Industrial giant United Technologies slashed its 2015 earnings forecast Tuesday due to the sharp slowdown in China's real estate sector and disappointing aviation parts sales. Key areas of weakness included the Otis elevator business, which suffered from anemic demand in China and Europe, and weaker-than-expected plane parts orders. Activity has also been lackluster in UTC's business for heating and cooling buildings, again due to a big decline in China.
"With six months of trends behind us, it is now clear the commercial aftermarket at UTC Aerospace Systems will be significantly below our expectations for the year," said chief executive Gregory Hayes. "This, along with continuing softness in Otis Europe and a slowing China, led us to reassess our 2015 outlook for UTC Aerospace Systems and Otis." The downgrade came as the company reported second-quarter net income of $1.5 billion, down 8.2 percent from the year-ago period.
Revenues were down 5.0 percent to $16.33 billion. UTC shares plummeted 7.7 percent to $101.95 in midday trade, making it the biggest loser in the Dow Jones Industrial Average. On Monday, UTC announced it was selling Sikorsky Aircraft, maker of the iconic Black Hawk helicopter, to Lockheed Martin for $9 billion. UTC said the sale of its helicopter division will allow it to sharpen its focus on its other businesses and that it will use the proceeds for share repurchases.
UTC now forecasts 2015 earnings per share of $6.15-$6.30, down from the prior range of $6.35-$6.55. Sales are projected at $57-$58 billion, down $1 billion from the prior range. Company officials described a broad slowdown in the Chinese housing market, with real estate investment, new construction starts and sales all "under pressure," said chief financial officer Akhil Johri.
Hayes said the slowdown in China "is worse than we had expected" for Otis, compounded by poor results in Europe, where Otis is expected to see a decline in the "low single digits" after initial expectations for an increase in that range. UTC expects Otis operating profits to be down $300-$350 million for the year, compared to the original projection for $100-$150 million growth. The weak demand in China and Europe has been exacerbated by the strong dollar. UTC executives said some aspects of the aviation business remain strong owing to robust industry investment in new planes. The company's Pratt & Whitney engine supply division notched higher sales and operating profits.However, UTC was "way too aggressive" in its earlier assumptions on demand for spare plane parts, Hayes said. The forecasts were based on robust growth trends in 2013 and 2014 have not held up in 2015. UTC now expects profits in the aerospace service unit to be down $25-$75 million in 2015, compared with the original expectation for growth of $225-$275 million.
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