United Tech Amends Canada Deal, Reaffirms Guidance

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United Technologies Corp. (UTX) declared that its segment Sikorsky Aircraft Corp. has amended a contract agreement with the Canadian Government on the Canadian Maritime Helicopter Program. Ending a long and costly dispute, the amended contract will allow Canada to replace its maritime fleet with Sikorsky’s CH148 Cyclone helicopters.

The Contract

Under the original $4.61 billion deal, the delivery of the helicopters was scheduled to begin in 2012. But the agreement hit a snag as Sikorsky and Canadian officials clashed over production and support issues, nearly scrapping the deal.

The revamped contract will pave the way for Canada’s Department of National Defense to begin retiring its aging fleet of Sea King choppers in 2015, and replace them with 28 maritime patrol helicopters by Sikorsky.

A senior Canadian Defense Official said that the Cyclones – a military version of Sikorsky’s S-92 choppers – are expected to start flying limited operational missions from warships in early 2016. However, the Cyclones will be confirmed as fully operational only in 2018, when Sikorsky delivers a software package that integrates all elements of the aircraft’s mission and warfighting capabilities.

Financial Effect & Outlook

As a result of the modified contract, Sikorsky’s sales will improve by around $850 million. The financial statements will also record a charge of $440 million in second-quarter 2014, taking into account the cumulative effect of progress to date toward completion of the program, as amended.  

United Technologies expects the charges to be offset by one-time gains over the course of the year and hence, they are expected to be neutral to 2014 earnings per share (EPS). Therefore, the conglomerate reiterated its guidance for 2014 EPS in the expected range of $6.65 to $6.85.

United Technologies currently holds a Zacks Rank #3 (Hold). Some stocks in the diversified operations industry worth mentioning include Hutchison Whampoa Limited (HUWHY), Sumitomo Corporation (SSUMY) and Noble Group Limited (NOBGY), each carrying a Zacks Rank #2 (Buy).

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