This summary is based on the first quarter fiscal 2007 earnings call conducted by United Technologies Corp (UTX: chart) on April 19, 2007.
Key Investors Issues
- The earnings per share increased to 82 cents as against 76 cents in previous year.
- Quarterly revenue rose 16% over last year to $12.3 billion.
- The company repurchased $500 million of its stock in the first quarter.
- Free cash flow was $245 million in the quarter.
First Quarter Fiscal 2007 Financial Highlights
The revenues for the quarter were up 16% to $12.3 billion, with organic growth of strong 10%.
A little over half of this organic growth relates to Sikorsky, which had a six weeks’ strike in the last year’s first quarter. But even excluding Sikorsky, the aerospace companies grew organically 8% in the quarter, with the commercial companies in aggregate growing 5% organically. Foreign exchange added another 3 points to revenue in the quarter.
Earnings per share of 82 cents was up 8% over last year.
This includes a net 7% drag associated with the resolution of the Otis EU matter. Excluding this one-time charge, earnings growth in the quarter was 17% and this 17% adjusted growth number does benefit from the year-over-year improvement at Sikorsky, which delivered essentially zero profit in last year’s first quarter versus $70 million in this year’s first quarter. FX also contributed about 3 points to the reported growth.
Free cash flow was $245 million in the quarter.
The first quarter cash flow was impacted by the payment of the EU fine and tax payment initiatives in Canada. These two items resulted in the net outflow of approximately $500 million. Absent these items, cash flow was still like the firm’s usual standard of free cash flow equal to net income. In addition to curious normal pattern of first half working capital build, the company also saw a continued growth in inventory across the aerospace businesses, as a result of strong organic growth and continued aerospace supply chain pressures. Even with the headwind of the Otis EU matter and the tax planning strategies, the firm is still confident that for the year free cash flow will equal or exceed net income.
The company repurchased $500 million of its stock in the first quarter.
At this point of the year, the firm is maintaining its guidance for both acquisition spending and share repurchase; $2 billion for acquisitions, and $1.5 billion for share repurchase. The management is pleased with its most recent portfolio adjustment in Fire & Security. United Technologies acquired Rentokil’s Electronic Security business for approximately $1.2 billion. This business holds nicely in the UTC Fire & Security’s existing electronic security business in Europe and it will increase the firm’s already solid market positions in the UK, France and the Netherlands. Concurrent with this acquisition, the firm also announced its intention to divest its manned guarding businesses in the UK and Australia.
United Technologies was fined to total of approximately $300 million for the Otis EU matter.
The fine was partially offset by related reserves with the net charge at approximately 20 cents per share. During the quarter, the company also incurred about $35 million of restructuring charges. Partially offsetting these items were realized gains associated with the sale of marketable securities, a benefit at Pratt & Whitney due to the favorable impact of a contract termination, and the sale of land reported in the Otis segment, with the minority share going through the minority interest line. The net impact of all these items was 7 cents per share.
Performance Analysis of Segments
Otis
Otis delivered another strong quarter with profit growth of 11% on revenue growth of 13%, before taking into account the $84 million gain from the sale of land. Foreign exchange contributed about 5 points of the revenue growth and 6 points of the profit growth. The strong revenue growth reflects higher new equipment backlog entering the year as well as robust new equipment execution across the globe. The continued shift in sales mix towards new equipment resulted in 30 basis points of margin deterioration although margins remained solid at 18.5%. Profit growth was driven by volume and continued cost containment partially offset by escalating commodity costs and continued price pressure in China, Japan and Korea. New equipment orders continued to be exceptionally strong, up 27% in the quarter. Orders increased double digit in all geographic areas and is with notable strength in North America and China.
Carrier
The operating profit increased 7% year-over-year on 8% higher revenues. Favorable foreign exchange contributed about 3 points to the growth rates. The firm saw the balance works at UTC and works at Carriers as well as double digit revenue and earnings growth in the commercial and the refrigeration businesses helped to offset continued weakness in the US residential market. Residential split system shipments in the quarter were down more than 30% and gas furnace shipments were down more than 15% resulting in another quarter of significant earnings decline in this historically high margin business.
Commercial markets on the other hand were strong in most regions and the segment benefited as well from prior restructuring and pricing actions. Backlog in this business is up 20%. Refrigeration’s growth is driven by robust container market and solid performance in Europe. Revenues in emerging markets, particularly in China and India, were strong in the solid double digit range.
