United Technologies Focus on Costs Counters Weakness in China

  • First-quarter earnings, sales exceed analysts' estimates
  • Stock buyback `the best M&A deal we can make,' CEO Hayes says

United Technologies Corp. beat analysts’ first-quarter profit estimates as a continued focus on controlling costs helped the aerospace and building-systems manufacturer overcome a sluggish Chinese market.

Adjusted earnings increased to $1.47 a share, United Technologies said Wednesday in a statement. That compared with the $1.40 average of estimates compiled by Bloomberg and exceeded the highest prediction. Sales rose slightly to $13.4 billion, topping the $13.2 billion analyst estimate.

“The top line is growing slowly, but we are getting good cost traction,” Chief Executive Officer Gregory Hayes said in a telephone interview. The company is achieving “good performance around the world in spite of some relatively slow macro trends that we’ve seen. The biggest challenge remains China, where we saw orders down across the commercial business.” He expressed optimism that the market could rebound soon.

China Elevators

As the company grapples with weakness in China, particularly in the Otis elevator division, it also faces heavy costs related to a new jet-engine program in the Pratt & Whitney unit. United Technologies shares trailed the broader market last year as those challenges were compounded by a strong U.S. dollar that weighed on overseas sales.

Hayes is under pressure to drive growth after rejecting a $90 billion takeover offer in February from Honeywell International Inc. He has made smaller moves to reshape the Farmington, Connecticut-based company’s portfolio since taking the helm in late 2014, including a deal last year to unload the Sikorsky helicopter unit.

United Technologies rose 1.4 percent to $106.30 at 9:33 a.m. in New York. The shares climbed 9.1 percent this year through Tuesday, compared with a 2.3 percent gain in the Standard & Poor’s 500 Index.

Restructuring Plan

United Technologies had about $62 million of restructuring costs in the first quarter, Hayes said. The manufacturer late last year announced a $1.5 billion, multiyear restructuring plan to reduce expenses in high-cost locations amid a sluggish global economy. The move came after the company boosted a buyback program in October.

First-quarter net sales rose 7.7 percent in the Pratt & Whitney unit, which recently introduced its geared turbofan engine to power airliners including Airbus Group SE’s A320neo. Pratt has had to make fixes in early-production engines for issues such as erroneous fault messages.

“There was a lot stronger revenue than we had expected at Pratt & Whitney, where we saw aftermarket sales up about 19 percent in the quarter,” Hayes said.

Revenue fell 1.1 percent in the Otis unit and declined 1.2 percent in the aerospace division.

North America “remains very strong,” while the company’s commercial business saw a slowdown in the Middle East, Chief Financial Officer Akhil Johri said in the joint interview with Hayes.

Deal Search

United Technologies plans to spend $3 billion repurchasing shares this year. The company has a placeholder of $1 billion to $2 billion for acquisitions.

“We continue to look for transactions, both on the commercial side and on the aero side,” Hayes said. “But right now, the biggest focus is continuing to buy UTX stock. With our stock price still significantly below intrinsic value, I think that’s the best M&A deal we can make.”

Profit in 2016 will be $6.30 to $6.60 a share, the company said, reaffirming an earlier forecast. United Technologies, which expects improvement in the second half, weighed raising the bottom end of its guidance, Hayes said on a conference call with analysts. Sales are predicted between $56 billion and $58 billion.

(An earlier version of this story corrected premarket trading.)

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