UTC's David: "We'll Come Back Again"


It has been a tough 12 months for George David and his United Technologies Corp. On Oct. 22, 2000, he watched former General Electric CEO Jack Welch announce a deal with Honeywell mere minutes before David was to cement a union. Through lobbying efforts in Europe, the UTC chairman and CEO helped sabotage the $45 billion GE-Honeywell marriage, which fell apart in July.

David scarcely had time to savor that victory when terrorists attacked America and sent key parts of his business, such as the Pratt & Whitney jet-engine unit, into a tailspin. BusinessWeek Associate Editor Diane Brady recently met with David in his Hartford (Conn.) headquarters to discuss the fallout from September 11 and how he intends to maintain growth. Edited excerpts of their conversation follow:

Q: You were one of the first out of the gate with bad news, telling the Street that the attacks could trim up to $250 million off your fourth-quarter earnings. Why so quick?

A: UTC has always been very straight with investors. We [consistently] report what I would characterize as high-quality earnings. We have a high cash content. We have had steadily rising earnings, steadily rising expectations. We have a pact [with investors], and I felt like that was breached when planes hit the World Trade Center. I thought we should tell investors about the impact of that (see BW Online, 11/2/01, "Is UTC Misunderstood on the Street?").

Q: Your outlook for jet engines is certainly more dire than what we're hearing from GE.

A: We're more in the line of fire than others. An engine is essentially leased for life. The aftermarket -- spare parts and support -- is where the profitability is. More than half of U.S. aircraft are Pratt-powered. Of course, the airplanes that get parked are typically the older ones, and 90% of those are Pratt-powered. The $64 trillion question is when traffic comes back. I think [we could have] several quarters of lower traffic.

Q: Several quarters of fear over flight safety?

A: There is still confidence among Americans in flight safety. What there is not today is confidence in flight security. Those are two different things. People are trying to process what this all means.

Q: Do you think the government should be bailing out airlines?

A: I do. The airline industry in the U.S. is $90 billion a year. Before September 11 happened, they would have lost about $3 billion. Now, I think the losses will be well north of $10 billion. We would simply not have a surviving airline industry if this goes on. That's the choice. The attacks were an event of such extraordinary magnitude that it requires an extraordinary response.

Q: On the day trading resumed, your stock plunged 26%. Were you surprised by how many people dumped your shares?

A: I was surprised that they didn't look back more to the 28 quarters of steadily beating expectations.... We're about 60% to 70% held by institutions. If you talk to the analysts, they know that our management is high-tenure and that we have good communications with investors.

I thought all of that would dampen the downdraft that happens when you give people bad news. I also thought they might cut us some [slack because of September 11].

Q: Patriotic buying?

A: Not patriotism. Bear in mind that the company is exactly what it was on Sept. 10. We have one thing that is directly impacted by the towers going down. That doesn't change the other businesses. The short-term impact ran to parked airplanes and the fact that fewer people will travel for the next few quarters.

Q: Does it make you think about how you position the company in this environment?

A: Yes. For example, we have an active M&A agenda. We buy between $1 billion and $2 billion a year. We had some deals coming in the fourth quarter. We'll let them [wait] a quarter or two.

These would've been cash deals, and we need to be alert to the cash consequences of this event. Airline receivables will stretch. We need to be in a position to team with airline customers in times of difficulty. I don't mean we should compromise the balance sheet of UTC, but airlines will need credit or help, and we will do it in the proper way. But that will reduce our cash flow.

Q: Do you think people perceive United Technologies as an aerospace company?

A: They do. We like more balance. We have a clear requirement that we don't want the aero to be more than half [of revenues]. By the same token, though, we like aero. The intellectual property of the company, the science of the company [comes from there]. We're one of the biggest research spenders in the U.S. -- $2.3 billion a year. About $900 million of that is government money. The rest is our money.

Q: How do you protect UTC from having this type of hit again?

A: We've been on that for a decade. In the late 1980s, UTC was 65% aerospace. Now, we're 45% aerospace. Pratt was 60% of the operating income, and today it's 33%. We are clearly working to [expand business other than Pratt] precisely because of shocks like this. The shock would have been twice as significant to us in 1990 as it is today.

Q: Tell me about Honeywell. People wonder if you might be interested again, now that GE is out of the picture.

A: We thought that Honeywell was a really good deal in October, 2000. It would have doubled the size of the aero portion of our business, from $12 billion to $22 billion.

We're in an environment where companies need to become larger. Our world economy has gone from national to continental to global in the last 15 years. Platforms need to be bigger in a globalizing economy. You need bigger financial resources, the ability to do bigger deals, more diversity.

By the way, I don't think there's any chance that a Honeywell deal will happen...in the next couple of years. Mr. Bossidy [Lawrence Bossidy, who was named chairman and CEO of Honeywell after the GE deal fell through in July] has been definitive that there will be no deal on his watch.

Q: Do you compare UTC to GE quite a bit?

A: As a financial peer, we compare ourselves to them all the time. Sometimes they're better than us, and sometimes we're better than them. We're certainly more international than they are.

Jack throws bouquets our way from time to time, and one of the bouquets he threw was something along the lines of a mild expletive of "how do those guys do so well in China?" We have very healthy good margins in China. We're part of the fabric of the society, and we operate with about 9,000 local managers. That's a good example of how we do it better than GE.

Q: Why did GE get the giddy multiples?

A: There's a GE premium. I think it would be really cool to have a better multiple than GE. They have the predictability. [Our] mantra is 15% earnings growth forever. You make the next quarter a year in advance. It's harder in a market like this. But I have high confidence that the growth will come back.

We've always been a little bit in the middle of the value and growth stocks. We've dropped back into the value sector as a result of this event. I got an e-mail from a longtime fan of UTC who owned millions of shares for years and has been out of the stock since we hit $80 earlier this year. Her response was, "great release...I can buy the stock."

I see us getting 15% for a long, long time. Others will decide if that means we're a growth stock. Like General Electric, we operate in mature markets. We are not a telecom or directly a dot-com. We're not a pharmaceutical. What we are is a mix of mature industrial markets.

Q: So where do you get the growth?

A: We tell the Street that we'll get 7% to 10% revenue growth, about half a percentage point to a percentage point in margin expansion each year, and the rest from acquisitions or things like share repurchase.

It's not easy. We divested UT Automotive in 1999. May I preen for five seconds? That was so good. We nailed that. Auto out, Sundstrand in. Ask any investor. They hated UT Automotive. So did we. We like all [the businesses we're in now] because they're world leaders. You think about Jack's mantra of being No. 1, No. 2. We're No. 1 in practically everything we do.

Q: It might be tougher to maintain that mantra in the coming months.

A: We like the philosophy around here of no bad news. Now, we have bad news.... I hate it. It's management's responsibility not to have bad news. On the other hand, this hasn't changed the fundamental strengths of our company. We're better positioned than we used to be, and we'll come back again. I'm sure of that.


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