United Technologies’ Q3 Earnings: Aerospace and Pratt & Whitney Drive The Top-Line As Otis Continues To Suffer In China

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United Technologies (NYSE: UTX) posted solid Q3 results with earnings beating the consensus estimate by a notable margin. Revenues were driven in the quarter by higher sales in the aerospace and Pratt & Whitney segments. The company’s share closed about 2% up yesterday, displaying investor optimism in the stock. Additionally, the management has decided to raise the bottom end of the EPS outlook range by about $0.10 (on top of the $0.15 the company raised at the end of last quarter). The full year EPS is now expected to lie in the range of $6.55 to $6.60. Furthermore, the company has also raised the low end of the organic growth outlook. It now expects growth to be within 2% to 3% as opposed to the previous 1% to 3%.

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Geared Turbofan Engine To Drive Pratt & Whitney’s Top-Line:

The latest innovation by UTC is stealing the show across the globe, at the moment. As of last week, the company’s GTF engines have flown over 30,000 revenue hours and more than 20,000 takeoff and landings. The engine is also experiencing a 99.9% dispatch reliability on the Airbus A-320 neo. This is testament to the fact that the new technology is meeting, and in some cases, exceeding its key performance targets.

Most recently, VivaAerobus, a low-cost operator from Mexico, took delivery of its first GTF-powered aircraft. The final leg on the delivery flight was over 9.5 hours, which is a record flight time for an A-320. This was only made possible by the engine’s ability to reduce fuel burn in the aircraft by a whopping 18%. This news has been received very well by customers. The company’s order book now stands at a significant 8,400 engines, positioning the company for long-term top and bottom-line growth. That said, the company has been plagued by slower than expected deliveries since Q3 last year. However, the good news is that the company is aware of this problem and is striving to fix it as soon as possible. The company has increased capacity while improving yields and perfecting the process.

So far in the year, the company has delivered about 80 engines, with 76 delivered this quarter. It intends to ship an additional 70 in Q4. That said, the ramp up in production is still significant. In 2015, UTC delivered only 14 engines. Going forward, it expects to ship around 350-400 GTF engines per year.

Otis Shines In North America And Asia; China Business Still Suffers:

Otis sales were relatively flat in comparison to the same period last quarter, coming in at $3 billion. The positive effects of a higher service volume, improved productivity and lower commodity costs were more than offset by continuing pricing pressures in China and EMEA. Profits were further affected by additional E&D investments and the absence of prior-year favourable, mark-to-market foreign exchange adjustments.

In China, new equipment sales were down 2% driven by an overall decline of about 13%. That said, North America displayed good demand with corporate sales up by almost 21%. Overall, service sales were up 3%, with continued solid growth in modernisation and repair, while maintenance sales were up slightly.

New equipment sales were up 2% in the quarter and up 8% outside of China. In EMEA, orders were up over 20% with broad-based growth. In Asia, outside of China, new equipment orders were up in the double digits, with orders in North America up slightly. Additionally, in Q3, Otis nabbed the single largest private real estate deal from Hudson Yards. Due to these developments, the company has raised the bottom end of the segment’s profit guidance and now expect profit to be down $150 to $175.

So as we can see from the results, all segments performed strongly this quarter and are supported by solid market fundamentals, continued urbanisation, growing passenger miles, and a middle-class expansion globally. All these factors are bound to help UTC deliver a significant earnings growth going forward.

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