Aviation And Construction Industries To Drive UTC Earnings In A Slowing Global Economy

United Technologies (NYSE: UTX) sales were down by 6% in the third quarter of fiscal 2015, primarily due to foreign currency headwinds and declining organic sales. ^[1] The fall in organic sales is primarily due to the delay in engine deliveries following a program transition at Pratt & Whitney, the pending sale of the Sikorsky business and a slowdown in the Chinese economy. We expect the company’s aerospace segments — both UTAS (UTC Aerospace Systems) and Pratt & Whitney — to grow in low single digit figures on account of surging airline profits, increasing revenue passenger miles and peaking backlog. Alongside, we expect continued growth in the sales of Otis and CCS segments, primarily driven by growth in housing and construction in the U.S. and Asia (excluding China). With a decline in sales, the company is increasingly focusing on cost reductions and restructuring to narrow down costs, successfully reducing operating costs by 5% in the third quarter.

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Commercial Sales To Drive Aerospace Sales Growth, Partially Offset By Declining Defense Sales

The global aerospace segment accounts for nearly 50% of the company’s total sales. UTC has two distinct business divisions, namely UTAS and Pratt and Whitney, which together comprise the company’s total aerospace exposure, on a going forward business. Through the Pratt and Whitney segment, UTC is one of the largest engine suppliers to aircraft manufacturers such as Boeing, Airbus and Embraer. The company, through its aerospace segment, is very well positioned in the global aviation supply chain. It posted segment sales down by 6% primarily due to a delay in engine deliveries and a decline in defense sales (down 12%). ^[2] We expect strong segment sales growth going forward with the growth in commercial aviation sector visible from the steadily rising revenue passenger mile (an indicator of passenger demand). As a result of greater demand for commercial aviation, aircraft manufacturers such as Boeing and Airbus have begun hiking their production rates resulting in high aerospace backlog for UTC.

The declining defense sales (down 20% quarter over quarter) are partially offsetting the commercial segment’s success, primarily attributed to the pending sale of the Sikorsky business, which has reduced UTC’s exposure to defense aerospace from 19% to 13%. The segment is witnessing additional pressure from UTCs ending the production for the C-17 (a hit to  Pratt and Whitney) and lower military spending.

Soaring Commercial Sales Driven By U.S. And Asia, Partially Offset By China Slowdown

In the commercial segment, the company witnessed mixed response in different regions, with Asia down 2%on the China slowdown, flat Europe sales and sales in U.S. up 7%. UTC’s Otis and CCS segments both have seen soaring sales in U.S., with the construction and housing markets looking more positive than expected, even as  economic growth continues to slow. We expect the U.S. housing market to remain a bright spot in the economy with increasing demand and weaker dollar.

UTC saw orders in China significantly down with Otis new equipment orders down 19% and CCS down 8%. The slowdown in the Chinese economy has slowed the growth in fixed investments. In addition, Asia (excluding China), which represents ~50% of the commercial business, continues to add orders growing in double digits. On a constant dollar basis, we expect the hike in segment revenue from U.S. and Asia to continue, partially offset by declining China sales and the impact of foreign currency.

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1. United Technologies Third Quarter Earnings Release, SEC, October 20, 2015 [↩]
2. United Technologies Earnings Call Transcript, The Street, October 20, 2015 [↩]