UTX United Technologies Corporation

Higher costs at its engine business are cited, along with lower sales for three units

By Ted Mann and Austen Hufford 

United Technologies Corp. booked a 16% drop in quarterly profit, weighed down by lower sales in three units as well as higher costs in its jet-engine business.

Despite cost-cutting efforts, the company reported lower operating margins at its four business segments. Total sales were essentially flat, with unfavorable exchange rates sapping a 2% increase in organic sales, which exclude acquisitions and currency swings.

Even with sluggish growth in some key markets for the aviation and building-equipment conglomerate, Chief Executive Gregory Hayes said in an interview it was a "very solid start to the year."

Sales at the Pratt & Whitney jet engine business rose 7.7%, and company executives said they were starting to see signs of stabilization in China -- an important market for the company's elevators and escalators.

Shares of the company rose 1% in midmorning trading to $105.67.

Mr. Hayes has been overhauling the Hartford, Conn.-based conglomerate's portfolio and management. Last summer, United Technologies sold its Sikorsky helicopter unit to Lockheed Martin Corp. for $9 billion. In December, the company laid out a three-year, $1.5 billion cost-cutting plan.

On Wednesday, Mr. Hayes waved off criticism of his cost-cutting strategy. The company triggered a social-media firestorm, and sharp criticism from presidential candidate Donald Trump, when it announced in February that it would close two Indiana factories in its Carrier air conditioning business and move those operations to Mexico.

The company is being "chastised by some of the politicians," Mr. Hayes acknowledged. He said United Technologies has to keep trimming expenses to remain competitive while taking care of the employees it will lay off in the process by doing things like paying for four-year college educations.

For the March quarter, the company reported a profit of $1.19 billion down from $1.43 billion a year prior. Total sales rose 0.3% to $13.4 billion. The year-ago figures include the Sikorsky helicopter business.

Sales at Pratt & Whitney were boosted on the strength of demand for aftermarket parts, especially for the company's V2500 commercial jet engines, which are coming due for overhauls. Commercial aftermarket sales jumped 19% for the first quarter.

Mr. Hayes said Pratt has mostly overcome some early hiccups with its newest family of commercial engines, called a "geared turbofan," which is the culmination of 10 years and more than $10 billion of development costs.

The company has tweaked software to eliminate 80% of the "nuisance messages" that had irked pilots on early flights of the engine. Changes in production will eliminate by June a cooling issue the engine faces between flight cycles.

Pratt's major factories in Middletown, Conn., and West Palm Beach, Fla., had "the strongest output we've seen in over a decade," Mr. Hayes said. There are now five Airbus A320neo airliners in revenue service, Mr. Hayes said, and the engines are showing better-than-expected performance on fuel efficiency and reliability.

The company says it is on pace to see the geared turbofan enter service on the new Bombardier C-series by midyear.

But the cost of that engine production is adding up. Pratt's operating profit fell 4% to $410 million in the quarter, driven in part by negative engine margin -- the difference between the profit on engines it has delivered and costs of developing and manufacturing them.

Sales and profits fell in the company's Otis elevator unit, but the results were better than expected in China and in North America. Orders for new equipment were up 33% in North America, the 16th straight quarter with an increase in that market, Chief Financial Officer Akhil Johri said.

And despite a decline in sales and orders in China, Mr. Johri said they saw signs of "economic stabilization" in the Chinese market after multiple quarters of declines.

The latest results exceeded Wall Street's forecast and United Technologies reaffirmed its financial forecast for the year.

Write to Ted Mann at ted.mann@wsj.com and Austen Hufford at austen.hufford@wsj.com

Corrections & Amplifications: Because of a rounding error, a previous version of this article stated that United Technologies' profit fell 17%.

(END) Dow Jones Newswires

April 28, 2016 02:48 ET (06:48 GMT)

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