United Technologies Earnings: Cost Cutting Boosted Profitability Despite Currency Headwinds

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United Technologies

United Technologies‘ (NYSE:UTX) profit rose 8% year over year in Q1 2015, even as a stronger dollar slashed gains from the company’s international sales growth. [1] The rise in profitability was primarily driven by continued cost reduction efforts, with some additional favorable impact from contract settlements and additional licensing income. [2] On the other hand, the company’s revenues decreased due to a stronger U.S. dollar in Q1 2015. United Technologies (UTC) generates more than 60% of its total sales from international markets, so a stronger dollar meant that organic growth from these markets translated to lower absolute revenues. Overall, UTC’s first quarter revenues reduced by 1% year over year, as 3% organic growth was partially offset by the stronger dollar. [3] UTC revenues of $14.5 billion in Q1 2015 missed analysts estimates by $0.4 billion. [4]

The company posted an impressive 20% year-over-year increase in earnings per share of $1.58, beating analyst estimates. Net of restructuring costs, the increase in reported earnings per share still remained high at 7%. [3]  The increase in earnings is a direct consequence of UTC accelerating cost-cutbacks along with increased buy-back of shares in Q1 2015. With this growth, the company remains confident to be on track with its previously issued earnings guidance of $6.85-$7.05 per share in 2015.

We currently have a price estimate of $125 for UTC, approximately 6% ahead of its current market price. This price estimate will be revised soon in light of the recent earnings.

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See our complete analysis of UTC here

Falling Revenues From Sikorsky Dragged Overall Organic Revenue Growth

Among the five business segments, three segments reported organic growth while one remained flat, making Sikorsky the only segment that reported a fall in organic revenues in the quarter. Sikorsky saw a 7% decrease in organic revenues, driven by lower commercial volumes as well as lower military and commercial aftermarket values. [1] The lower commercial values are an aftermath of falling oil prices which has led to a pullback in exploration and production activity. The company revealed last month that it has been considering spinning-off or selling this business segment, however a concrete announcement is only expected in June this year. [4]

Pratt & Whitney witnessed no change in organic revenues. This was driven by flat defense-related sales, while commercial sales continued to witness a growth. The Aerospace Systems segment saw a decline in defense revenues as U.S. military spending did not witness any recovery. However, this fall was offset by a 10% increase in commercial revenues within the segment. [1] Growth in the global commercial aerospace market is likely to continue for the foreseeable future, driven by rising production rates at major airplane makers such as Boeing and Airbus. So, UTC, which is a key supplier of airplane engines and aerospace systems, will likely see its sales from commercial aerospace continue to rise in the coming quarters.

Otis reported a 2% growth in organic revenue, as commercial construction markets remained encouraging through the quarter. [1] Sales in America, Asia and China witnessed growth. However, the growth in China of 7% was softer than the anticipated 10% due to slower real estate and construction activity. This slowdown is expected to continue in the near future. However, as of Q4 2014, China contributed only 6% to UTC’s overall revenues, and hence we estimate that the impact from the slowing growth in this region will be limited. [5] The EMEA region saw a fall in organic growth in the quarter. However, on the brighter side, orders here were very strong, showing a growth of 37% across the region. [2]

Climate, Controls & Security (CCS) posted a 6% organic growth in the first quarter. This was primarily driven by Transicold, which saw a solid growth in revenues due to a high order intake in Q4 2014. [6]

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Notes:
  1. 1Q 2015 Earnings Conference Call Presentation, United Technologies [] [] [] []
  2. United Technologies’ [UTX] CEO Greg Hayes on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha [] []
  3. UTC Reports First Quarter 2015 Results, United Technologies [] []
  4. United Technologies Beats Views Amid ‘Overwhelming’ Dollar, Bloomberg Business [] []
  5. UTC’s 2014 Q4 earnings transcript, January 27 2015, www.utc.com []
  6. 1Q 2015 Earnings Call Presentation, United Technologies []