UTC Earnings: 2015 Was Good, But 2016 Could Be Even Better

The year 2015 proved to be a strong one for United Technologies (NYSE: UTX) and by the looks of it, next year could be even better. In the year, the company managed great earnings figures despite a decrease in revenues across the business. This can be attributed mainly to the company’s efficient cost cutting strategies. Within the quarter, the company managed to beat analyst estimates by 2 cents to record $1.53 in earnings per share. Additionally, in keeping with the company’s strategy to focus primarily on their core business, the Sikorsky divesture was finalized on November 6th. This earned the company about $3.4 billion after tax, which the management has decided to use to repurchase $6 billion worth of shares. ^[1]

Key Financial Highlights:

• The company completed sales worth $56.1 billion in the year which is 3% lower than what it managed to post in 2014.
• Adjusted full year EPS for the company was recorded at $6.30 (held back slightly by unfavorable foreign exchange conditions) which is 2% lower than the EPS from the year prior.
• Despite the flattish revenue growth, segment operating margins were a solid 16.7%, primarily because of cost restructuring.

Looking forward, the company has set a pretty picture in terms of guidance. UTC expects to earn $6.30 to $6.60 per share in 2016. Revenues on the other hand, are expected to come in around $56 to $58 billion. This outlook is quite reassuring, considering the difficult macro economic conditions prevalent at the moment.

Continued Cost Restructuring and the Sikorsky Divesture:

As previously mentioned, United Tech closed the Sikorsky deal during the quarter in keeping with their cost cutting and restructuring strategies. The company has decided to focus primarily on its more profitable core business of building, and aerospace solutions and technologies. UTC hopes that such a change in the game plan will enable the company to increase organic growth, margins and thereby free cash flows.

Additionally, the company also decided to slim their business down by a certain proportion in both their aerospace, and building and industrial segments. This further allows the company to structure their business in a way that allows greater efficiencies, better visibility and higher accountability as it now only  has four main segments to concentrate on. Currently, these segments are well positioned and are poised to provide the Hartford based company with long term growth going forward.

Furthermore, the company is currently in the middle of a multi-year restructuring process. The management announced a $5 billion restructuring plan in order to enhance its long term cost competitiveness. It is estimated that this will bring UTC close to $900 million in run rate savings by 2019.

Business in China a Possible Headwind, While Business in North America Continues to Grow:

Like most companies, United Tech is facing tough conditions in China as the country undergoes several significant structural changes. Hence, business in China has been down this year and the management expects this trend to continue into 2016. That being said though, the company sees great potential in China in the long term. Despite the slowdown, it is estimated that by 2025 the country will have about 221 million cities with more than 1 million inhabitants in each. This is bound to increase business for the company in the long term.

On the flip side, the year witnessed increased sales in the North American region, especially in the U.S. For example, Otis recorded an increase in sales to the tune of 30%. This is over and above the 40% increase in sales in 2014. Other segments too performed well, with numbers mostly in the green. This showcases a very encouraging trend going forward, especially as the U.S. economy shows signs of a solid recovery. Given the momentum, it is likely that business here will continue to show great promise.

Looking forward, it seems like the company is headed for long term growth boosted primarily by its cost cutting and downsizing strategies, which will enable the company to raise revenues and margins significantly. Only time will tell how things actually pan out.

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1. UTC Q4 2015 Earnings Call Transcript, www.seekingalpha.com [↩]