United Technologies Q4 Earnings: Otis And Aerospace Drag On Earnings

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United Technologies (NYSE: UTX) did not disappoint this time around with earnings coming in line with consensus estimate of $1.56 per share. The company has managed to beat the consensus earnings estimate for eight quarters in a row now. Concurrently, it managed to post revenues of $14.659 billion, slightly higher than the consensus estimate of $14.620 billion, on the back of improved performance in a majority of its segments. Only Otis and Aerospace fell short. The industrial giant has reaffirmed guidance in anticipation of improved organic sales growth in the near future.

It expects the adjusted earnings to be in the range of $6.30 to $6.60 per share on revenues of $57.5 to $59.0 billion. Furthermore, the company also reaffirmed its acquisition expectations of $1 billlion to $2 billion and free cash flow guidance in the range of 90 to 100% of the net income. Additionally, it also plans to repurchase shares worth $3.5 billion in 2017.

Pratt & Whitney Accomplished Major Milestones In 2016

Pratt & Whitney recorded relatively flat sales this quarter in comparison to the same period last year. Revenues increased marginally from $3.981 billion to $3.992 billion. Despite this, in the year, the segment delivered a total of 138 Geared Turbofan engines (GTF) and now supports 13 operators in service. About 62 GTF engines were delivered in the last quarter itself. This figure happens to be the highest output for a quarter to date.

Pratt & Whitney has had quite an eventful year. GTF engines have flown over 82,000 revenue hours and have completed more than 30,000 takeoff and landings. Furthermore, the engine has experienced a 99.9% dispatch reliability on the Airbus A-320 neo in the year. This is testament to the fact that the new technology is meeting, and in some cases, exceeding its key performance targets. At the moment, the GTF engine powers about 46 A320neo and C-Series aircraft.

In 2015, United Tech was facing significant delays on the GTF engines. This led to heavy additional costs at the program. However, the good news is that the company has identified the problems and is striving to fix it as soon as possible. In this respect, the company has significantly increased capacity within the year, while improving yields and perfecting the process. In 2017, the company expects to deliver a record 350 to 400 engines.

Otis Ends The Year Flat

Otis sales were relatively flat in comparison to the same period last quarter, coming in at $3.063 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. Furthermore, profits came in 4% lower than Q4 2015. Profit in the quarter benefited from higher service volume, productivity and mark-to-market FX tailwind. Such has been the sentiment throughout the year in fact.

New equipment sales in the year were down 2% on the back of low double-digit decline in China and a massive 40% decline in the Middle East. In contrast, continued strong growth in North America led to an increase of new equipment sales by 13%. Europe also saw the metric increase by about 7%. Overall, service sales were up 3%, with continued solid growth in modernisation and repair, while maintenance sales were up slightly. Furthermore, the full year operating profit was down about 6% in constant currency on 1% higher organic sales. Organic sales excluding China were up 4%.

Gains in market share over KONE in China has led to a 10% decrease in pricing. This shows that the company is willing to take a hit on margins in return for a gain in market share in key markets. At the  Morgan Stanley Laguna conference, United Tech stated that while its margins in China were around 20%, it was likely that adverse pricing pressures would persist throughout 2016 and the whole of 2017. The region represents $2.5 billion of UTC’s $12.5 billion Otis business, so it’s a key market that pressures margins.

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