United Technologies Will Now Officially Separate Sikorsky

The aviation industry is gathered in France for the Paris Air Show. The focus is usually on the orders for industry giants Airbus and Boeing (BA), but this year also featured an interesting announcement from United Technologies (UTX). During its Investor Day presentation, the company confirmed that it would exit the helicopter business, with either a spinoff or sale of its famed Sikorsky helicopter unit.

The announcement is the culmination of a strategic review initiated several months ago and a final decision on the exit direction is expected sometime during the next quarter. The press release had some comments from UTX’s CEO Gregory Hayes:

“Our strategic review has confirmed that exiting the helicopter business is the best path forward for United Technologies,” said Gregory Hayes, UTC President and Chief Executive Officer.  “Sikorsky is the world’s premier helicopter company and through a series of strategic wins is well positioned for long-term growth.  However, separation of Sikorsky from the portfolio will allow both United Technologies and Sikorsky to better focus on their core businesses.  Over the coming weeks, we’ll determine whether a spinoff or direct sale is the best way to enhance Sikorsky’s long-term success and create the most value for customers and shareholders.

The company also started releasing financial information excluding Sikorsky, whose separation will incur one time charges of $0.10-0.20 per share. In a surprising move, UTX also slightly cut its full year earnings guidance as the helicopter business has been hit hard by the slowdown in the oil & gas space. The WSJ notes just how drastically projections for the business have changed since March:

The commercial market accounts for 30% of Sikorsky’s revenue, and sales are expected to fall by 18% to 20% from last year, a sharp reversal from the rise of 3% to 5% projected in March. That would leave operating profit down $100 million to $125 million in 2015, compared with last year and an earlier projection for a rise of as much as $25 million.

In response to the changing environment, Sikorsky plans to significantly reduce its headcount and shutter some locations. Despite the challenges, there should be plenty of potential buyers for the highly regarded unit, including Boeing and Textron, but we are still rooting for a spin off. A sale is considered to be difficult due to the resulting tax bill, but companies have become creative in ways to get around that. We will keep you updated once a decision is reached by management.

Disclosure: Author holds no position in any stock mentioned.