November 28, 2018

Hayes: UTC investors drove split

Photo | CNBC
Photo | CNBC
Gregory Hayes, CEO of UTC, told CNBC on Tuesday that company shareholders drove its decision to spin off its Carrier and Otis divisions.
HBJ File Photo
UTC's Farmington headquarters.

Splitting United Technologies Corp., Farmington's 84-year-old conglomerate, into three separate companies was an arduous, yet easy decision, according to its chief executive.

In near unanimous support, UTC shareholders lobbied over the last year for the company to spin off its Otis elevator and Carrier building systems businesses.

Shareholders also backed an aviation-focused business, led by jet-engine maker Pratt & Whitney and newly acquired avionics parts maker Rockwell Collins, UTC CEO Gregory Hayes said Tuesday on CNBC, just hours after the company announced plans to split into three companies by 2020.

Over time, UTC has held that "balance works," with its Carrier and Otis divisions supplying extra capital to support certain aerospace investments, Hayes said.

Carrier, a global provider of HVAC, refrigeration, building automation, fire safety and security products, recorded $17.8 billion in sales last year and Otis, a manufacturer of elevators, escalators and moving walkways, had $12.3 billion in sales.

"And the fallacy in our thinking was that you needed cash flows from Otis and Carrier to pay for the investments in Pratt & Whitney and the aerospace systems business," he said. "That was the magic moment when the board said 'we don't really need to be together.' Then the question was 'should we be together?'"

UTC completed its $30 billion acquisition of Iowa-based Rockwell Collins, that, with the combination of Pratt and UTC Aerospace Systems, will create one of the world's largest aerospace companies billed as Collins Aerospace Systems.

With Rockwell Collins, UTC projects about $50 billion in aerospace sales when the split is completed in 2020. And with the demand for travel rising, UTC was confident its aerospace division has the strength to cover its own expenses, free of cross-subsidiary backing.

"I would tell you as I've gone out and spoken to all of our investors over the last year, there is almost unanimity that the businesses would perform better as separate, focused businesses," Hayes told CNBC, with the New York Stock Exchange serving as a backdrop.

"Because we are so big, and I will tell you complicated because of the different markets that we operate in, the different cycles our businesses go through, it will be so much simpler" to manage and grow Otis and Carrier independently, he said.

Hayes on cost, tariffs

Hayes is adamant that UTC's split comes from a position of strength.

The chief executive, in his fourth year leading the company, says the three multibillion-dollar businesses are strong enough to operate independently, making the split "the right thing for our employees, our customers and shareholders." UTC has about 233,700 employees globally and about 69,000 and 18,000, respectively, in the U.S. and Connecticut.

Still, significant one-time costs will be needed for the split. Hayes says the transition will cost between $2.5 billion to $3 billion for two main reasons: About $2 billion for tax restructuring of UTC's 1,200 worldwide entities (an 18-month process); and $500 million to establish IT and new tax structures for each business.

"In terms of separating, we already have three businesses that run by themselves," Hayes told CNBC. "Our goal now is just to set up three public company headquarters to support those businesses."

Adding headaches to UTC's growth plans, the company is dealing with a tariff war inflamed by President Donald J. Trump, Hayes says.

UTC has raised prices three times at Carrier this year to cover additional tariff costs, he said.

"Tariffs benefit no one," he said. "We are going to spend $150 million in the coming year to pay for these additional tariffs. Ultimately, tariffs become a tax on consumers. Tariffs don't bring jobs back."

Future divestitures?

When asked whether UTC would consider other divestitures, Hayes said the company will listen to offers.

UTC executives are currently eyeing selling off Carrier's $2.5 billion fire safety and security business, a venture that lacks innovation and provides little technology advancement, he said.

"We've been talking about a potential divestiture there," Hayes said. "If somebody comes forward with a compelling offer, we will certainly listen."

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