That's what you call no drama?
United Technologies Corp., the $91 billion maker of jet engines, air conditioners and elevators, reported fourth-quarter results on Wednesday that met analysts' estimates and allowed it to slightly beat full-year earnings-per-share guidance. On the earnings call, CEO Greg Hayes had this to say about the company's performance:
So overall, 2016, no drama at the end of the day. A lot of challenges throughout the year but good execution by the entire team.
This is undoubtedly a victory for Hayes, who kicked off his tenure as CEO with a series of cuts to the company's profit outlook, and it makes him stand out in a year where slow growth has forced most industrial companies to dial back their expectations. But while the headline numbers were almost boring, 2016 wasn't without its moments and United Technologies has much to prove before investors start thinking of it as old reliable.
For one thing, I don't think anyone would call the company's run-in with President Donald Trump over plans to move jobs at its Carrier air-conditioner unit to Mexico a drama-free experience. But more important than the company's rather insignificant commitment, financially speaking, to keep about 800 employees in America were the issues United Technologies experienced with its geared turbofan engine -- a key product decades (and billions of dollars) in the making.
The company originally expected to deliver 200 engines in 2016; it had to cut that target to 150 in September amid production and supply chain foul-ups, but Hayes repeated that goal as recently as last month. Turns out, United Technologies delivered just 138 of the GTF engines last year.
There were shortages of a small number of parts. And certain components of the engines are struggling to withstand harsh environments in places such as India so it's implementing a redesign. It's not clear how big of a deal to make out of this. Hayes acknowledged that this latest setback is "annoying" for its customers, but characterized it as simply a low-drama growing pain and said the company is doing what it can to minimize the impact. We'll see if the plane makers have anything further to add on that. The initial production issues forced Bombardier Inc. and Airbus Group SE to alter their delivery issues and drew snide remarks from executives at those companies. For now, United Technologies CFO Akhil Johri says they're "satisfied."
Any sort of misstep on the GTF engine is going to make investors jittery. The engine is supposed to be United Technologies' means of challenging rival General Electric Co. for share of the narrow-body plane market. And as is often the case with the rollout of new aerospace products, United Technologies won't see much profit from the program until it's more mature and generating maintenance work. So additional financial drags tied to production setbacks hurt all the more. Shares of the company were down about 1.3 percent as of 1 p.m. in New York.
Perhaps the biggest takeaway from this GTF issue is that Hayes's trials at United Technologies are far from over. Investors are going to be watching for any signs that the company might fall short of its forecast for 350 to 400 deliveries in 2017. Even small hiccups will pressure the stock. The outlook for the U.S. industrial economy appears to be improving, though risks still loom in Europe and from the strong dollar. So the company will likely be in show-me mode for its 2017 guidance of $6.30 to $6.60 a share and organic sales growth of as much as 4 percent.
Hayes isn't blind to the challenges that the company had in 2016, nor those that lie ahead. His task is to manage those difficulties in a way that will boost United Technologies under-performing stock. Should he want to think beyond operational execution, might we suggest a breakup?
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