation, productivity and restructuring alongside modest top-line increases have driven solid results.
Since 2009, the company sights $1 billion in incremental organic EBIT on $1.8 billion of organic sales. The estimated mid-50 percent implied incremental margins reflect both the benefits of price, commodity, restructuring savings, and volume driven increments that would be in the mid-20 percent range.
"Assuming volumes come, we think a 50bps/yr improvement in CCS is a baseline with upside from there on price/restructuring benefits," the analyst added.
Looking to 2014, buy-side investors are hoping for $7 EPS in 2014 while management is more likely to offer up guidance in $6.80 range towards year-end. The difference will depend on how the year ends on pension, defense spending, and Europe, in particular.
Importantly, order trends remain healthy across the company's commercial businesses, and investors will remain engaged on the confidence of renewed organic growth in the mid-single digit range for the next 4 quarters.
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