While the merger of
announced last month has its fair share of critics, the conglomerate’s previous big aerospace acquisition is turning out nicely.
On Tuesday, UTC raised its outlook for the rest of 2019 after reporting better-than-expected second-quarter numbers. Much of the good news came from Collins Aerospace, the division created after the $30 billion acquisition of Rockwell Collins last November. While not uncontroversial, this deal is now forecast to boost UTC’s 2019 earnings per share by about 2%.
By contrast, UTC’s air-conditioning and elevator divisions were weak, highlighting why the company is spinning them off to become a pure-play aerospace giant, following a period of unprecedented growth in air travel. This doesn’t dispel worries that the Raytheon deal offers little upside, though.
Previously, Collins had warned about the potential impact of the world-wide grounding of Boeing 737 MAX jets, to which it supplies a large array of parts, including landing systems and sensors. In the end, second-quarter sales were 9% higher than in the same quarter last year, thanks to 16% growth in revenue from component repairs—the so-called aftermarket. Ironically, the MAX grounding ended up boosting repair work, because airlines had to get older jets up to spec.
The MAX’s tribulations aside, Collins seems to be delivering. Margins are beating forecasts, and about $200 million in cost savings from integrating it into UTC’s existing aerospace-parts division, UTAS, have already been achieved. Merging the two was initially supposed to save $500 million in costs by 2022, but this number could now be above $600 million, UTC Chief Financial Officer Akhil Johri said Tuesday.
This shouldn’t be seen as validating the company’s more recent buying spree. UTAS and Rockwell Collins may not have had much direct overlap, but they were still competing in the same space. Together, they offer a complete catalog of aerospace products that make them a bigger part of key programs such as Boeing’s 737 and 777X and Airbus’s A320—at a time when jet makers are squeezing suppliers and doing more in-house.
As for the latest merger proposal, the benefits of adding Raytheon’s mostly unrelated defense programs to the mix seem much murkier, beyond some promise of technology sharing.
Integrating Collins while hiving off other divisions is already an operational challenge for UTC. Taking on more complexity, even within an industry that is doing well, may be pushing its luck too far.
Write to Jon Sindreu at firstname.lastname@example.org
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