The future is "bright for Sikorsky," says the CEO of the rotorcraft maker’s parent company, United Technologies Corp. (UTC) – but it is not bright enough to keep it inside UTC.

With an adjusted operating margin of 10-13% for 2014, Sikorsky is "just a little, not quite as attractive as the rest of the businesses," according to UTC CEO and President Gregory Hayes. Other operating units inside UTC – namely Pratt & Whitney (P&W), UT Aerospace Systems (UTAS), Otis Elevator and Climate, Controls & Security (CCS) – returned at least 15%.

Also, Hayes said, Sikorsky is a platform-oriented provider dependent on its King Kong-like customer, the Pentagon; both are factors that make squeezing out higher margins more difficult for a conglomerate like UTC compared with commercially oriented systems providers like P&W, UTAS, OTIS and CCS. Defense industry profit growth is seen in low single digits versus mid/high single digits elsewhere in UTC, and Sikorsky’s cash flow is "investment dependent" versus other units where net income can exceed corporate investment.

Hayes spoke March 12 to Wall Street analysts in a webcast event to explain UTC’s decision, announced the night before, to consider spinning off Sikorsky tax-free.

A decision from a review of strategic alternatives is slated by the end of this year, UTC said late March 11. "However, no specific timetable has been set, and there can be no assurance that a spin-off or any other transaction will take place. Likewise, no decision has been made on the timing or terms of any such transaction if one were to occur."

If spun off, Hayes promised Sikorsky would be left a viable, stand-alone business, without too much debt, despite whatever cash out UTC will take. "It is a very, very good business," Hayes said, and "has a solid backlog." He pointed to the renewed VXX presidential helicopter and ongoing CH-53K programs in the Navy Department, as well as the congressionally-favored Air Force rescue helo, which might go with a variant of Sikorky’s iconic Black Hawk.

Moreover, it is a leader in technology development, starting with advances in vehicle autonomy, a research priority for the Pentagon. And Sikorsky’s S-97 Raider prototypes are trying to prove the operational value of the 220-kt. cruise speed, high-g maneuverability, low-speed agility and hover efficiency of the X2 rigid coaxial-rotor compound helicopter. In turn, the Raider underpins a Sikorsky/Boeing SB-1 Defiant medium-utility demonstrator for the Army, scheduled to fly in 2017.

According to Capital Alpha Partners, U.S. government sales were 52% of Sikorsky’s total $7.5 billion in 2014 sales, while international military made up about 20%. Bank of America Merrill Lynch estimated 2016 earnings before interest, taxes, depreciation and amortization (Ebitda) will be about $416 million, while EBIT margin will be 6%. Its "unlevered," i.e., debt-free enterprise value could be $3.6 billion.

But besides a lower margin compared with other UTC units, Sikorsky also brings in less sales revenue, at $7 billion last year versus roughly $30 billion for the other units. In turn, many analysts said they were not surprised by a possible spin-off, which would be more welcome by stakeholders like UTC and its shareholders versus a taxable sale to another company. It also comes as Hayes follows through on Wall Street expectations that he reshape and refine UTC toward greater profit growth after his abrupt promotion late last year (Aerospace DAILY, Jan. 30).

"We think Sikorsky is an under-appreciated part of UTX (UTC), and spinning it out (versus a tax inefficient sale) could realize this value," RBC Capital Markets said. "Sikorsky’s military markets are looking up, and it has had a clean sweep of new program wins in 2014. Down the line there could also be more helicopter market consolidation."