By Doug Cameron, Tess Stynes and Ted Mann
Lockheed Martin Corp. on Monday agreed to pay $9 billion for
Sikorsky Aircraft and announced plans to shed many commercial and
government businesses that would refocus its role as the world's
largest defense company by revenue.
The planned purchase of Sikorsky from United Technologies Corp.
will add the world's largest military helicopter maker to its
lineup of combat jets, missiles and intelligence services at a
price that also allows it to retain the shareholder return policy
that has driven its stock price over the past two years.
The twin moves by Chief Executive Marillyn Hewson will shift its
nondefense exposure to the oil and gas market through Sikorsky's
civil helicopter business, and dilute the growing reliance on sales
from the F-35 Joint Strike Fighter, which is expected to be
declared combat-ready as early this week after years of delays and
cost overruns.
United Technologies, meanwhile, said it plans to use proceeds
from the deal to buy back stock. 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.
Lockheed is paying around $7.1 billion for Sikorsky after tax
benefits, and analysts don't expect the proposed deal to run into
regulatory challenges ahead of the planned closing in late 2015 or
early 2016.
The company also reported forecast-beating second-quarter
profits, and its shares rose 0.5% to $202.21 in morning trading,
just shy of their all-time high. They have more than doubled since
Ms. Hewson took over at the start of 2013.
The proposed transaction continues Lockheed's recent strategic
shift to become an owner of military platforms rather than an
integrator focused on adding weapons and communications services,
having in recent years added Navy ships and a proposed Army truck
to its product lineup.
With U.S. military budgets close to trough but set to grow at
low single-digit levels, Sikorsky also adds a growth engine and an
avenue to boost Lockheed's international exposure beyond the
targeted 25% of group sales.
The maker of the Black Hawk helicopter would add around $6.5
billion in 2015 revenue to Lockheed's own forecast sales this year
of up to $45 billion, a level that has been flat over the past five
years. Sikorsky executives have said they aim to grow that business
to $10 billion by 2025, a faster rate than the IT and services
businesses employing 17,000 that Lockheed plans to shed. It also
plans to secure $150 million in annual synergies from Sikorsky.
Lockheed said it would conduct a strategic review of large parts
of its information systems and services operations, including areas
such as commercial aerospace and cyber that have been expanded in
recent years through acquisitions.
Businesses with annual sales of around $6 billion are likely to
be spun off or sold. The operations collectively have high
single-digit margins that lag Lockheed's four other business units:
aeronautics, space, missiles and fire control, and missions systems
and training.
Another strong quarter from the space business helped Lockheed
report forecast-beating second quarter profits and raise its
full-year guidance.
Lockheed reported a second-quarter profit of $929 million,
compared with $889 million a year earlier. Per-share earnings rose
to $2.94 from $2.76, and sales climbed 3% to $11.6 billion. It also
raised its per-share earnings estimate by 15 cents to a range of
$11 to $11.30, and left its sales forecast unchanged at $43.5
billion to $45 billion.
Separately, United Technologies said its 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.
For Mr. Hayes, figuring out how to dispose of Sikorsky was an
early test of his leadership at United Technologies. 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.
Shares of United Technologies slid 0.5% to $110.14 in morning
trading.
Write to Doug Cameron at doug.cameron@wsj.com, Tess Stynes at
tess.stynes@wsj.com and Ted Mann at ted.mann@wsj.com
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