By Tess Stynes And Ted Mann
Lockheed Martin agreed to acquire military aircraft maker
Sikorsky from United Technologies Corp. for $9 billion and said it
may separate its government information-technology and technical
services businesses.
Lockheed said it would explore whether those businesses can
achieve greater growth and create more value for customers and
shareholders outside of the corporation.
Specifically, Lockheed will review its information systems and
global solutions business segment as well as a portion of the
missiles and fire control business segment. Lockheed said those
programs represent roughly $6 billion in estimated 2015 sales and
include more than 17,000 employees.
Lockheed added that information systems and global solutions
programs that aren't included in the strategic review are mostly
focused on defense and intelligence customers and will be realigned
into its four other business segments after the review.
As for the Sikorsky deal, Lockheed said in a news release Monday
that the price goes down to about $7.1 billion, after taking into
account tax benefits resulting from the transaction.
Sikorsky, best known for its Black Hawk choppers, is one of the
world's largest helicopter makers. It manufactures military and
commercial helicopters and is the Pentagon's largest rotorcraft
supplier by value. In March, United Technologies said it would
explore strategic alternatives for the business.
In premarket trading, shares of Lockheed Martin added 1.9% to
$205, while shares of United Technologies rose 1.4% to $112.25.
The planned purchase of the world's largest military helicopter
maker could provide a growth engine for Lockheed, whose revenues
have remained essentially flat over the past five years as Pentagon
budget cuts have only been partially offset by expanding export
sales.
The companies expect the acquisition to close by later this year
or early 2016. Sikorsky will become part of Lockheed's mission
systems and training business segment.
Lockheed added that the transaction won't impact the company's
previously stated dividend or stock-repurchase plans.
United Technologies, meanwhile, said it plans to use proceeds
from the deal to buy back stock to offset the impact of the deal on
its per-share results. The company's board authorized the
repurchase of as much as 75 million shares of its stock, worth
roughly $8.3 billion, replacing an earlier share-repurchase plan
that was nearing completion.
The buyback program is another indication of management's desire
to pare back sluggish portions of United Technologies' portfolio,
and to placate investors who have grown impatient with the stock's
performance relative to peers. The buyback allows United Tech Chief
Executive Gregory Hayes to swap out a low-margin, low-growth unit
of the conglomerate while effectively replacing the value of
Sikorsky's earnings for investors.
For Mr. Hayes, figuring out how to dispose of Sikorsky was an
early test of his leadership. Now that he has struck a $9 billion
deal, Mr. Hayes will have to show investors that United
Technologies' remaining operations including Otis elevators, Pratt
& Whitney jet engines and Carrier air conditioners are on the
right track amid a variety of pressures from increasing cost of jet
engines production to slowing growth in China.
Company officials are bullish about the Otis elevator unit,
which racked up years of strong growth on sales of new elevator
units, especially in rapidly urbanizing China. But the percentage
of elevators under long-term service contracts is lower in China
than in core markets like the U.S. and Europe, making them less
profitable. As the pace of growth in China has eased off, United
Technologies is under greater pressure than ever to boost its
service business there to keep up Otis' margins.
In China, Otis should be able to grow its service business by
20% a year, United Technologies Chief Financial Officer Akhil Johri
told an investor conference in early June.
A more pressing issue is how to handle the stresses of ramping
up production at Pratt & Whitney, the company's jet engine
business.
The company says it has orders, with future options, of nearly
7,000 of its newest family of jet engines. But before those engines
can start driving profits for Pratt, the company faces twin
headwinds--the cost of ramping up production to build the engines,
and the need to pare back research and development spending to
support profit margins.
Mr. Hayes has warned investors since before taking over as CEO
about the need for patience as Pratt enters the ramp-up. Typically,
engine makers begin to reap profits on new engine sales once the
engines are in service and throwing off revenue from service and
maintenance.
Lockheed Martin also reported second-quarter earnings rose 4.5%,
topping expectations and leading the company to boost its full-year
guidance.
Lockheed Chief Executive Marillyn Hewson attributed the results
in the latest quarter to "solid operational and program
execution."
For the year, Lockheed raised its per-share earnings estimate by
15 cents and now expects $11 to $11.30. Lockheed also affirmed its
net sales guidance of $43.5 billion to $45 billion.
Overall, Lockheed reported a second-quarter profit of $929
million, or $2.94 a share, up from $889 million, or $2.76 a share,
a year earlier. Revenue increased 3% to $11.6 billion.
Analysts polled by Thomson Reuters expected per-share profit of
$2.66 and revenue of $10.99 billion.
Write to Tess Stynes at tess.stynes@wsj.com and Ted Mann at
ted.mann@wsj.com
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